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TOWARD ECONOMIC COOPERATION IN EAST ASIA by Chung H. Lee University of Hawaii at Manoa & East-West Center Working Paper No. 100 August 2000

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Toward Economic Cooperation in East Asia

Chung H. Lee University of Hawaii at Manoa and East-West Center

The author wishes to thank Tianshu Chu, Dieter Ernst, Hideaki Hayashi, Anne Krueger, and Peter Katzenstein for their useful comments on the paper. An earlier version of the paper was presented at the 2000 EWC/KDI Conference on “A Vision for Economic Cooperation in East Asia: China, Japan, and Korea,” 31 July-2 August 2000, Honolulu, Hawaii.

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I

Introduction

Since the late 1970s when it undertook the Four Modernization reforms, China has become a thriving member of the world economic community. It has also become a major trade partner and an important host for foreign direct investment for its two neighbors—Japan and South Korea (henceforth Korea). Given the sheer size of its economy and good prospects for further economic development, China’s importance to Japan and Korea will certainly continue to grow in the 21st century. The three countries in East Asia—China, Japan, and Korea—constitute a significant portion of world population and economy. In 1998, for instance, they had a combined population of 1,411 million (24 percent of the world population) and a combined GNP of $5,389 billion (about 19 percent of the world GNP) with per-capita income ranging from $750 for China to $32,380 for Japan (Table 1). Given that the three countries account for such a significant portion of world population and output, how the region develops will have a profound effect not only on these three constituent economies but on the entire world economy as well (Bergsten 2000). East Asia is one region in the world where there is as yet no formal machinery for regional integration, and some might suggest that establishing such machinery would be a good way of formalizing economic cooperation among the three countries. In fact, a free trade area of Japan and Korea is being officially considered, and there are even talks about expanding it to include China to form a Northeast Asia Free Trade Area. It will be argued here, however, that for various reasons to be discussed below a formal regional integration in the form of a preferential trading bloc is not in the region’s interest, not at least in the foreseeable future. We propose, instead, that the three countries cooperate in developing various institutions designed for the provision of what might properly be called regional public goods. Such regional public goods will strengthen “natural” economic ties among the

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three countries, which in turn will facilitate trade and investment and promote further economic integration in the region. The rest of the paper begins with a brief discussion of economic changes in the postreform China since those changes have had a significant effect on the economies of Japan and Korea and their relationship with China. In Section III we offer some projection on the future economic development of China and its implications for Japan and Korea since it will, we believe, undoubtedly affect the economies of these two economies.

In Section IV we

examine various reasons why a regional trading bloc in East Asia is neither feasible nor beneficial to the region. We argue in Section V that the region should create institutions that would provide regional public goods as a way of bringing about regional economic cooperation. Some concluding remarks are made in Section VI.

II

Economic Changes in the Post-Reform China

Since its reform in the late 1970s, China has emerged as a major trading country in the world. Its international trade grew at the average annual rate of 14.5 percent during 1990-97 (excluding 1996) while its trade dependence ratio increased from 29.9 percent in 1990 to 36 percent in 1997. In 1997, its exports and imports reached $182.7 billion and $142.4 billion, respectively. Pari passu the rapid growth of China’s international trade, economic interdependence between China and its two neighbors has increased. Japan is now one of China’s major trading partners, accounting for 17.4 percent and 20.39 percent of China’s exports and imports in 1997. And, in terms of total value of trade, Japan is China’s largest trading partner. Korea is also an important trade partner for China, accounting for 5.47 percent and 9.57 percent of China’s exports and imports in 1997. That same year, Japan and Korea together accounted for 22.87 percent and 29.96 percent of China’s exports and imports, which,

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respectively, exceeded the U.S. shares of 17.9 percent and 11.46 percent of China’s exports and imports (Tables 2 and 3). China has also become an important trade partner for Japan, albeit not yet a major one. In 1997, when Japan’s exports and imports amounted to $421 billion and $339 billion, respectively, China accounted for 5.15 percent and 12.35 percent of Japan’s total exports and imports. It is important to note that the United States is still Japan’s largest trade partner, accounting for 28.12 percent of its exports and 22.43 percent of its imports (Tables 4 and 5). China is an important trade partner for Korea as well. In 1997, for instance, China accounted for 9.99 percent of Korea’s total exports valued at $136 billion and for 6.9 percent of its imports valued at $145 billion. It should be noted that, as in the case of Japan, the United States is Korea’s largest trade partner, accounting for 15.85 percent and 20.73 percent of its exports and imports (Tables 6 and 7). Foreign direct investment (FDI) in China has also increased at a rapid rate since the reforms of the late 1970s. In the nineties, the flow of FDI to China was four times as large as that for the ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand). Japan has been an important source of FDI for China, which has attracted much of the Japanese investment with its abundant supply of cheap labor and its potentially large domestic markets (Seki 1999). Japanese FDI is concentrated in industries such as food, textile, garments, chemical products, metal products, general machinery, electric machinery, home electronics, electronic equipment, and precision machinery. In 1997-98, Japan and Korea invested $7,726 million and $3,942 million, respectively, in China, together accounting for 12.8 percent of total investment in China. The corresponding figures for the United States were $7,137 million and 7.9 percent (Table 8). The pattern of Japanese FDI in China and the pattern of China’s subsequent export expansion are closely correlated, and this seeming linkage between Japanese FDI and Chinese

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exports resembles the linkage between Japanese FDI and manufacturing exports from the ASEAN economies. Although long time-series and detailed FDI data are necessary to obtain conclusive evidence on this linkage, there is enough evidence for the hypothesis that Japanese FDI has contributed to the growth of manufacturing exports from China (e.g., Kreinin, Plummer, and Abe 1998). Although no study has been found that links Korean FDI and China’s manufacturing exports, casual observations lead to the conclusion that a similar linkage also exists in the case of Korean FDI in China. Along with the expansion in China’s overall trade there have occurred significant changes in the commodity composition of trade, particularly in manufacturing exports. Exports increased rapidly in labor-intensive manufactures such as textiles, apparel, footwear, and toys and sporting goods, their share of China’s total exports growing from 29.6 percent in 1985 to 40.2 percent in 1990. Equally significant was a surge in exports of electrical equipment—mostly black and white televisions, radio receivers, telephone equipment, and domestic electrical equipment, its share expanding from 2 percent in 1985 to 11 percent in 1990. A study of China’s revealed comparative advantage (RCA) by Abe and Lee (2000) shows that between 1987 and 1996 China made a significant gain in the number of industries in which it has a comparative advantage. What is more remarkable is that this increase was not limited to labor-intensive industries: China has also become internationally competitive in a number of capital-intensive industries. In comparison with the ASEAN-4, the change in China’s trade structure has been rapid. First, China’s RCA in all the labor-intensive industries has been increasing while ASEAN’s RCA in the same industries has been decreasing. China, for instance, increased its RCA in apparel from 4.77 in 1990 to 5.34 in 1996 while ASEAN’s RCA in the same industry decreased from 2.34 to 1.81 during the same period. Second, China has been increasing its

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RCA in a larger number of capital-intensive industries than ASEAN has. In 1996, for instance, China had RCA greater than one in twenty-five sectors while ASEAN had in only thirteen sectors. In other words, as a developing country China already has a relatively welldiversified trade structure. China has accomplished this diversification more quickly than its ASEAN neighbors. Between 1987 and 1996 China increased the number of sectors in which it has RCA greater than one from 16 to 25 while ASEAN increased the number from 5 to 13 between 1980 and 1996. In other words, it took only 9 years for China to gain 9 more sectors in which it has a comparative advantage whereas it took 16 years for ASEAN to gain 8 more sectors.

The

relative rapidity with which China has been increasing the number of industries in which it has a comparative advantage may be an indication of the speed with which the Chinese economy is becoming industrialized and is replacing ASEAN-4 in the world markets for labor-intensive manufactured products. What is remarkable about the changes in China’s RCA is that China has become a major exporter of labor-intensive products in general as well as some capital-intensive products. This is consistent with the “wild-geese-flying pattern” of industrial development, according to which a developing country first exports simple consumer goods and then exports refined and capital goods. What is different, however, about China’s experience is that it seems to be gaining comparative advantage in capital-intensive industries even before it begins to lose its comparative advantage in labor-intensive industries. A plausible explanation for that is that China is a dualistic economy with both a large pool of low-cost labor and an adequate pool of skilled labor capable of producing capital-intensive products. In other words, although China as a whole is still at an early stage of economic development it has a number of sectors such as electric and electronic products that are capable of and, in fact, are catching up rapidly with more advanced economies in the region.

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III.

Future Economic Development in China and Its Implications for Japan and

Korea The prospects for China’s staying on a high-growth path throughout the early part of the 21st century appear good as it gradually introduces a rule-based society characterized by markets, private ownership, and pluralistic political institutions (Jefferson 1997, Naughton 1997). This is a likely scenario for China if it maintains relative stability, a high saving rate, a strong record of pragmatic reforms, a disciplined and literate labor force, the supportive overseas Chinese, and a growing administrative capacity.1 In fact, the World Bank predicts that China’s GDP growth will average 6.6 percent in the first two decades of the 21st century (World Bank 1997). What effect will such economic growth in China and the increasing diversification of its economy have on the economies of its two neighbors? According to the World Bank report (1997), China’s demand for capital- and knowledge-intensive products will be growing at 8 percent per year while its exports of labor-intensive manufactured products will be also growing as rapidly. If that happens, Japan, a major exporter of the first group of products, will gain from an improvement in its terms of trade. In fact, it is estimated that Japan would gain as much as 6.5 percent in its cumulative terms of trade by 2020 (4.0 percent for North America and 1.4 percent for Western Europe).

Although China’s export growth in labor-

intensive manufactured products may have an adverse effect on the jobs and income of unskilled workers in Japan, this effect will be negligible since Japan long ago lost its comparative advantage in those industries and has successfully made the necessary structural According to The Economist (October 24-30, 1998, pp.23-26) China’s economy is entering a period of sluggish economic growth (3-4 percent per annum). Such economic slowdown, plus an insolvent banking system and a sharp divide between the relatively wealthy parts of the country and the poor regions, could threaten China’s stability. Furthermore, unless it is reformed in a radical manner China’s ailing financial system will bring about a decrease in the rate of saving, which in turn will deprive China of the resources necessary to address its long-term environmental and other challenges (Lardy 1998). 8 1

changes. The effect on Korea will not be so salutary as for Japan. China will actually present a challenge to Korea, which has built its economy on its labor-cost advantages in a few pillar industries. These include textiles, steel and petrochemicals, and automotive—the areas in which China has been gaining its comparative advantage. Korea’s loss in the market share relative to China is already clearly visible in the U.S. markets, where Korea’s market share decreased from 3.6 percent to 2.8 percent between 1986 and 1996 while China’s share increased from 1.4 percent to 6.5 percent during the same period. A similar pattern is also found in the European Union where China’s market share went up from 0.5 percent to 1.9 percent while Korea’s share rose from 0.6 percent in 1988 to 0.7 percent in 1994 (Booz-Allen & Hamilton 1997). Even at the current rate of economic development it will, however, be many years before China joins the ranks of fully developed economies.

According to the World Bank

study cited earlier, the Chinese people will, for the foreseeable future, remain on average less well educated than the South Koreans. It projects that by 2020 the number of years in secondary education per person in China will be 5.94 years and the number of years in tertiary education will be only 0.36 years per person. These figures do not compare favorably with 6.44 and 6.75 years, respectively, for South Korea. Given its large, at present not well-educated population and given the huge human resource requirements for developing its own scientific and technological foundation, China will thus remain for some time a country with a comparative advantage mainly in the production of unskilled labor-intensive manufactured goods. But, that does not mean that China will for long be unable to develop some technologically more sophisticated industries capable of international competition. In a select number of areas, China will soon develop a sufficiently large pool of well-trained people to be able to exploit scale as well as

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agglomeration economies in research and development. In fact, China is already a country with “no shortage” of well-trained scientists, engineers, mathematicians, or other technical experts, and as its older researchers retire and are replaced by younger, Western-educated researchers, China’s ability to absorb, assimilate, and innovate new technologies will grow (Yoshitomi 1996, Bureau of Export Promotion 1999). Another factor that would help China succeed in moving up the specialization ladder is the network of the overseas Chinese that it can rely on to provide the necessary capital and know-how. This is what some call “Greater China,” which includes individuals from the People’s Republic of China, Taiwan, Hong Kong, Singapore, and the overseas Chinese in Southeast Asia and throughout the world (Lilley and Hart 1996). As a part of this “Greater China,” the People’s Republic of China has already benefited since much of the foreign investment that has fueled its present economic success is from the overseas Chinese. It is quite conceivable that with the right incentives they can be induced to invest in the development of high-tech industries in China. Nelson and Wright (1994) point out that in the period since the 1950s the economic and technological gaps among the major industrial powers has been dramatically closed, largely ending the leadership position held by the United States nearly for a century.

They

offer basically two reasons for this convergence—globalization of markets and the advent of science-based technologies.

First, because of a decrease in transportation costs and the

lowering of trade barriers, the advantages of having large national markets and the access to cheap raw materials have eroded. Consequently, even those firms located in a small, resourcepoor economy can exploit the economies of scale and acquire raw materials at globally competitive prices. Second, the advent of science-based technologies has significantly increased the extent to which scientists and engineers possess generic technological understanding. Many

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of such technologies are codified and thus more easily transferable across national boundaries and more generally accessible to those, wherever they may be located, with the requisite skills and willingness to make the required investments. Given these changes in market conditions and the nature of technology, a country that is willing and able to train at least a portion of its labor force and devote a sufficient proportion of its GNP to research and development will be able to import and utilize technologies from abroad as well as create new technologies. As a case in point, Nelson and Gavin cite the rapid speed with which the Japanese, the Koreans, and the Taiwanese learned to command American-made technologies during the 1970s and 1980s. Given what these East Asian economies have done, we see no reason why China, a much bigger country, will not be able to replicate, if not surpass, the record achieved by its smaller neighbors in East Asia. According to the World Bank study cited earlier, by 2020 China will gain 8 percent of the world market in transport equipment and other machinery and 4 percent in highly capitalintensive heavy manufactured goods (chemicals, rubber, plastics, paper, iron and steel, nonferrous metal). It will also gain a 10 percent market share in light manufactured goods (leather, fabricated metal products, and miscellaneous manufactured products).

If this

projection is correct, China’s technological advance will present serious challenges, as noted earlier, to Korea, a second-tier country in terms of technological development. The pattern of economic development in China is similar to the historical process that Japan experienced in catching up with the West and the one that Korea has been going through in more recent years. In this catching-up process, as happened in Japan (Akamatsu 1962), a technologically lagging economy such as China first imports crude, labor-intensive consumer products, undertakes their domestic production, and then finally exports them to the rest of the world.

The country repeats this process—the cycle of import, domestic

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production, and export—as it moves up the ladder of technological sophistication until it finally catches up with the industrially advanced economies of the world. Although the economic interaction that we now observe between China and Japan (and to some extent Korea) appears to be following this catch-up pattern of industrial development, China is unlikely to become a fully advanced economy by the early part of the 21st century.

What is more likely is that even though China will, by then, succeed in

developing a number of technologically advanced industries that will seriously challenge their counterparts in Japan (and surpass some in Korea), a majority of its industrial activities will remain in the unskilled labor-intensive manufacturing sector. The reason is, as pointed out by Garnaut and Huang (1995), obvious: Given China’s large population and its generally low level of education it will take several more decades of rapid economic growth and human and physical capital accumulation for it to become an advanced industrial economy.

IV.

Regional Economic Integration or Cooperation?

The rapid changes in the Chinese economy, discussed above, will present both challenges and opportunities for Japan and Korea as well as for China. Specifically, as noted above, there will be problems of structural adjustment as well as cross-border issues such as migration and pollution that will inevitably arise as China becomes more open and economically more developed. Some might propose an East Asian regional economic integration as an institutional response to such challenges and opportunities. According Lee and Woodall (1998), three conditions determine the likelihood of successful negotiation for regional economic integration.

The likelihood is high if the

candidate countries are located in relatively close geographical proximity to one another and do not have any major territorial disputes, if they have compatible political regimes and regime objectives, and if they are at similar stages of economic development.

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China, Japan, and Korea are certainly in close geographical proximity, but China and Japan are at present in dispute over Diaoyu/Sengaku islands in the East China Sea and Japan and Korea are in dispute over Takeshima/Tok-Do islands in the Sea of Japan/the East Sea. Compounding these disputes is the long history of political rivalry or, worse, political enmity between China and Japan and between Japan and Korea. The difference between China and Japan and Korea in political regimes and regime objectives seems rather obvious. And, as discussed above, the three countries are all at different stages of economic development. All these factors point to the low likelihood of there emerging a regional economic integration in East Asia for the foreseeable future. Furthermore, it is very unlikely that Japan will want any regional integration in East Asia that would weaken its ties with the United States. As pointed out by Ichimura (1998, pp.116-117), Japan and the United States have some basic interests and values in common: They share a common geo-political position in Asia and the Pacific; they are dedicated to the same democratic values; they cooperate increasingly in science and technology; and their economies are already highly interdependent with each other. As he sees it, the mutual benefits of the close relationship between the Unite States and Japan are so great that it would be inconceivable for Japan to take any action that would lead to deterioration in her relationship with the United States. What further complicates economic relations among the three countries in East Asia is the fact that there are three triangles involving the United States and the three East Asian countries—the U.S.-China-Japan triangle, the China-Japan-Korea triangle, and the U.S.China-Korea triangle (Han 2000).2 The first triangle is an uneven one in that the United States and Japan are much closer to each other—militarily, economically, and diplomatically—than either is to China. In the second triangle, Korea is squeezed between the

The term triangle is used in diplomacy to describe a special dynamic among three nations such that considering only bilateral relations among them is inadequate (Han 2000). 2

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two major powers in the region and is forced to cope with the contending ambitions and influences of the two. Han believes that this triangle portends dangers for Korea since it will be difficult for it to stay aloof in the Sino-Japanese competition. Han finds both hope and opportunity for Korea in the third triangle—a hope because it can stay clear of potential rivalry and conflict between China and Japan and an opportunity because a close involvement of the United States in the region will give Korea room to maneuver among and between powers. Furthermore, as pointed out by Scalapino (1999), the relationship between the United States and China is of vital importance to Asia as a whole since positive relations between the two will support regional peace and stability whereas tension-dominated relations will put a “dark cloud over the region.” In sum, the region’s prosperity is highly dependent on the U.S. presence in East Asia and, consequently, to create a regional economic integration that excludes the United States will not be beneficial to the region even if it does not incite any retaliation from that country. Even if a regional trading bloc is feasible in East Asia, will it be beneficial to its member countries? This is precisely a question raised by Panagariya (1998) with respect to forming an “East Asian” trade bloc (the Asian NIEs, the ASEAN-4, China, and Japan). He argues that the economic desirability of forming such a bloc is difficult to assess because its effects go beyond the simple efficiency effects of trade creation and diversion. As he sees it, given the importance of the region in world GNP and trade, the creation of a discriminatory bloc will bring forth retaliation from the rest of the world. Granted that his question is about a larger group of countries than the three countries in East Asia, the latter group is large enough for their forming a trading bloc to prompt similar retaliation from the rest of the world. As mentioned earlier, the three countries in East Asia account for a significant portion of world population and world GNP. Furthermore, China, Japan, and Korea individually

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depend heavily on trade with the United States and Europe. For instance, in 1997 the United States accounted for 17.9 percent and 11.46 percent of China’s exports and imports, 28.12 percent and 22.43 percent of Japan’s exports and imports, and 15.85 percent and 20.73 percent of Korea’s exports and imports (Tables 2-7). The same year Europe accounted for 12.63 percent and 13.09 percent of China’s exports and imports, 14,52 percent and 12.58 percent of Japan’s exports and imports, and 12.36 percent and 12.97 percent of Korea’s exports and imports (Tables 2-7). Given the size of these exports and imports, one would have to be extremely naïve, if not foolhardy, to think that the United States and the European Union would not take retaliatory actions to the forming of an East Asian trading bloc. Taking such actions into account, Lee and Woodall conclude that for East Asia, “…open regionalism promises to benefit the welfare of every country and people on the Pacific Basin.” Open regionalism does not, however, exclude the possibility of there being what Scalapino (1999) calls “natural economic territories,” which are “economic entities that cut across political boundaries, combining resources, manpower, capital, technology and managerial skills, taking advantage of the reciprocal capacities of adjoining territories.” The forming of such natural economic territories would be a bottom-up process that would be facilitated as political barriers between countries are lowered and cross-border trade and investment grow. Since such territories will be non-discriminatory it is safe to assume that the rest of the world would not take retaliatory actions. As political barriers come down and as intra-regional trade and investment grow in East Asia there might indeed “naturally” emerge several natural economic territories in the region. There are, however, government actions that can accelerate this process.

V.

Provision of Regional Public Goods

It is now widely recognized that global public goods such as international regimes providing

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common frameworks for international transportation and communication, trade, harmonized taxation, monetary policy, governance, etc., are central to the well-being of the nations and individuals of the world. For the same reason there are certain public goods that are specific to a region and are essential for the well-being of the nations and individuals of the region. For the reasons well understood by economists such public goods will have to be delivered on the supranational level by a number of national governments in the region acting in concert (Cook and Sachs 1999). A general list of such regional public goods includes cross-border environment issues, infectious disease, financial market regulation and stabilization, transport, telecommunications and data transmission, power grids, agricultural research and extension, and law enforcement. The following discusses some of the East Asian region-specific issues that call for the provision of regional public goods:

Environment:

Trans-border

environmental

issues,

in

general,

include

watershed

management, many kinds of pollution (acid rain, effluent runoffs), management of natural reserves, scientific research on issues of eco-zone management (biodiversity, desertification, impacts of climate change). A case of trans-border environment issues in East Asia is what is known in Korea as the “spring uninvited guest,” the yellow dust that blows over to Korea and Japan from the Gobi and Taklamakan deserts in China in the dry spring months. This problem has become worse in recent years because of a long drought in China and industrial development in Northern China. The dust is known to cause eye and respiratory illnesses, visibility problems for pilots, hinder operation of precision machines, and impair the growth of agricultural products.3 It is now even accused of having caused this year’s livestock epidemic in Korea (The Korea Environmental ministers of China, Japan, and Korea have met several times to discuss the ways of cooperation. One concrete outcome of these meetings is that the three countries have decided to jointly combat desertification in China by planting trees in an area bordering China 16 3

Herald, April 4, 2000).

Public Health: As yet East Asia does not have as large migratory populations as in Africa, the Southeast Asia, and the Middle East, but migratory population will also increase in East Asia as disparities in income remain in the region. Japan has a large pool of legal as well as illegal aliens working in the country, and Korea also has alien workers, some of them ethnic Koreans from China. There are infectious diseases that accompany migratory workers and these are cross-border issues. Basic research on those diseases is a regional task and raises issues relating to the intellectual property rights to its discoveries as they affect the entire region, not just an individual country.

Transnational Crime: This, including trafficking in drugs, arms, and human beings, is an issue discussed at this year’s ASEAN Regional Forum (The Honolulu Advertiser, Monday, July 24, 2000). Although transnational crime does not yet appear to be a major problem in East Asia it is never too late to begin working toward developing regional institutions to deal with it.

Financial Market Regulation and stabilization: The Asian financial crisis of 1997-98 has clearly demonstrated that a financial panic that starts in one country can quickly spread to neighboring countries and that lack of prudential regulation and supervision is not simply a matter of concern for a single country. In other words, the quality of oversight of financial markets in one country affects financial markets in neighboring countries. If the region is to avoid another crisis in the future it must find ways to harmonize financial regulations and ensure that all countries in the region are appropriately monitoring their financial institutions and policies. As recently discussed, the three East Asian countries might consider establishing and Mongolia (The Korea Herald, April 1, 2000). 17

a swap arrangement, which could be extended to include the ASEAN countries.4

Telecommunications and data transmission: Information highways pose important crossborder issues. Satellite systems and fibre-optic cables service regions rather than nations. The regional scale of competition among providers of telecommunications services will determine, to a significant extent, the pricing and quality of service within any individual nation.

Power grid: This is not an issue for the region yet, but if the two rivers that border China and North Korea are to be developed for hydroelectric power, regional cooperation will be needed.

Agricultural research and extension: Agriculture research has deep public goods aspects, and these often inhere to the region rather than national scale. Weather monitoring stations, weather modeling and forecasting, crop insurance, conservation research and management, and biotechnology research also have public goods aspects.

As pointed out by Cook and Sachs, regional public goods are generally underprovided and often completely neglected. The reasons for this under-provision include high transaction costs in managing regional public goods and the tendency of international assistance programs to be directed to national governments rather than supranational entities, which may not even exist. In recent years there has been a serious attempt at creating a North East Asian development bank for the purpose of providing funds for infrastructure investments. An additional role that such a bank may undertake is obviously the funding of regional public

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“Asia plan to protect markets,” The Financial Times, May 7, 2000. 18

goods, which national and local governments or private actors are unlikely to provide.

VI.

Concluding Remarks

Even though China has achieved spectacular economic development since its modernization starting in the late 1970s and continues to grow at a relatively high rate, it is not likely to become a fully developed economy by year 2020. Japan will still lead China and other Asian countries in technology and in capital goods, but with its sheer size and potential for further economic growth, China will play an increasingly important role in the region’s economic prosperity. It is likely that in place of the Japan-led flying-geese pattern of development of the second half of the 20th century there will emerge a new multi-polar East Asia with Japan and China as its major players. China’s emerging as a major economy in East Asia will certainly have many positive effects on the region’s economic prosperity but it will also create problems of structural adjustment in its neighboring economies that are currently ahead of China in economic and technological development. It is highly unlikely that China will take over Japan as the leading economy in East Asia by 2020 although some of its leading industries may be able to compete with their Japanese counterparts in the global markets. For Korea, however, catch-up by China in the areas in which it now has a comparative advantage is a strong possibility, and it will be faced with the serious and painful problems of adjustment and structural change. Obviously, structural adjustment will be easier and less costly if China opens up its economy, creating demand for exports from Korea. As observed by Ichimura (1999), Asia has never been at peace for longer than a tenyear period. In East Asia alone, peace has been intermittent between the Sino-Japanese War (1894-95) World War I (1914-18), the Manchurian Incident (1931-32), the Japanese invasion of China (1937-41), the Great East Asian War (1931-45), and the Korean War (1950-53).

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This is a history that East Asia does not want and cannot afford to repeat. Up to 1992, Japan’s China policy was to support China’s modernization programs, its economic development, and its domestic stability.

Since then, however, a series of

developments have led to changes in Japan’s perception of China. Many in Japan now see China as being overbearing toward the region and, worse, as having territorial ambitions beyond the confines accepted during the Cold War (Soeya 1998). If this perception persists in Japan and if China begins to believe, as observed by Pryzystup (1996), that its economic success should restore it to its rightful place in Asia as the Middle Kingdom, the two engines of growth will be at loggerheads instead of working together. Thus what the 21st century will bring to the region will depend very much on how the region’s two major powers relate to each other politically. If, as remarked by Alaggapa (1998), a hierarchical order with a single center of power and authority is no longer tenable in East Asia, then China and Japan will have to come to terms with each other and learn to coexist, although historically unprecedented, as great powers in the region. Starting on regional economic cooperation is a first step toward that goal.

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References Abe, Shigeyuki and Lee, Chung H., “Economic Development in China and Its Implications for Japan” in M. Blomstrom, B. Gangnes, and S. LaCroix (eds.), Japan’s New Economy: Continuity and Change in the 21st Century, Oxford University Press (forthcoming). Akamatus, Kaname, “A Historical Pattern of Economic Growth in Developing Countries,” The Developing Economies, No.1, March-August 1962. Alagappa, Muthiah, “International Politics in Asia: The Historical Context” in M. Alagappa (ed.), Asian Security Practice, Stanford University Press, Stanford, California, 1998. Booz-Allen & Hamilton, Vision Korea, Seoul, Korea, 1997. Bergsten, C. Fred, “The New Asian Challenge,” Institute for International Economics, Working Paper 00-4, March 2000. Bureau of Export Promotion, U.S. Department of Commerce, U.S. Commercial Technology Transfer to the People’s Republic of China, Office of Strategic Industries and Economic Security, Washington, D. C., January 1999. Cook, Lisa D. and Sachs, Jeffrey, “Regional Public Goods in International Assistance” in I. Kaul, I. Grunberg, and M.A. Stern (eds.), Global Public Goods: International Cooperation in the 21st Century, United Nations Development Programme, New York, 1999. Garnaut, Ross and Huang, Yiping, “China and the Future International Trading System” in China and East Asia Trade Policy, Pacific Economic Papers, No. 250, AustraliaJapan Research Centre, Australian National University, Canberra, Australia, December 1995. Han, Sung-joo, “The Emerging Triangle: Korea between China and the United States,” East Asian Review, Vol.12, No.1, Spring 2000, pp.3-29.

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Ichimura, Shinichi, Political Economy of Japanese and Asian Development, Springer-Verlag, Tokyo, 1998. Jefferson, Gary H., “China’s Economic Future: A Discussion Paper,” Journal of Asian Economics, Vol. 8, No. 4, winter 1997, 581-595. Kreinin, Mordchai, Michael G. Plummer, and Shigeyuki Abe, “Export and Direct Foreign Investment Links: A Three Country Comparison” in M. Kreinin, S. Abe, and M.G. Plummer (eds.), International Economic Links and Policy Formulation, Elsevier, forthcoming 1999. Lardy, Nicholas R., China’s Unfinished Economic Revolution, Brookings Institution Press, Washington, D. C., 1998. Lee, Hiro and Woodall, Brian, “Political Feasibility and Empirical Assessments of a Pacific Free Trade Area” in H. Lee and D.W. Roland-Holst (eds.), Economic Development & Cooperation in the Pacific Basin: Trade, Investment, & Environmental Issues, Cambridge University Press, 1998. Lilley, James R. and Hart, Sophia C., “Greater China: Economic Dynamism of the Overseas Chinese” in Joint Economic Committee, U.S. Congress, China’s Economic Future: Challenges to U.S. Policy, U.S. Government Printing Office, Washington, D.C., August 1996. Naughton, Barry, “The Future of the China Circle” in B. Naughton (ed.), The China Circle, Brookings Institution Press, Washington, D. C., 1997. Nelson, Richard R. and Wright, Gavin, “The Erosion of U.S. Technological Leadership as a Factor in Postwar Economic Convergence” in W. J. Baumol, R. R. Nelson, and E. N. Wolff (eds.), Convergence of Productivity: Cross-National Studies and Historical Evidence, Oxford University Press, New York, 1994. Panagariy, Arvind, “Should East Asia Go Regional?” in H. Lee and D.W. Roland-Holst

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(eds.), Economic Development & Cooperation in the Pacific Basin: Trade, Investment, & Environmental Issues, Cambridge University Press, 1998. Pryzystup, James J., “Thinking about China” in Joint Economic Committee, U.S. Congress, China’s Economic Future: Challenges to U.S. Policy, U.S. Government Printing Office, Washington, D.C., August 1996. Scalapino, Robert A., “Challenges and Potentials for Northeast Asia in the Twenty-First Century” in Regional Economic Cooperation in Northeast Asia, North East Economic Forum, Honolulu, Hawaii, 1999. Seki, Mitsuhiro, Japanese Firms in the Age of New Asia Era (in Japanese), Chuo Koron Shinsha, 1999. Soeya, Yoshihide, “Japan: Normative Constraints Versus Structural Imperatives” in M. Alaggapa (ed.), Asian Security Practice, Stanford University Press, Stanford, California, 1998. World Bank, China 2020, Washington, D. C., 1997. Yoshitomi, Masaru, “The Comparative Advantage of China’s Manufacturing in the Twentyfirst Century” in China in the 21st Century: Long-Term Global Implications, Organization for Economic Co-operation and Development, Paris, 1996.

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Table 1: Major Statistics of China, Japan, and Korea, 1998 GNP

Per GNP

Population

China

1,239 million

Japan

126 million 46 million

Korea

capita

GDP Growth Rate 1980-90 1990-98 10.2

$929 billion $4,090 billion $370 billion

$32,380 $7,970

4.0

1.3

9.4

6.2

st

Source: World Bank, Entering the 21 Century: World Development Report 1999/2000, Oxford University Press, 2000.

Table 2: China’s Merchandise Exports to Japan, Korea, the United States, and Europe (US $billions, %)

Total Export s Japan

1989

1990

1991

1992

1993

1994

1995

1996

1997

$53

$62

$72

$85

$92

$121

$149

$151

$183

15.9 8

14.5 1

14.2 2

13.7 5

17.2 0

17.8 3

19.1 3

20.4 5

17.4 0

2.49

2.40

4.76

8.38 9.51

8.34 9.22

8.56 9.50

4.36 10.1 2 9.07

4.25 18.5 0 12.9 3

4.53 17.7 5 12.3 3

4.95 16.6 2 12.4 2

5.67 17.6 8 12.7 3

5.47 17.9 0 12.6 3

Korea United States Europe

11.1

$750

Note: The figures for Korea are calculated from Korea’s imports from China on Table 5. Europe is for Belgium (and sometimes, Luxembourg), France, Germany, Italy, the Netherlands, Spain, Switzerland, Sweden, and the United Kingdom. Source: ICSEAD, East Asian Economic Perspectives: Recent Trends and Prospects for Major Asian Economies, Vol. 10, February 1999, Kitakyushu, Japan.

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Table 3: China’s Merchandise Imports from Japan, Korea, the United States, and Europe (US $billions, %)

Total Import s Japan

1989

1990

1991

1992

1993

1994

1995

1996

1997

$59

$53

$64

$81

$104

$116

$132

$139

$142

17.8 1

14.2 2

15.7 2

16.9 8

22.4 0

22.7 7

21.9 6

21.0 2

20.3 9

2.18 13.2 5 16.4 2

2.53 12.3 2 15.8 6

1.58 12.5 4 14.0 8

3.26 11.0 5 13.1 6

4.96 10.2 8 15.1 6

5.32 12.0 2 15.9 2

6.95 12.2 0 15.5 9

8.15 11.6 4 14.0 4

9.57 11.4 6 13.0 9

Korea United States Europe

Note: The figures for Korea are calculated from Korea’s exports to China on Tables 5. Europe is for Belgium (and sometimes, Luxembourg), France, Germany, Italy, the Netherlands, Spain, Switzerland, Sweden, and the United Kingdom. Source: ICSEAD, East Asian Economic Perspectives: Recent Trends and Prospects for Major Asian Economies, Vol. 10, February 1999, Kitakyushu, Japan.

Table 4: Japan’s Merchandise Exports to China, Korea, the United States, and Europe (US $billions, %)

Total Export s China

1989 $275

1990 $287

1991 $314

1992 $339

1993 $361

1994 $395

1995 $443

1996 $410

1997 $421

3.10

2.14

2.73

3.51

4.76

4.73

4.97

5.33

5.15

6.31 34.07

6.51 31.70

6.70 29.29

5.71 28.42

5.51 29.48

6.45 30.03

7.34 27.57

7.68 27.53

6.63 28.12

18.3 3

19.3 3

19.3 7

18.7 3

15.6 1

14.5 5

14.8 8

14.3 1

14.5 2

Korea United States Europe

Note: The figures for Korea are calculated from Korea’s imports from Japan on Tables 6. Europe is for Belgium (and sometimes, Luxembourg), France, Germany, Italy, the Netherlands, Spain, Switzerland, Sweden, and the United Kingdom. Source: ICSEAD, East Asian Economic Perspectives: Recent Trends and Prospects for Major Asian Economies, Vol. 10, February 1999, Kitakyushu, Japan.

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Table 5: Japan’s Merchandise Imports from China, Korea, the United States, and Europe (US $billions, %)

Total Import s China

1989

1990

1991

1992

1993

1994

1995

1996

1997

$207

$231

$234

$231

$239

$272

$333

$347

$339

5.38

5.21

6.07

7.33

8.56

10.0 9

10.8 2

11.6 4

12.3 5

6.46 23.3 7 13.9 9

5.45 22.7 9 15.8 7

5.30 22.9 5 14.1 4

4.99 22.7 8 13.8 6

4.83 23.3 3 12.8 5

4.91 23.2 3 13.3 2

5.06 22.7 2 13.6 9

4.44 22.9 2 13.3 3

4.36 22.4 3 12.5 8

Korea United States Europe

Note: The figures for Korea are calculated from Korea’s exports to Japan on Tables 5. Europe is for Belgium (and sometimes, Luxembourg), France, Germany, Italy, the Netherlands, Spain, Switzerland, Sweden, and the United Kingdom. Source: ICSEAD, East Asian Economic Perspectives: Recent Trends and Prospects for Major Asian Economies, Vol. 10, February 1999, Kitakyushu, Japan.

Table 6: Korea’s Merchandise Exports to China, Japan, the United States, and Europe (US $billions, %)

Total Export s China, Japan, United States Europe

1989

1990

1991

1992

1993

1994

1995

1996

1997

$62

$65

$72

$76

$82

$95

$123

$124

$136

2.07 21.5 6 33.2 7 12.6 0

2.06 19.3 7 29.9 9 14.6 3

1.40 17.2 4 25.9 6 13.6 8

3.47 15.1 8 23.7 6 11.9 8

6.29 14.0 9 22.2 3 11.0 9

6.50 14.0 5 21.6 9 11.1 1

7.46 13.7 1 19.8 5 12.1 4

9.14 12.4 2 17.6 2 11.0 3

9.99 10.8 6 15.8 5 12.3 6

Note: Europe is for Belgium (and sometimes, Luxembourg), France, Germany, Italy, the Netherlands, Spain, Switzerland, Sweden, and the United Kingdom. Source: ICSEAD, East Asian Economic Perspectives: Recent Trends and Prospects for Major Asian Economies, Vol. 10, February 1999, Kitakyushu, Japan.

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Table 7: Korea’s Merchandise Imports from China, Japan, the United States, and Europe (US $billions, %)

Total Import s China Japan United States Europe

1989

1990

1991

1992

1993

1994

1995

1996

1997

$61

$70

$81

$81

$83

$102

$132

$145

$145

2.16 28.4 4 25.9 3 11.2 6

2.13 26.6 8 24.3 4 12.8 7

4.23 25.9 8 23.2 5 13.0 3

4.58 23.9 0 22.4 8 12.6 6

4.71 23.9 9 21.5 2 12.9 0

5.38 24.9 7 21.2 4 13.8 2

5.59 24.6 2 22.8 4 13.0 3

5.90 21.7 2 22.6 5 13.5 3

6.90 19.2 6 20.7 3 12.9 7

Note: Europe is for Belgium (and sometimes, Luxembourg), France, Germany, Italy, the Netherlands, Spain, Switzerland, Sweden, and the United Kingdom. Source: ICSEAD, East Asian Economic Perspectives: Recent Trends and Prospects for Major Asian Economies, Vol. 10, February 1999, Kitakyushu, Japan.

Table 8: Foreign Direct Investment and Other Foreign Investment (on arrival basis) in China (in US $millions) 1997-98

Japan Korea United States World Total

Foreign Direct Investment $7,726 (8.5%) $3,942 (4.3%) $7,137 (7.9%) $90,720 (100%)

Other Foreign Investment $108 (1.2%) $86 (1%) $497 (5.4%) $9,225 (100%)

Source: China Statistical Press, China Statistical Yearbook 1999 (Table 1715). Note: Other major investors in China are Hong Kong, Singapore, Taiwan, and United Kingdom.

Table 9: Korea’s Direct Investment in China, Japan, and the United States

27

Cumulative Total 1968-99 Cases China Japan United States World Total

4,235 (41%) 280 (3%) 1,716 (17%) 10,259 (100%)

Cumulative Total 1968-99 Amount (US $ millions) $4,315 (17%) $457 (2%) $7,266 (28%) $25,703 (100%)

in

Source: Economic Cooperation Bureau, Ministry of Finance and Economy, Republic of Korea, Outward Direct Investment (in Korean), December 31, 1999.

Table 10: Foreign Direct Investment in Korea (on arrival basis) Cumulative Total 1962-October 1999 $31 million

China (0%) Japan United States World Total

$5,479 million (19%) $6,469 million (23%) $28,640 million (100%)

Source: Industry and Energy Bureau, Ministry of Commerce, Republic of Korea, Trends in Foreign Direct Investment (in Korean), November 30, 1999.

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