Monday, March 12, 2012

Politics and Asian trade

One of the more remarkable and most important features of Asia’s economic success is the way in which trade growth and economic integration have proceeded apace despite what many thought were high political odds.

Yet, once the economies of East Asia committed to open economic policy strategies, economic relationships across the region burgeoned despite an unusual number of troublesome political relationships. Diplomatic relations were not normalised between China and Japan until 40 years ago, and the China-Japan political relationship has had many ups and downs over the ensuing years — especially during the six years of Junichiro Koizumi’s prime ministership when the bilateral economic relationship surged ahead. South Korea did not have diplomatic relations with China until 20 years ago. After the Indo China war, Vietnam was isolated diplomatically by the United States until half a decade ago. And political stand-off between Beijing and Taipei has been an ongoing feature of the regional political landscape since the Chinese revolution.

Despite the political and diplomatic tensions, East Asia’s economy has prospered and economic relationships thrived. Only North Korea and Burma have remained apart from East Asia’s spectacular economic integration. The positive economic relationships have also come to dominate conflictual political relationships.

How has this been possible?

The critical factor, of course, was the global trade regime to which East Asia almost universally has signed on.

Take the case of China and Japan. The ups and downs in the China-Japan political relationship never derailed the growth of their economic relationship, despite the fears that it would. History is littered with examples of bilateral relationships that have had large disruptions to trade and investment because of bad politics resulting in costs to both sides. That hasn’t been so with China–Japan in the years of miracle growth in Asia.

Some of the explanation relates, as Armstrong suggests, to the standard liberal argument from strategic studies that increased mutually-beneficial trade reduces conflict. But there are costs involved in bad relations, even in the Japan-China case. There is increased business risk from fluctuating political relations with uncertainty about future relations. In the extreme case of military conflict or trade embargo these costs are clear. Even with moderate, low intensity conflict, the inability to sign or update agreements or to mediate and deal with problems can hurt commerce. This is one reason why so much emphasis was placed on the importance of Japan-China leadership visits. The only bilateral trade agreement between Japan and China is the Long Term Trade Agreement (LTTA) which was signed in 1978, and the bilateral investment treaty (BIT) is from 1988 — both out of date and irrelevant to the nature of trade and other business between China and Japan today. The two countries have the third-largest trading relationship in the world and one of the most important.

A large part of the explanation lies in China’s accession to the WTO which affected China’s economic interaction with the international economic community, including Japan. WTO accession meant that the global economic community recognised China as an equal partner and one that had committed to progress towards economic globalisation.

It signalled China’s commitment to a rules-based global trading system, illustrated by its willingness to place constraints on Chinese policy makers towards foreign traders who were party to the same commitments. China’s membership in the WTO also affected the behaviour of China’s major trading partners, including Japan, towards China. It changed Chinese policy behaviour and the environment in which foreign and domestic firms operate, and the behaviour of foreign and domestic firms operating in China. Japan, of course, has been committed to the multilateral system and much of its economic development in the post-war period was underpinned by its integration into the global economy. And fundamentally, that same system has underpinned East Asia’s remarkable integration into the global economy. These commitments to the global system meant that, whatever the ups and downs of the political relationship, the China-Japan economic relationship grew largely undisturbed and has come to have a positive impact on their political relationship.

Could commitment to the global system create happier political relations in South Asia, around the divide between India and Pakistan?

This week’s lead essay from Mohsin Khan signals a harbinger of change that over time might help to repeat East Asia’s experience of economics trumping difficult political relations.

Khan begins by asking why India and Pakistan trade so little with each other despite the existence of a common history, language and culture, as well as a long common border? The answer, of course, is that while both are notionally members of the WTO, neither has fulsomely committed to globalisation nor to treating each other by the global most favoured nation (MFN) rules. There are now encouraging moves to change that. On 2 November 2011, the Pakistani government announced that it was ready to grant MFN status to India. The cabinet’s decision to grant India MFN status is a turning point in trade relations between the two countries, and finally fulfils Pakistan’s obligations as a WTO member.

As Khan concludes: ‘The complete liberalisation of trade between India and Pakistan will be a long and arduous process, but Pakistan’s granting of MFN status to India is a good start. Higher levels of trade will benefit both countries, and Pakistan more so than India — although increased trade with Pakistan will also help facilitate India’s trade with China, Iran and Central Asia. Indeed, with India cementing its position as the region’s engine of growth, Pakistan must hitch its wagon to the locomotive or risk getting left behind. The Pakistani government, and perhaps also the supposedly ‘India-centric’ military, is finally coming to recognise and accept this reality. As such, there is now considerable optimism on both sides of the border that increased trade could at last provide the two neighbours with an opportunity for better overall relations’.

The Japanese earthquake and tsunami one year on

Yesterday marked the first anniversary of the Tohoku earthquake and tsunami in Japan — a disaster of huge proportions, the consequences of which the Japanese people are still struggling to deal today. Nobuaki Yamashita and Sisira Jayasuriya provide a review of the outstanding issues on this sad anniversary. They include the aftermath of the nuclear calamity at Fukushima and broken confidence in government and political trust. Although national rejuvenation might not have followed from the disaster so swiftly as some dared hope, the remarkable restoration of infrastructure, the resilience of the Japanese people and the depths of social capital on which they could call in confronting the task of reconstruction after the quake are national achievements that are a source of admiration and envy around the world.

By Peter Drysdale Editor of the East Asia Forum.

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