World's Trade and Manufacturing Centres Shift East
By Philip S Golub*
Le Monde diplomatiqueOctober 2003
East Asia has supported the United States economy for a long time, using its savings to invest in the US in exchange for access to the US market. But China and Japan now lead the slow creation of a whole new economic structure in the region.
Washington now has a favourite game: blaming East Asia for the economic ills of the United States. In the mid-1980s US ire focused on Japan and the newly industrialised countries (NICs), which were intensely pressured to revalue their currencies and open their economies to US trade and foreign direct investment. Now it is China's turn to face aggressive US trade diplomacy. The ostensible reason for this is the rising US trade deficit. But there is a deeper concern: China's new role as the engine of regional integration in East Asia, an unintended consequence of US mismanagement of the 1997-98 East Asian financial crisis.
On 18 July 2003 many voices in the US accused China of being the main culprit causing the chronic US trade deficit, rising unemployment and the destruction of textiles and electronics manufacturing industries. "US manufacturing industry has been getting killed," complained Senator Charles Schumer. "The Chinese yuan is being devalued artificially, causing a flood of lower- priced foreign goods that our companies can't compete against," concurred Senator Elisabeth Dole. "The Chinese cheat on their trade agreements . . . the Treasury needs to look into this and take appropriate action to ensure the Chinese aren't allowed to continue devaluing their currency to the detriment of our domestic industries," added Senator Lindsey Graham (1).
Testifying to Congress the day before, the Federal Reserve chairman, Alan Greenspan, had lent weight to these arguments, saying that China and other East Asian countries had undervalued currencies. He warned that their accumulation of large foreign currency holdings could not continue indefinitely (2).
The Senators officially asked the Treasury to pressure China to eliminate exchange controls and to float the yuan, which is pegged at 8.3 to the dollar. The furore died down in August, but in September Treasury Secretary John Snow, on a tour of Asia, again exhorted China to "let the market price the currency" - which seems curious behaviour by an administration in dire need of Chinese help to deal with North Korea and Asian regional security.
We should expect more of the same pleas in future as the US struggles with rising deficits and as China, one of the few growth centres of the world economy, becomes the epicentre of East Asian regional economic integration. The latest Asia-bashing is not just part of a recurrent pattern of aggressive US trade diplomacy reflecting the vagaries of domestic US politics. It also expresses longstanding US anxiety over a coming tectonic shift in the distribution of world economic power in favour of East Asia, especially China.
US ambivalence about East Asian economic dynamism was already apparent in the 1980s when the flood of commentary about the Asian miracle was accompanied by warnings over Asian mercantilism and the growing Japanese and Asian competitive threat. By then the US had become a debtor country, for the first time since 1918, and was facing growing balance of payments and budget deficits. Like China today, Japan and the East Asian NICS were accused of damaging the industrial fabric of the West and were pressured to revalue their currencies and open their economies and financial systems to US trade and investment.
In 1985 the Reagan administration engineered a 50% revaluation of the yen through the Plaza Accords. These were imposed on allies who were structurally dependent on the US market and enmeshed in the US security system, and they were supposed to boost US exports and decrease Japan's industrial competitiveness. But the policy had unintended consequences: the appreciation in the yen transformed Japan overnight into the world's leading creditor, and quickened the pace of Asian regional economic integration by pushing Japanese firms to relocate their lower value-added export activities to South East Asia. Redeployment of Japanese manufacturing capacity quickly created a concatenated Japan-centred regional division of labour in East Asia.
In the 1950s, 1960s and 1970s the regional political economy was structured around trans- Pacific trade and characterised by the single- market dependency of Northeast Asian countries on the US. East Asia, in the words of Meredith Woo-Cumings (3), was "an American lake" and the US made export-led industrialisation possible by absorbing the bulk of Asian exports.
The Asian developmental state was tolerated, indeed encouraged, as part of a deal in which Japan, South Korea and Taiwan became a bulwark of security and prosperity around the Soviet Union and China.
As part of the cold war compact, they traded their political sovereignty for unrestricted access to the US market. Until the mid 1980s the US accounted for more than one-third of Japan's exports, 40% of Korea's, and 44% of Taiwan's. This structural dependency gave the US a powerful political leverage over its East Asian allies. But after the Plaza Accords, Japan diversified its trade and investment flows, mainly though not exclusively, towards the rest of East Asia. By the early 1990s Japanese exports to the US, as a share of total exports, had fallen to 27%. During the same period the share of intra-regional trade rose from 32% to 44%, reflecting the growing import ance of subsidiaries of Japanese multinational corporations (MNCs) in the regional division of labour (4). By 1994 intra-regional trade accounted for 48.5% of total Asian trade and in 1995 it passed 50%.
This was not an outcome that the US had desired or foreseen. During the cold war Japan, and later the NICs, had been "invited by Westerners to do well but not so well as to threaten them" (5), certainly not to become contenders for world economic hegemony. In the post-cold war world, the Asian developmental state not only lost its strategic relevance but became a menace in US and European eyes. The US became obsessed by the spectre of a dynamic East Asian bloc.
In 1989 Lawrence Summers, who became President Bill Clinton's Undersecretary of the Treasury, said: "An Asian economic bloc with Japan at its apex is in the making. This raises the possibility that the majority of American people who now feel that Japan is a greater threat to the US than the Soviet Union are right"(6). There was a perceptible and foolish sigh of relief when Japan plunged in 1990 into a prolonged period of economic stagnation after the Tokyo finance, insurance and real estate sector bubble burst. The crisis proved, in the condescending words of a US author, that the "Japanese model was not a different type of capitalism but a holdover from an earlier stage of capitalism" (7).
It proved nothing of the sort, of course, but the idea soothed Western anxieties of decline by seeming to dim the prospect of an autonomous East Asian bloc. A few years later the acute 1997-98 regional crisis in Asia was greeted as further evidence of Western singularity and superiority (or of Eastern economic infantilism). As Chalmers Johnson noted, "pundits and economists expressed open delight" as the region oscillated on the brink of social and economic disaster (8).
Charles Krauthammer, a prominent US neo- conservative writer now best known for cheerleading for war and empire, wrote: "Our success is the success of the American capitalist model which lies closer to the free market vision of Adam Smith than any other. Much closer, certainly, than Asia's paternalistic crony capitalism that so seduced critics of the American system during Asia's now burst bubble" (9).
Some academics concurred. "The crisis," said one, "has destroyed the credibility of the Japanese or East Asian model of economic growth" (10). Alan Greenspan entered the debate, arguing that Asia's plight had been caused by developmentalism - state-led industrialisation and government rather than market-led allocation of resources: the crisis signified that the world was inexorably moving away from dirigism "towards the Western form of free market capitalism" (11). The Asian miracle was authoritatively pronounced a mirage.
The subtext of the debate was that the Asian latecomers to modern capitalism had been put in their rightful place. And on both sides of the Pacific, the crisis was interpreted as an East-West shock and a defining moment for the balance of world economic power. US management of the crisis confirms the idea that the aggressive liberalisation of local financial markets during and after the crisis was an instrument of US power and part of a larger effort to "dismantle developmentalist policies throughout the world" (12).
In contrast to the US Treasury's rapid and decisive bailout of Mexico in 1994, the US and its transatlantic partners sat back for months while the crisis spread through East Asia. A vast International Monetary Fund bailout was arranged only when it became clear that the contagion was getting out of control and spreading to global markets. More significantly the Treasury vetoed a 1997 Japanese proposal to set up an Asian Monetary Fund (AMF), which would have pooled Asian resources and provided much needed liquidity to countries facing massive capital outflows, with few conditions attached.
The proposal was "quickly and brutally crushed" by the Treasury Secretary, wrote Bernard Gordon, hardening the view in East Asia that the US "was prepared to write off several of the Asian economies. Some even believed that Americans were anxious to benefit from Asia's plight" (13). The problem, as seen from Washington, was that the AMF might have been the kernel of an autonomous regional system rivalling the IMF, one of the West's tools of hegemony. Instead the IMF was sent in with its usual draconian structural adjustment policies designed to save creditors, open up protected sectors of the economy, and compress domestic demand.
There is little doubt that the crisis was considered an opportunity to gain control of protected strategic sectors of local economies. As Morgan Stanley's Daniel Lian recently pointed out in a critical assessment of US policy, the West has a vested interest in maintaining East Asia's "dependence on external demand and foreign-owned or foreign- financed production capacity", and also in access to domestic economies. He said Western capital used the crisis to try to "secure ownership of the region's domestic economies" (14).
Much like the earlier effort to revalue the yen, this policy has been a failure, producing outcomes opposite to those desired. It caused a strong nationalist backlash in the countries and the bargain sale of domestic industries did not happen. On the contrary, with some exceptions such as Indonesia, most countries affected by the crisis have managed to maintain control of strategic sectors through government takeovers of the debt of private companies or by blocking privatisation of the public sector.
The policy stimulated greater regional monetary cooperation. In 2000 Asian countries launched the Cheng Mai initiative to formalise regional monetary coordination, an informal AMF. In 2003 a number of East Asian countries set up the Asia Bond, a shared monetary instrument to mobilise productively the region's gigantic accumulated foreign exchange reserves (15).
The US, by weakening Japan's regional construction efforts, unintentionally enhanced China's strategic position. Regional economic integration, which earlier was led by Japan, is now happening under Chinese auspices.
China, which was insulated from the direct effects of the 1997 crisis thanks to exchange controls, has since the late 1990s become the centre of regional trends towards integration. This reflects Japan's loss of momentum during the 1990s and the continuing dynamism of the Chinese economy - 7.8% growth in 2002 and 8% to 9% of GDP in 2003. It also highlights China's geopolitical intent to secure a central position in East Asia in future.
In 2001 the Chinese authorities launched regional free trade areas with South and North East Asia, to be complete by 2010: negotiations over these continue. In contrast with sliding global trade, trade and investment flows between China and the rest of Asia have boomed. This has been a factor in South East Asian post-crisis recovery. Exports by the Association of South East Asian Nations to China rose 55% in the first half of 2003 to $20bn out of $70bn. In fact regional Asian trade with China has been growing far faster than Asian trade with the US. Japan's imports from China already exceed those from the US and Japanese exports to China have been steadily rising. This tendency is also apparent in South Korean, Thai, Malaysian, and Singaporean bilateral trade (16).
These trends imply that we are seeing the first steps in the construction of a Chinese regional political economy. For China, this has advantages: over time it will reduce trade dependency on the US market and decrease its vulnerability to external pressure or shocks. It also creates webs of interdependence between the rest of Asia and China, a buffer between China and the West.
For the rest of the region, the consequences are more ambiguous. Japan, by far the most technologically and economically advanced of the countries, is now in a race with China over regional economic influence, even as its multinationals invest ever more heavily in China. This competition may benefit South East Asian countries that hardly desire to trade a strategic dependency on the US for one with China. Given their productive profiles and narrow specialisation in low value-added sectors (electronics, textiles), China represents a major challenge for the developing countries of the region.
Japanese regionalism generated shallow rather than deep modernisation in South East Asia. Given the sharp differentials between developed countries (Japan, South Korea, Taiwan, Singapore) and less developed countries (Malaysia, Thailand, Indonesia, Vietnam), as well as interstate rivalries, a coherent Asian regional system is still a long way off. But longer-term trends point toward it. This is a structural phenomenon that can be compared to the rise of the US as a core economic power, a process that was interrupted but not stopped by the Great Depression. As the row about the yuan suggests, it will take a Copernican revolution in the West to accept this fact graciously.
*About the Author: Philip S Golub is a journalist and lecturer at the University of Paris-VIII.
Endnotes:
(1) "Senators urge Treasury to take action to get China to float its currency"
(2) "Fed's calls for yuan float grow louder", International Herald Tribune, Paris, 17 July 2003.
(3) Meredith Woo-Cumings, "East Asia's American Problem" in Past As Prelude, Westview Press, Boulder, Colorado, 1993.
(4) See Claude Pottier, Les multinationales et la mise en concurrence des salariés, l'Harmattan, Paris, 2003.
(5) Giovanni Arrighi, The Long Twentieth Century, Verso, London, 1994.
(6) Quoted by Richard Katz, The System that Soured: The Rise and Fall of the Japanese Economic Miracle, M E Sharpe, 1998. Europeans expressed similar views. In 1991, in widely publicised unfortunate remarks, the French prime minister, Edith Cresson, said that Japan was a hermetically sealed system that wanted to conquer the world.
(7) Ibid.
(8) Chalmers Johnson, Blowback: the Costs and Consequences of American Empire, Metropolitan Books, New York, 2000.
(9) Quoted by Chalmers Johnson, ibid.
(10) Donald K Emmerson, "Americanising Asia", Foreign Affairs, New York, May-June 1998.
(11) Alan Greenspan, speech at the annual convention of the American Society of Newspaper Editors, Washington, 2 April 1998.
(12) Immanuel Wallerstein, "America and the World: The Twin Towers as Metaphor", Charles R Lawrence II Memorial Lecture, Brooklyn College, 5 December 2001.
(13) Bernard K Gordon, "A High-Risk Trade Policy", Foreign Affairs, New York, July/August 2003.
(14) Daniel Lian, "Mr Thaksin's role in the East-West Dichotomy", Morgan Stanley Economic Trends Reports, 25 July 2003.(Text in Japanese)
(15) Japan and China have $900bn of foreign currency reserves (respectively $560bn and $340bn), mostly in US Treasury Bonds. Adding other East Asian countries, the figure is well over a trillion dollars. East Asia is the primary finance source for US debt.
(16) Bernard K Gordon, op cit.
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