Asian Network of Economic Policy Research (ANEPR) 2003-2004 Asia in Search of a New Order 16-17 January 2004 (Summary)

The fundamental question was raised as to whether it is rational for a government to pursue free trade agreements (FTAs) and/or regional economic integration. Some participants called for prudence, arguing that FTAs and regional integration - though good for competitive global players - may be detrimental to domestic companies that may have inefficient operations but provide jobs and pay taxes.

Noting that the gap between winners (global players) and losers (inefficient domestic players) has been widening in Japan, one participant suggested that it may not be a good move for the Japanese government to promote FTAs thereby supporting the global players, which have relocated production bases and jobs overseas, in exchange for the suffering of local companies.

In opposition to this view, others claimed that the function of FTAs is not to drive competitive companies out of a country, but to get them to stay in the country and bring jobs back to the country by creating more favorable business conditions.

One participant argued that consumers' interests should come first in government consideration of FTAs. They also said that Japanese people would be better off with FTAs as they would encourage competitive companies to maintain domestic operations and export from Japan, instead of relocating production bases overseas. Another participant said that Japanese automakers, which have launched assembly lines in China over the past few years, might have hesitated to do so if operating conditions in Japan had been more favourable.

With regard to Japan's pursuit of FTAs, it was pointed out that Japan is promoting FTAs as one of the many tools to push forward domestic reform. Meanwhile, another participant pointed to the need to pay more attention to the widening gap between winners and losers - though it is happening with or without FTAs - so as to prevent the spread of negative sentiment toward FTAs.

As a more general remark on FTAs in East Asia, one participant underlined the importance of including elements of economic cooperation in addition to trade liberalization, calling attention to the reality of the region where many countries are still in a developing stage with a large discrepancy between the real sector and the financial sector, the latter having difficulty in catching up with the former.

Free discussion centered on the issue of currency stability in East Asia based on two different ideas proposed by Takatoshi Ito of the University of Tokyo and Ronald I. McKinnon fo Stanford University, respectively.

While supporting the idea of "Asia Bond" that was proposed by Ito, one participant questioned how the scheme could be made to work, referring to the need to first promote the development of a viable local bond market before inviting in foreign investors. It was also suggested that promoting the development of an equity market might be more important because a problem common to many East Asian companies is over-borrowing.

Meanwhile, in reference to the idea of pegging currencies to the U.S. dollar, proposed by McKinnon, one participant voiced concern over the loss of independence in monetary policy, protesting that Japan cannot afford to lose independence especially under current economic conditions. In response to these concerns, however, it was argued that Japan would be better off if pegged to the dollar because it would diminish deflationary expectation in the future. At the same time, it was noted that Asian countries would need to have fail-safe provisions for collective appreciation vis-a-vis the U.S. dollar so as to retain stability, should their currencies be pegged to the U.S. dollar.

Responding to two contrasting government reactions to severe acute respiratory syndrome (SARS) in Asia - on the other hand, with globalization and information technology credited for containing SARS in China and the control of information for preventing the spread of the epidemic in Singapore on the other - participants discussed the dichotomy between free communication and information control for the sake of security. They generally acknowledged that countries now face a dilemma between social needs, as represented by social security, and individualism, as represented by the freedom of communication and privacy.

At the same time, however, some participants pointed to the need for governments to ensure the free flow of information even at times of crisis. But one participant added that this would be far more difficult to achieve when the "threat" involves social factors, and is not a purely biological threat as was the case with SARS. As an example of government reactions to a social threat, it was noted that the U.S. had been moving toward tighter security control following the September 11 terror attacks.

Highlighting an even more ominous phenomenon, the same participant contended that moves toward tighter control are not necessarily imposed by government authority but stem from public anxiety. An increasing number of people are voluntarily giving up their privacy in exchange for security, he said, citing the installation of security cameras in public places, a voluntary move by certain local communities in Japan, as well as the increasingly widespread use of global positioning system (GPS) devices for the purpose of protecting small children or locating them in case of kidnapping and other street crimes.

Participants also discussed problems surrounding the Internet, a point raised by Izumi Aizu from Asia Network Research, who presented his observations of the World Summit of Information Society held in Geneva in December 2003. He shared his view on the challenges he found in the ongoing multilateral and multi-stakeholder efforts toward setting global rules for governing the Internet. Some participants called for a mechanism to deal with the spread of inaccurate information. One participant suggested, however, that de facto damage limitation may already be in place because of the difficulty of convincing people through the Internet owing to the very nature of its anonymity.

Free discussion during this subsession centered on the transnational spread of cultural content such as songs, movies and TV dramas. In relation to the presentation by Masayoshi Sakai of the Ministry of Economy, Trade and Industry on pop culture as a driving force for East Asian integration, questions were raised concerning the role of governments in promoting pop culture.

Quite a few participants commented that the Japanese government should play a minimum role, if any, or continue its current policy of "benign negligence."

Meanwhile, on the transnational spread of pop culture and content, one participant expressed the anxiety that pop culture could be used as a tool to pursue foreign policy objectives if a government intended to do so. Another participant reacted that cultural content - whether movies or TV dramas - originating from one country would not spread that far abroad if they were too nationalistic, and therefore any impact would be slight.

Lively debate centered on three major issues concerning regional security in Asia, namely, U.S. unilateralism and security policy, the rise of China and its changing diplomatic policy, and the problem of North Korea.

Participants questioned the viability and the sustainability of U.S. unilateralism, which was described by one participant as reflecting the national interests and military capability of the country and not the peculiarities of the administration of President George Bush. One participant asked why only the U.S. - among the many nations pursuing market-oriented liberalization - has been singled out as a target of terrorism, while others asked how long would the U.S. be able to sustain its warfare and whether the U.S. government had considered the long-term costs of its unilateralism. It was also suggested that the particular style of the current administration under President George Bush of taking a polarized stance may be a factor behind the unilateralism, even though it does reflect the structural needs of the country.

On the rise of China, quite a few participants, sharing the views presented by Shi Yihong from the Renmin University of China and Akio Takahara from Rikkyo Universtiy, acknowledged an apparent policy shift by Beijing, which has begun to pursue more conciliatory approaches toward its neighbors.

Yet, one participant doubted the prospect of China being accepted as a "normal state" as long as it remained the largest Communist regime in the world, suggesting that it may be a good idea to change the name of the country. Meanwhile another stressed that China continues to pose a military threat to Taiwan, adding that Taiwan seems to be singled out as a target of direct military threats now that Beijing uses only indirect threats toward other nations.

On the subject of the China-Taiwan issue, many participants suggested that the question of sovereignty be shelved for the time being with both sides concentrating first on deepening economic relations in order to build mutual trust and increase stakes in each other; all of which would eventually facilitate some sort of settlement on the issue. But some participants asked whether China would find it acceptable if Taiwan started FTA negotiations with other trading partners as a legitimate member of the World Trade Organization or what would happen should Taiwan file a formal complaint to the WTO against China or vice versa.

Regarding the problem of the Korean Peninsula and the six-party talks, it was pointed out that denuclearization of North Korea, unification of North and South, and departure of U.S. troops would be a solution acceptable to all parties concerned, with the possible exception of North Korea. Meanwhile, one participant noted that a package deal - rather than making denuclearization the precondition for resuming talks on the normalization of diplomatic ties and economic aid - may be the only possible option even though there is little prospect of its success. The question, however, is how the five countries dealing with North Korea in the six-party talks can come up with a common view as to how to proceed, he added.

Remarking on the ongoing multilateral efforts to resolve the North Korean issue, one participant said that China seemed to be increasing its influence by playing a go-between role and asked how that approach was being perceived in the U.S. Another participant said that the current regime of North Korea might be dismantled should China greatly reduce the economic assistance it provides. Having said that, however, he added that China hesitated to do so because its influence over Pyongyang would be lost forever, and that once the crisis is over, China would turn out to be a great loser while the rest of the world would benefit. Responding to this view, however, one participant said that China should have strategic interests of its own in solving the problem of North Korea, and urged Beijing to play a more active role.

Meanwhile, as an assessment of the background to Pyongyang's stance, it was suggested that North Korea might have felt isolated as China and Russia recognized South Korea one after another without any diplomatic consultation with the North. It was also noted that it is necessary to take more time to convince North Korea that it is not isolated but protected by the international community.

In Session 4, which was dedicated to discussing the theoretical aspects of what was discussed in the earlier sessions and to exploring possible new orders, debate focused on the conventional notion of state, borders and sovereignty vis-a-vis the potential for new institutional frameworks.

Pointing to a series of departures from the conventional notion of a sovereign state, it was suggested that institutional innovation could be the way to solve the Taiwanese issue. However, it was also argued that any departures from conventional arrangements would have to be based on voluntary agreements among the relevant parties and might have to be reinforced by explicitly recognized alternative institutional arrangements.

The conventional idea of a sovereign state was explained as one in which international legal sovereignty, Westphalian sovereignty (domestic autonomy) and domestic governance go together. Furthermore, the European Union - whose member states are subjected to a supranational institution - and Andorra - which is recognized as an independent state though two out of the four members of its supreme court are appointed by Spain and France - were cited as examples of departures from that notion. One participant contended that there are a wide variety of institutional forms even in the contemporary environment. But then, he added, these departures are based on voluntary agreements among the actors involved.

Others noted that the conventional idea of sovereignty still plays an important role in the world today. It was also pointed out that in talking about new orders - whatever they may be - it was necessary for each country concerned to work out specific proposals that would be accepted domestically.

Participants generally recognized the need to expand the roles of nongovernmental organizations (NGOs) or alternative government systems, but opinions differed on the question of the scope. One participant called for minimizing the role of government, which they described as the most costly organization, leaving other tasks to NGOs or other cheaper alternative actors. However, there was also the view that NGOs, though increasingly important, are no substitute for a conventional governmental system.

There was also discussion on how Asian countries should allocate the burden of inevitable adjustments resulting from the growing global imbalance, namely, the U.S. current account deficits with Asia.

It was acknowledged that foreign exchange rate adjustments would be too costly and may not be effective in correcting the imbalance. Instead, it was suggested that Asian countries coordinate macro- and microeconomic policies, launching a new collective exchange rate regime and removing trade barriers. One participant also proposed that two groups of Asian countries - China and ASEAN countries except for Singapore in one group, and Japan, South Korea, Taiwan, Hong Kong and Singapore in another - form a currency bloc and maintain relative parity among currencies within each bloc, that is among countries and regions competing in exports, so as to facilitate exchange adjustments against the U.S. dollar.

Report by NASHIMA Mitsuko, RIETI Online Editorial Team