This month, the nations of East Asia and India will hold a summit in Kuala Lumpur, Malaysia, for heads of government from the region.
While many of the leaders will have met only a few weeks before at the APEC summit in Korea, the Kuala Lumpur event will be unprecedented. It will be the first time so many Asian countries have held a political gathering without the presence of the United States or any other great power.
The decision to hold the summit this month has resulted from three factors.
The first is the great East Asian financial crisis of 1997-98. This event had a devastating impact on the region. It caused unemployment to rise threefold in Thailand, fourfold in South Korea and tenfold in Indonesia. It forced all three countries to turn to the International Monetary Fund for emergency relief programs and accept numerous constraints on their economic policies.
At the time of the crisis, Japan proposed the creation of a new Asian IMF to help countries in the region; the idea was rejected by the United States and received little support from China. Instead the countries launched a new forum called Asean , the Association of Southeast Asian Nations , to promote regular dialogue between finance ministers and central bank governors. They have established $36 billion of currency swaps to help countries suffering from balance of payments problems. The region has also accumulated $2.5 trillion of foreign exchange reserves compared with $500 billion seven years ago, so it is now playing a major role financing the U.S. budget deficit, not just local current account imbalances.
The second factor encouraging the summit is the crisis in the Doha trade round. The East Asian nations have traditionally been strong supporters of the multilateral trading system, but as a result of the crisis in the Doha trade round, they are now hedging their bets with more bilateral and regional trade deals.
The third factor driving the conference is the re-emergence of China as a great economic power. After two decades of 9 percent to 10 percent real gross domestic product growth, China is now playing a more important role in the world economy than at any time since the 18th century, when it accounted for about a third of the global output.
China’s trade achievements since the 1980s have been daunting. Its exports are now approaching $700 billion and could overtake those of the United States and Germany within two years. During the past dozen years, China has attracted more than $600 billion of direct foreign investment.
Foreign firms have turned China into an export powerhouse and major importer of capital equipment and components for reassembly with the consequence that a large share of the value added in the Chinese economy trickles to other Asian countries that supply goods to Chinese manufacturers. As a result, China now has large trade deficits with most Asian countries and accounts for 44 percent of Hong Kong’s exports, 37 percent of Taiwan’s exports, 22 percent of Korea’s exports, 13 percent of Japan’s exports, 11.4 percent of the Philippines’ exports, 8.6 percent of Singapore’s exports, and 7 percent to 8 percent of the exports of Thailand, Indonesia and Malaysia.
China has displaced the United States to become the leading trade partner of Japan, Korea and Taiwan.
There are diverse views in the region about the rise of China as a great economic power. Japan is apprehensive. It is America’s strongest ally and tensions with China remain about issues left over from World War II. The Southeast Asian nations and Australia welcome the trade opportunities offered by China but they also want to maintain close ties with the United States.
Vietnam fought a war with China 25 years ago but is now collaborating with China on many economic issues. India was initially very suspicious of China because of the war they fought in 1962, but the two countries’ heads of government have held numerous meetings since 2001 promising to encourage trade and investment.
Taiwan is nominally in a state of conflict with China, but its corporate sector has invested $100 billion on the mainland while 10 percent of Taiwan’s labor force now works there.
The decision to invite Australia and New Zealand to the conference was part of an attempt by Japan, Indonesia and Singapore to balance the influence of China.
Australia is a close ally of the United States but has been striving to play a more important role in Asia for several years. The Asean countries demanded Australia sign a treaty of amity and cooperation as a precondition for being invited. The Howard government was at first reluctant to sign the treaty, but decided it was a modest concession compared with the benefits of being a founding member of the new summit conference. Some Asian countries also regard India’s membership of the group as a further balance to China.
India traditionally has not been active in the region because of isolationist economic policies. As a result of the market opening policy, which began 14 years ago, they now want to pursue engagement with East Asia.
Washington is concerned about the fact that it was not invited to the Kuala Lumpur summit. It also is very apprehensive about China playing a regional leadership role. The United States has to accept the new economic reality evolving in East Asia. China is rapidly becoming the region’s most important market for capital goods, components and commodities.
Washington cannot attempt to re-create the Cold War with China, because other Asian countries will not join an anti-Chinese alliance. The United States must instead attempt to maximize its influence on China through other channels. There are several ways the United States could restrain Beijing.
First, the United States is China’s most important market. It consumes one-quarter of China’s exports and provides China with a $200 billion trade surplus. If the United States suddenly restricted trade with China, it would cause the Chinese growth rate to slow sharply and drive up unemployment in the coastal regions, which depend upon exports.
China has recently emerged as the world’s leading consumer of most industrial raw materials and second largest consumer of oil. China is concerned about the safety of its commodity supplies and the fact that it depends upon potentially high-risk countries, such as the Sudan and Iran, for a growing share of its oil imports. The United States should assure China that it will help protect the country’s supply links and collaborate on policies to improve its access to oil supplies. It should stress that the congressional opposition to the Unocal bid was a one-time event and not a precedent for the United States blocking future Chinese attempts to secure reliable sources of energy.
Many in Washington are concerned about China’s growing defense budget and the potential danger it poses to Taiwan. What they should recognize is that China’s growing interdependence with the world economy is producing new vulnerabilities that will significantly constrain China’s freedom of action.
China exports 38 percent of its GDP compared with only 10 percent to 12 percent for the United States, Europe and Japan. It depends upon foreign companies to produce nearly 60 percent of its exports. It has a rapidly growing dependence upon imports of iron ore, copper, oil and other commodities from places as far away as Africa and Latin America.
China needs a good relationship with the United States to cope with its new vulnerabilities. Washington should therefore regard the Chinese economic takeoff as an opportunity for cooperation rather than as a threat to its hegemonic status.
David Hale is a noted American economist based in Chicago who is considered a worldwide expert on Asia.