JPRI Critique Vol. VIII No. 4 (May 2001)
American Economic Policies Toward China and Japan
by Alan Wm. Wolff

It is time to restore a strategic sense to American foreign economic policy. From 1945 to the late 1980s, there was a clear conceptual framework for post-World War II and Cold War trade and investment policy. The use of trade, investment, and assistance was always considered part of an explicit, coherent plan to prevent the resurgence of fascism, to oppose the spread of communism, to raise the standard of living of the American people, and later, in the 1960s, to dilute the discrimination against American products inherent in the consolidation of Europe.

Today, the underlying purposes of U.S. foreign economic policy have become obscure. Free trade has come to be considered an end in itself, as if American policy existed to fulfill the expectations of the economics departments of the nation's universities and a number of its think tanks. Prudence dictates that America act to foster its clear interests rather than to act primarily from ideological bias. Fortunately, at the broadest level, America's beliefs and its interests are not at odds. But a good understanding of America's interests is essential to avoid making serious errors in the choice of policy tools, or worse, taking a completely wrong turn.

A basic assumption of American policy is that the hope of economic advancement for a people, while it does not guarantee democracy, creates the possibility of democracy and that democracies are less likely to make war upon each other, or involve America in war. A late 20th century addition to this prescription for harmony is that information technology provides a level of communication that makes totalitarian government of the kind that existed throughout the middle of the last century nearly impossible and reinforces the movement toward democracy and market economies.

As the threat of war diminishes in this post-Cold War period, commerce becomes more important. Much of the news of the day is about levels of economic activity-- in Tokyo it is about economic stagnation, in Washington it is about recession, in Beijing it is about sustaining a high rate of growth, and in New Delhi it is about participation in the information revolution. As communications and commerce are rapidly shrinking the world, a new consensus is emerging that favors the use of market mechanisms to foster material progress. This consensus is still very fragile, and given the last century's history of bloodshed it would be foolhardy to be excessively optimistic.

It would take only a very short time for the focus of policy to shift from economic advancement to political or military conflicts. Should sharp differences arise over the Taiwan Strait, the thirty-eighth parallel in Korea, a nuclear exchange over the Indo-Pakistan border, economic considerations would at once assume a subordinate role in policy. The possibilities for continued global integration could also be sharply reduced by an economic downturn in the U.S., which would greatly reduce domestic tolerance for trade problems abroad. With all these cautions, there still exists for however brief a period an opportunity to foster global harmony and economic well being through expanding international economic exchange.

China

The U.S. should work to include China into the international economic and political system. The introduction of more democratic and market-oriented mechanisms into China is very much in the interests of the United States, and is in line with the Chinese leadership's stated objectives. China deserves the full support of the Western nations for its strong devotion to economic development that welcomes Western capital, goods and services. Any current visitor to China's major eastern cities can see the results. Similar material progress may soon be visible in the western provinces as well.

Nonetheless, China poses some of the greatest difficulties for American policy in Asia. China's repression of religious movements, its absorption of Tibet, its actions against a free press, its threatened interference with the Internet, all will call forth criticism from within the United States. What China views as internal matters not to be meddled with and acts of U.S. "hegemonism" are to the U.S. the projection of America's democratic and liberal economic ideals. Chinese saber rattling directed at Taiwan and continued Chinese arms sales also strain relations. U.S. plans for a missile defense system, U.S. arms sales to Taiwan, or potential incidents involving the military arms of the two countries could give rise to an accelerating arms race with China. In theory, this collision course ought to be avoidable, since neither China nor the United States has territorial designs on the other, or on any other part of the globe's real estate.

U.S. economic relations with China have generally been good. American businesses want to increase sales in the Chinese market and expand their production in China. The Chinese central and provincial governments welcome these efforts. The U.S. has not taken any comprehensive action to counter the adverse effects of China's trade on competing U.S. industries, although Chinese textiles and apparel have been restricted as they have been from other major suppliers. However, there are areas where economic friction may occur as U.S. import-competing industries enter what may be a recession and at the same time suffer from foreign dumping.

The rule of law is not yet widespread or effective within China. The Chinese government acknowledges that corruption is widespread. Counterfeiting of Western goods (and increasingly of Chinese goods) is endemic. Chinese noncompliance with the World Trade Organization (WTO) is likely to occur in significant matters given the current state of development of Chinese domestic institutions, the limitations of its governmental structure, and the prevalence of relationship-based economic dealings. This will give rise to trade friction. In an economic downturn, with high U.S. unemployment rates, the bilateral trade deficit with China could become a major issue in the relationship.

Nonetheless, unmanageable conflict is avoidable with relatively simple solutions, applied early. China needs and would welcome substantial bilateral and multilateral assistance for capacity building of its infrastructure for administering a system of law and a complicated market economy. To date, the response from the United States has been very limited, even compared with modest European and Japanese efforts. What is required is a coherent strategy, pursued with untiring effort and backed by resources equal to the magnitude of the challenge posed. The United States has not yet effectively begun to address this task.

Japan

While relations with China and Europe are characterized by their own set of challenges, relations with Japan are in many ways even more complex. The U.S.-Japan relationship has never been an easy one. Putting aside the non-NATO-like alliance with Japan as one peculiarity (although this may seem less peculiar as European consolidation continues), there are other problems. Japan's capacity for executive decision-making is often limited. Its protectionist policies are a drag on the economic growth of the region, and although its investments there provide a strong and necessary economic stimulus, its deeply-rooted mercantilism renders these initiatives suspect, even when they might have been a net positive (as in the proposal for an Asian Monetary Fund).

Whenever the security aspects of the U.S.-Japan relationship are muted, the economic relationship has generally been dominant and largely negative. Thus, "trade friction" was a pronounced feature of the relationship for much of the 1960-95 period. This confrontation has waned in recent years largely due to Japan's economic stagnation, and a decline in U.S. interest in access to the Japanese market. This has left a vacuum in the bilateral relationship-- seen in Tokyo as "Japan passing," as the Americans began to shuttle to Beijing instead of Tokyo.

Yet, the lack of bilateral trade friction also has more positive causes than the sluggish demand in Japan for goods, foreign and domestic. Hungry for foreign capital and management skills, Japan has become more open to foreign investment, and has welcomed, particularly in the field of information technology, much more entrepreneurial activity. Financial sector deregulation and increased application of sound accounting standards are more widespread. There has also been some progress in Japanese acceptance of more foreign goods and services, and even significant foreign immigration is beginning to be contemplated.

Difficulties still persist, however. The Japanese distribution system is still an impediment to Japanese economic growth and import penetration alike, private restraints of trade are widespread and antimonopoly enforcement is rare, the imprint of crony capitalism on financial institutions is still a vast blot. In short there is great scope for "deregulation" initiatives.

A serious question is how the United States can play a positive role in Japan's continuing struggle for structural reform. While some schizophrenia is evident on the Japanese side, it is clear that some American role is welcomed. The two governments and their private sectors are bound by fate to continue to pursue a dialogue in one form or another that will seek to quicken the pace of liberalization of the Japanese economy.

Aside from Japanese economic reforms at home, how can the U.S. and Japan collaborate on broader economic issues? Japan is the most capable partner in Asia to join the United States in regional and global economic initiatives. However, Japan's track record leaves substantial room for improvement. Its performance at the failed WTO Ministerial at Seattle in December 1999 was dreadful. This fact was masked by several things. The United States failed to prepare the conference well, having created insufficient common ground with any other of the significant players beforehand, and garnering little in the way of enthusiasm at home for the talks. The Europeans were busy retreating on agricultural liberalization and screening this negative objective by pressing forward tactically on matters clearly non-negotiable (competition policy and dumping). And the developing countries were seeking to be excused from their previous commitments, complaining (not completely without reason) that some greater attention had to be given to capacity-building at home for them to benefit more fully from participation in the world trading system.

In the general collapse of the talks, Japan's wholly negative contribution went largely unnoticed. What Japan actually did was to introduce into global trade liberalization talks an intellectual defense designed to make protection of its agriculture permanent (unfurled under the banner of "multifunctionality"-- a defense of agrarian life), while at the same time seeking to change the rules in order to obtain unfettered access to dump its manufactured goods in foreign markets. Unfortunately, in light of concerns over genetically modified organisms and the current hoof-and-mouth disease tragedy in Europe, agricultural protectionism may soon have a renewed appeal to many countries.

The current state of the U.S.-Japan relationship is largely free of friction because it is free of interest. The U.S. is preoccupied with China because the latter both poses larger national security issues and presents a vast (if in the near term, generally overestimated) market opportunity. But in the absence of friction we should be crafting a more positive partnership with Japan.

As the world's second largest trading nation, Japan has an enormous stake in the preservation and enhancement of an open, growing, international economic system. The greatest and most important point of convergence of Japan-U.S. interests should be the fostering of the information revolution, and electronic commerce. Japan is looking for a way to end its period of moribund economic performance. It has a very strong base in the invention of electronic applications. The information revolution is credited with a substantial portion of the low-inflation, high-productivity growth that has characterized the United States for the last decade. Japan seeks to emulate this entrepreneurial activity and is opening up at least selected parts of its economy to foreign capital.

In short, Japan may be ripe for a partnership with the United States that will expand economic exchange across borders through the fostering of the information industry. Japan and the United States could together craft the elements of an e-round of trade negotiations based on barrier-free e-commerce. What is required is not an immediate declaration for a new round so much as joint efforts (which should include the European Union) to prepare for broad, trade-liberalizing negotiations covering the major elements necessary to assure that new barriers do not arise that curb the expansion of e-commerce.

ALAN WM. WOLFF is a former U.S. Deputy Special Representative for Trade Negotiations and is today Managing Partner of Dewey Ballantine LLP's Washington, DC office. These remarks are excerpted from a talk he gave on February 12, 2001, at the release of a new task force report of the Asia Foundation on American Policy Toward Asia in the 21st Century. Alan Wolff is a member of JPRI's Board of Advisers.


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