c h a p t e r 9 China and Economic Integration in…

c h a p t e r                    9


China and Economic
Integration in East Asia
Implications for the United States


C. Fred Bergsten




East Asia is clearly, if gradually and unevenly, moving toward regional economic
integration. Market forces are leading the process, as firms construct across the
area production chains that exploit the comparative advantage of individual East
Asian countries.1 Governments are now moving to build on and consolidate those
forces through a series of formal agreements to intensify their economic
relationships and create an East Asian Community.
    The current phase of intergovernmental economic cooperation was launched
in the wake of the financial crises of the late 1990s. In part to avoid ever again
being dependent on the Washington-based International Monetary Fund (IMF),
World Bank, and U.S. Treasury, Asians have built a network of bilateral swap
agreements to help insulate themselves from outside pressure in future crises.2
Though the swaps, now called the Chiang Mai Initiative (CMI), have seen their
modest $70 billion overshadowed by the huge buildup of national foreign
exchange reserves in most countries in the region, some Asians hope this
evolution will eventually produce an Asian Monetary Fund that can be a viable
alternative to the IMF.
    Regional trade initiatives have been even more active in recent years. At least
half of the East Asian countries are already linked through such agreements, and
the linking of the remainder is well under way through ongoing negotiations or at
least official studies. Such studies have been mandated to develop blueprints for

    1
      On China-ASEAN trade, for example; see Nicholas R. Lardy, The Economic Architecture of
China in Southeast and Central Asia (Washington: Peterson Institute for International Economics,
2006). China has now become the leading trading partner of Korea, Taiwan, and many other
economies in the region.
    2
      For a review of the debate over the Asian Monetary Fund and the CMI, see Randall C.
Henning, "East Asian Financial Cooperation" in Policy Analyses in International Economics 68
(2002).


                                              169
170 China and Economic Integration in East Asia


both a Northeast Asia Free Trade Area (China, Korea, and Japan)3 and a full East
Asia Free Trade Area (those three plus the member countries of the Association of
Southeast Asian Nations [ASEAN], also called the "10+3"). Japan has recently
proposed broadening the group to a "10+6," to include Australia, India, and New
Zealand, but the countries of the region have declared the "10+3" to be "the main
vehicle," at least for now, for pursuing their "long-term goal" of an East Asian
               4
Community.
    Unlike the European experience after World War II, these Asian economic
integration schemes are not driven by any top-down, overarching political
decision to unify the region. Indeed, not even the monetary and trade initiatives
have been coordinated. The different pieces might be joined at some point in the
future, and an East Asian Vision Group has been proposed, to be created via an
East Asian Community, but each economic integration initiative is currently
proceeding on its own track, and this trend seems unlikely to change in the
                     5
foreseeable future.
    China plays a central role in all these efforts. Like the United States, it vetoed
the original proposal for an Asian Monetary Fund in 1997, largely because the
fund was a Japanese initiative intended to preserve that country's financial
leadership of the region. At the same time, it has helped strengthen the Chiang
Mai Initiative and has agreed to study its multilateralism. After its accession to the
World Trade Organization (WTO), China moved quickly to begin developing a
free-trade agreement (FTA) with the Association of Southeast Asian Nations
(ASEAN), which has recently been extended to cover some services, while Japan
and Korea are still trying to conclude their belated efforts to catch up with parallel
compacts. Meanwhile, China has responded coolly to Japan's effort to broaden the
10+3 to include three more major powers, India, New Zealand, and Australia,
from the region's perimeter, as China perceives the 10+6 as a ploy to dilute its
                 6
own influence.
    3
       The study of a China-Japan-Korea FTA commissioned by the three governments has been
carried out by the Development Research Center of the State Council of China, the National
Institute of Research Advancement (NIRA) of Japan, and the Korea Institute for International
Economic Policy. The study recommended in 2005 the formation of such an FTA "as a midterm
goal" and reaffirmed "an increasing need" for that proposal in 2006. See NIRA, "Joint Report and
Policy Recommendations Concerning a Free Trade Agreement among China, Japan, and Korea" in
NIRA Newsletter, no. 10 (January 2007).
     4
       The countries specified their preference most recently at their latest summit in Cebu on
January 15, 2007.
     5
       One leading Japanese analyst of the process characterizes it as "regionalization without
regionalism," with the latter defined as "an articulated idea of creating a region with specific goals
in mind." See Akihiko Tanaka, "Prospects for East Asia Community" in Challenges to Trilateral
Cooperation: The Trilateral Commission, Tokyo Plenary Meeting 2006 (Tokyo: Trilateral
Commission, 2006). Fukushima (2006) views the challenge as "how to transform a web into a
network."
     6
       One Chinese observer argues, however, that "it is impossible for China to lead the regional
integration process," because it is a latecomer (far behind ASEAN) to that process, has too many
domestic problems, and provokes too many suspicions from others both inside and outside the
region. He believes that Japan is also unsuited for a leadership role and concludes that "ASEAN is
the only qualified driver." See Qin, "Prospects for East Asia Community" in Challenges to Trilateral
                                                                        C. Fred Bergsten 171


    A key question for the United States and the rest of the world is how East
Asia's evolving economic integration will affect China's role, and vice versa. Will it
further enhance China's power by enabling it to count on support from this large
and dynamic region on key global issues, including multilateral trade negotiations,
                                                         7
rule-making, and responses to future financial crises? Will it foster a set of
increasingly close and extensive political-security relationships, thereby altering
the regional security environment?8
    Conversely, and despite China's growing regional dominance in both
economic and security terms, will regional constraints limit China's ability to
exercise its growing national power--much as the North Atlantic Treaty
Organization (NATO) was once said to be intended "to keep the Soviet Union
out, the United States in, and Germany down"[italics added]? Or, most likely, will
the outcome be somewhere in the middle--presenting opportunities for the
United States to exercise its influence as well as challenges?


How Has East Asian Integration Affected U.S. Relations
with the Region So Far?
The United States and Asian countries have already skirmished over the budding
initiatives toward East Asian regionalism. Some tensions have been bilateral,
others broad and systemic. And while they haven't yet been too disruptive, they
could presage more serious conflict.
     As already noted, Japan's initial proposal for an Asian Monetary Fund in 1997
elicited sharp opposition from the United States (and China). The proposal,
offered in the midst of the financial crises of 1997­1998, was viewed by the United
States as a potentially fatal blow to the IMF, on which it was relying to counter
them. The United States has moderated its opposition to the subsequent and more
modest CMI but still insists that any regional arrangement must be consistent
with the global institutional order to be acceptable to it.9 In particular, the United
States wants CMI lending to be linked to IMF programs and conditionality--
which is precisely what some Asians want to escape.
     On the trade side, the United States has grown increasingly uneasy over the
prospect of an East Asian bloc, which could discriminate significantly against U.S.
exports. One U.S. response has been to counter the intra-Asian network of FTAs
with bilateral FTAs of its own. After concluding an initial agreement with
Singapore in 2002, it has undertaken negotiations with Thailand, Korea, and

Cooperation: The Trilateral Commission Tokyo Plenary Meeting 2006 (Tokyo: Trilateral
Commission, 2006). A similar Japanese view can be found in Fukushima (2006). This is consistent
with the series of "10+1" FTAs, centered on ASEAN, that have dominated the regional trade
process so far. At a minimum, however, China must be an active participant if regional initiatives
are to prosper.
     7
       Antkiewicz and Whalley (2004) note that "in China, the argument is made that [its FTA with
ASEAN] may be the first step for China in creating an economic counterforce to the United States
and Europe...."
     8
       As argued by Frost (forthcoming, 2007).
     9
       How such consistency should be promoted is treated in Henning (2006).
172 China and Economic Integration in East Asia


Malaysia and has begun to talk about initiatives with Indonesia and Japan. The
potential conflict here is over the terms of the agreements: Most of the intra-Asian
FTAs to date, especially those including China, are of relatively low quality in
terms of issue coverage and effective liberalization, while the United States
consistently seeks "gold standard" FTAs with comprehensive coverage and
                                                                                   10
extensive--even intrusive--reduction of impediments to trade and investment.
     In late 2006, at the Asia-Pacific Economic Cooperation (APEC) summit in
Hanoi, President George W. Bush launched the second and more comprehensive
U.S. response by proposing that the APEC forum "seriously consider" the creation
of a Free Trade Area of the Asia Pacific (FTAAP), which would embed the Asia-
only trade initiatives in a broader framework that included the United States and
would thereby avoid, or at least sharply limit, any new discrimination against it.
The APEC leaders agreed to do so, and APEC is studying the issue for further
consideration at the September 2007 Sydney summit (Bergsten, 2007).
     China approved the APEC declaration, and President Hu Jintao did not
comment on President Bush's strong support for the idea at the leaders' meeting.
At the preceding APEC ministerial meeting, however, China had reacted
negatively to Secretary of State Condoleezza Rice's equally strong advocacy for the
idea, arguing that it would undercut the Doha Round of global trade negotiations
in the WTO and delay implementation of APEC's own commitment to achieve
"free and open trade and investment" among the advanced countries in the region
by 2010 (the Bogor Goals). At the meeting of APEC senior officials in mid-January
2007, China posed a long list of questions about the initiative. Hence, its position
on the FTAAP is unclear at this time.
     So far, China's stated objections do not have much substance. Beijing is not
pursuing the Doha Round issue itself with any great vigor, and the round may fail
regardless. China also knows that there is no way APEC will achieve the 2010 goal.
Most likely, China's chief concerns about the FTAAP lie elsewhere--for example,
in its opposition to including Taiwan in any trade initiative of this type, although
it has been agreed since 1991 that Taiwan can participate fully in all APEC
           11
activities. Another likely concern is China's preference for trade agreements that
are of low quality, do not require much new liberalization by China itself, and are
largely motivated by political rather than economic considerations.12 Yet another


    10
        A useful analysis of China's early regional trade agreements can be found in Antkiewicz and
Whalley (2004). They stress the very sharp differences both among China's initial agreements
themselves (i.e., the absence of any common template) and between them and the much more
precise agreements of the United States and the European Union.
     11
        This and other institutional objections to the FTAAP idea (e.g., that APEC is not a
negotiating forum) could be met by pursuing the initiative outside of APEC. The United States'
and the APEC leaders' statement itself has been careful to propose a Free Trade Area of the Asia
Pacific [emphasis added] rather than an "APEC Free Trade Area."
     12
        Sheng (2006) concludes that China's trade policy priority is clearly its regional FTAs,
compared with the Doha Round or other possible options, including the FTAAP. He suggests that
China's doubts about the FTAAP also include old-fashioned protectionism ("protection of
sensitive sectors") and the implied institutionalization of APEC procedures. He also argues,
however, that "China would undoubtedly benefit from joining [a high-quality] agreement and
                                                                         C. Fred Bergsten 173


likely concern is China's fear that the United States might use the FTAAP to hijack
and dominate the Asian regionalism process (Wu 2006).
     Other APEC members, including Japan, have tried to reconcile the contrasting
views on the region's future architecture by suggesting the pursuit of both the
Asia-only and Asia-Pacific ideas. Most have proposed doing so on a sequential
basis, however, with the 10+3 or 10+6 to be accomplished first as a "building
block" for the FTAAP. Such sequencing is unlikely to satisfy the United States, in
light of the long gestation period any of the Asia-only configurations would
require. Both the Taiwan issue and the conflicting views on the basic architecture
of the region could produce clashes between China and the United States as the
FTAAP process unfolds, though it is hard make predictions until the Chinese view
                   13
becomes clearer.
     A final Asia-U.S. skirmish, also minor to date but potentially of greater
magnitude over time, has arisen over participation in the annual East Asia
summits. Some Americans and Asians believe that the United States should be
invited to such gatherings in view of its traditional deep involvement in Asia and
its keen interest in the topics that Asian leaders are discussing. Many Asians (and
some Americans, including this author) believe it would be inappropriate for the
United States to attend, and note that Asians are not invited to the periodic
Summits of the Americas and that neither Americans nor Asians are invited to the
frequent summits of the European Union.
     This disagreement obviously carries political as well as economic overtones
and could become much more salient if the substance of the Asian summits--
especially with respect to meaningful economic integration or important security
questions--intensifies.


What Challenges Does an East Asian Economic Bloc
Pose for the United States?
The growing prospect of an East Asian economic bloc poses two fundamental
issues, one bilateral and the other systemic, for the United States and the world.
Because China will inevitably play a central role in the evolution of East Asia, the
United States will need to devise a strategy to counter both dimensions in its
                                                 14
increasingly complex relationship with China.
    The bilateral issue is "simply" the discriminatory impact of East Asian
regionalism on the United States. Based on an earlier in-depth analysis of a wide


therefore would be likely to join," although he opines at the same time that "achieving a high-
quality agreement is highly unlikely" (p. 65).
     13
        Japan's effort to counter China's rising dominance in the region by attempting to include
Australia, New Zealand, and India via its 10+6 proposal is puzzling. It would seem more promising
for Japan (and others fearing China's rise) to align with the United States in broadening the 10+3
to the Asia-Pacific context.
     14
        A third, predominantly security, issue is that the creation of effective East Asian regional
arrangements could undermine the U.S. security alliances and quasi-alliances in the region. This
important topic will not be addressed here.
174 China and Economic Integration in East Asia


range of possible pan-Asian and Asia-Pacific trade configurations (Scollay and
Gilbert 2001), I have estimated that the United States could immediately lose as
much as $25 billion of annual exports as a result of the initial static effects of the
tariff discrimination that would result from true free trade in East Asia (based on
the 10+3 model). These numbers could increase over time as dynamic economic
effects are triggered, especially with respect to new investment patterns.
    On the other hand, the impact could be reduced by the extent to which the
East Asians exempted "sensitive products" and otherwise diluted their new trade
arrangements, and the extent to which the United States negotiated East Asian
FTAs of its own.
    The systemic issue is the potential clash between a China-led Asia and a
United States­led "West" for leadership of the global economy. China itself is
already the second- or third-largest economy in the world and will shortly become
the second-largest trading nation. Supported by a cohesive Asian bloc, it could
ascend even more rapidly toward a high degree of influence, and indeed
leadership, in global economic norms and institutions. At a minimum, it could
undermine the functioning of the current institutions; indeed, its blatant
manipulation of its exchange rate is already undermining the IMF norm against
competitive currency undervaluation and producing huge current account
surpluses that make it harder for other countries, including the United States and
European countries, to maintain open trade policies and support the WTO
system.
    China and much of Asia are already offering an alternative to U.S. leadership
of the global trading system with their emphasis on low-quality FTAs driven
largely by political considerations. The Doha Round's failure would discredit the
existing WTO-based multilateral system and provide an opening for such new
leadership. The Asians, led by China, are likewise posing to the principles of the
monetary regime an alternative of flexible exchange rates through their active
currency management to prevent the reduction of their external surpluses. The
related, weakening reduction in political legitimacy of the IMF and its G-7 steering
committee in recent years provides an equally opportune opening for China and,
on the financial side, a possible Asian Monetary Fund.
    This is of course not the first time that the United States has faced the creation
of a megaregional economic bloc that has discriminated substantially against its
trade and challenged its systemic leadership. The European Union has represented
a similar case over the past 50 years, evolving from a simple customs union at its
outset in 1957 into a comprehensive economic and monetary union. Despite some
ambivalence throughout this period and sporadic sharp clashes over particular
issues, notably agriculture and exchange rates but also several of the EU bursts of
membership expansion, the United States has accepted and basically supported
the enterprise.
    There were three fundamental reasons for this benign outcome. One was the
adherence of the European Union to the General Agreement on Tariffs and Trade
(GATT) requirement to cover "substantially all trade" (and, indeed, to go far
beyond it) and the plausible argument that its economic union created for
outsiders more trade than it diverted. A second was Europe's willingness,
                                                                          C. Fred Bergsten 175


sometimes reluctant but to date always eventually realized, to enter into global
negotiations to subsequently reduce its discrimination toward outsiders through
reciprocal negotiations in the GATT/WTO; in fact, the creation and subsequent
broadening and deepening of the European Union contributed significantly to the
globalization of the past half century by catalyzing the process of "competitive
liberalization" (Bergsten 1998). Most important was the overriding U.S. security
goal of supporting a unified Europe that would never again drag the world into
war, the cardinal purpose of the European leaders themselves who initiated and
carried through the continent's integration.
     A fourth factor should be mentioned as well in explaining U.S. attitudes
toward European integration. That process began when the United States was still
the world's dominant economy and military power. The European Union was
already well into its unification process by the time the United States began to
worry about foreign competition, and even the early stages of that modification in
the American mindset focused heavily on Asia rather than Europe. America's
current global economic position and the geographical locus of perceived threats
to it may result in more anxiety about Asian integration than about Europe's
endeavor of half a century ago.
     At the moment, the "Asian model" of trade agreements appears to be on a
collision course with that of the United States. As figure 1 shows, there are two
considerable differences. The substantive difference lies in the quality of the
agreements, with the United States insisting on comprehensive coverage,
including sensitive sectors like agriculture, while the Asian compacts are far from
meeting such standards.15 The geographical difference, now brought into sharp
relief by the U.S. proposal and APEC decision to "seriously consider" an FTAAP,
is that the United States wants to embed Asia-only trade arrangements in a
broader Asia-Pacific construct to counter both the bilateral and systemic
implications of Asian regionalism.

Figure 1. Competing Models of Trade Integration

                                           High quality                        Low quality

Asia only                         Japan's economic                   China's free-trade
                                  partnership agreements and         agreements and "10+3"
                                  "10+6" 

Asia Pacific                      U.S. free-trade agreements         Free Trade Area of the
                                                                     Asia Pacific?


    15
       The Asians, including China, argue, correctly in legal terms in the case of most of their FTAs
to date, that they are not bound by the higher standards, because they are (self-declared)
developing countries covered by Part IV of the WTO rather than by the "substantially all trade"
and other criteria that apply to advanced countries. Moreover, the United States itself does not
always adhere precisely to those standards, as when it excludes sugar altogether from its FTA with
Australia and insists on "yarn forward" rules of origin to maintain important protection for its
textile industry. Still, there is a substantial qualitative gap between U.S. and Asian FTAs to date.
176 China and Economic Integration in East Asia


    There are several possible compromises between the currently polar positions
of the United States and China. Japan's proposals for "economic partnership
agreements" (EPAs), which have already been implemented with Mexico as well as
within Asia, include some of the same ambitious objectives as U.S. FTAs, for
example regarding investment and some services, while excluding some others,
particularly agriculture. An FTAAP could inspire constructive amalgamation
among the competing models and the evolution of a new Asia-Pacific template for
trade liberalization and, eventually, economic integration--one that might differ
from the traditional GATT/WTO/U.S./EU approach.
    The arrows in figure 1 indicate the direction of deviation of the Japan and
FTAAP "models" from the columns in which they are listed: Japan's EPAs and its
10+6 proposals are not always of the highest quality, and an FTAAP would
hopefully be of considerably higher standard than China's current compacts and
10+3 ideas. The matrix nonetheless displays the important differences across the
two key variables in the policy debate.
    The security aspect of the issue is necessarily even more conjectural,
particularly because of the rivalry between China and Japan for leadership of Asia.
                                                                            16
On the one hand, as former secretary of state George Shultz has argued, an Asian
community that eliminated the risk of conflict between those two countries would
benefit the United States in much the same way as the ruling out of future Franco-
German conflict by the European community has benefited it. On the other hand,
the Sino-Japanese rivalry--and the absence of any Monnet-type vision and
regional consensus--raises profound questions about the prospects for
meaningful integration. It also preserves a temptation for the United States to
oppose regional cooperation in favor of maintaining and seeking to exploit its
traditional bilateral relationships--especially with Japan but also with Korea,
Taiwan, Australia, and even Singapore and Thailand--in order to balance China,
                                                               17
as advocated by former secretary of state Henry Kissinger.
    At this point, it would be futile to speculate on either the timing or the
substantive outcome of Asian economic integration. It is quite possible, however,
that the results will be contrary to U.S. interests in several respects:
n   substantial discrimination against U.S. trade;
n   such discrimination without the mitigating benefits of either full economic
    integration or meaningful political union and perhaps even without much
    constraint on China's behavior from its Asian partners;18
n   such discrimination without, perhaps, a willingness to reduce its new
    economic preferences through subsequent negotiations with nonmembers
    (either globally via the WTO or regionally via an FTAAP or even bilaterally);

    16
       In conversations with the author.
    17
       Ibid.
    18
       For example, China's neighbors have a major current interest in the appreciation of China's
currency, but aside from a few statements on the issue by Japan and Korea a couple of years ago
and by Thailand recently, they have been unwilling to pursue it. It is unclear whether China's
domination of its neighbors on such topics would be greater with or without more formal Asian
economic links.
                                                                       C. Fred Bergsten 177


n   increasing acceptance, in Asia and beyond, of low-quality and highly
    politicized trade agreements that would undermine the traditional U.S.
    emphasis on high-standard trade deals along with global rules and
    institutional arrangements centered on the WTO;
n   a steady buildup of a network of Asia-only financial agreements, and perhaps
    eventually an Asian Monetary Fund, that will undermine the global
    stewardship of the IMF; and
n   China's increasing leadership and even domination of the process, with the
    resulting augmentation of its international economic (and perhaps political)
    clout.


What Should a U.S. Strategy Look Like?
The United States needs a thoughtful, skillful strategy to try to tilt the Asian
integration movement in directions more compatible with U.S. interests.
Fortunately, some of the Asian countries themselves would prefer to strengthen
rather than jeopardize transpacific ties. Moreover, other non-Asian countries
presumably share the U.S. objectives and should be willing to cooperate with the
United States in seeking to affect the course of the Asian process.
    An effective U.S. strategy toward the East Asian integration movement would
begin by accepting, clearly and unambiguously, the legitimacy and desirability of
economic integration in East Asia. The rationale would largely mirror U.S.
acceptance of European integration: The potentially substantial benefit that a
united Asia would offer the United States--both by creating more trade than it
would divert and by putting to rest traditional rivalries, especially between China
and Japan, in a region that has drawn the United States into three major wars in
                        19
the twentieth century.
    The Asian consensus in favor of regional integration has already progressed
beyond the point where the United States could block the initiative. Indeed, such a
U.S. effort at this time could create such a backlash in Asia that it would spur
exactly what it aims to prevent--accelerating integration and encouraging the
Asians to shut America out, as well as alienating even its best friends in the region.
    In the past, it might have seemed appropriate for the United States to
postpone any clear expression of policy while waiting to see how quickly, and in
what direction, Asia evolves. But the region's growing commitment to unify, at
least in some important areas, suggests that this cautious approach is feeding

    19
       A similar Chinese view can be found in Qin (2006), who argues that "East Asian regionalism
is not a zero-sum game between China and the United States" and that "there is a huge amount of
room for the United States to play several roles in these areas (of the East Asian integration
process)." For a contrary view, see Bernard K. Gordon, "U.S. Perspectives on East Asian Economic
Integration" in Journal of Economic Development 31, no. 2 (December 2006): 149­68, based on
judgments that "any movement toward Asian economic integration" will intensify Sino-Japanese
rivalry, have other adverse effects on U.S. security interests, and generate domestic political
resistance in the United States.
178 China and Economic Integration in East Asia


Asian suspicions of U.S. hostility toward their efforts.20 This in turn undermines
the United States' ability to discuss those efforts candidly with the Asians and help
steer them in constructive directions. The time has come to clearly articulate U.S.
support for East Asian economic integration, to create a basically cooperative
framework within which U.S. suggestions on the specific outcomes--and
especially the external relationships--of that integration will be taken seriously
                          21
and hopefully accepted.
    Second, the United States (and the other non-Asian members of APEC,
especially Canada and Mexico) should seek to embed any new Pacific-Asia trade
arrangements in a broader Asia-Pacific framework.22 President Bush has already
urged the APEC member economies to "seriously consider" an FTAAP, as noted
above, and the APEC leaders agreed to do so at their 2006 summit in Hanoi. The
United States should now try to move this process forward as quickly as possible,
not least because the onset of Democratic control in the U.S. Congress will make it
difficult to extend trade promotion authority beyond mid-2007 without a major
new initiative of this type, especially if the Doha Round remains stalled; and also
because the prospect of a Democratic president in 2009 means that it may be
essential to commence such a negotiation in the near future if it is to get off the
ground at all (Bergsten 2007). China and the other East Asian countries should
support these goals, as they would be among the largest losers from the turn
toward protectionism in the United States that would result from a cessation of
U.S. participation in new liberalizing initiatives.
    The case for nesting regional economic agreements in a broader context is
well-known. Otherwise, the smaller grouping may become content with its own
arrangements, including its discrimination against outsiders, and resist further
external liberalization. The Southern Cone Common Market (Mercosur) is

    20
         See Wu (2006). He even reports "widespread suspicion in China that the United States,
concerned with possible Chinese domination in (the East Asia summit process), was actually
behind the idea" advanced by Japan to dilute the 10+3 by adding Australia, India, and New
Zealand. He also indicates, however, that "the attitude that Washington adopts toward East Asian
cooperation is perceived to have a crucial impact on the process."
   21
      There have already been several U.S. policy statements that move modestly in this direction. In
June 2004, James A. Kelly, former assistant secretary of state for East Asian and Pacific affairs,
testified briefly to the House International Relations Committee that "regional cooperation and
integration in East Asia is part of an encouraging set of trends" in the region. More importantly,
the joint statement from the White House in June 2005 of President Bush and President Susilo
Bambang Yudhoyono of Indonesia "welcomed the development in the region of an open and
inclusive institutional architecture that...contributes to economic development and prosperity."
Christopher Hill, assistant secretary of state for East Asian and Pacific affairs, added in a speech in
Singapore in May 2006 that "it is understandable that Asia is looking to strengthen its own regional
initiatives--and we welcome it." He added, however, that "we need to think hard and clearly about
how we can integrate pan-Asian and transpacific forces (including APEC)...to determine how the
pieces can fit better together."
      22
         Non-Pacific countries that might support the U.S. effort to tilt the evolution of East Asia in
the suggested directions might balk at this component of the proposed strategy or at least seek to
augment it with new arrangements of their own. The European Union, for example, might insist
on pursuing an Asia-EU Free Trade Area, based on their Asia-Europe Meetings, to parallel the
FTAAP in APEC.
                                                                         C. Fred Bergsten 179


perhaps the best contemporary example of that reaction, as it has apparently
become unwilling to make the concessions necessary to permit agreement on a
broader Free Trade Area of the Americas or perhaps even a meaningful Doha
Round in the WTO. The European Union, by contrast, was always embedded in
an effective multilateral system via the GATT, along with an exceedingly thick
network of transatlantic arrangements with the United States and Canada, which
effectively countered its periodic proclivities to resist cooperation with
nonmember countries.
    At present, it would be risky to rely on the global system to provide such
nesting, as both the IMF and the WTO, particularly in light of its stalemate over
the Doha talks, are themselves increasingly shaky. Hence, the Bush administration
has taken an important step by proposing an FTAAP, which could evolve in
parallel with the Asia-only arrangements, avoiding the multiple economic and
political risks of an Asia-only integration process. It would be essential for the
Asia-Pacific and Pacific-Asia processes to proceed in tandem, however, as opposed
to the idea currently being suggested by some Asians to build their 10+3 or 10+6
construct first, with a Pacific-Asia counterpart to follow at some undefined,
                                             23
probably quite distant, point in the future. Reprising the NATO analogy, a key
goal of an FTAAP would be "to keep the United States in"--this time, in the
transpacific community.24
    The global system can still provide a useful context for any new Asian bloc,
however, and it would in fact be highly desirable to imbed an FTAAP in such a
system to make sure that it, too, does not become inward-looking. Thus, the third
part of the U.S. strategy should be to redouble its efforts to shore up the global
economic institutions, notably the WTO and IMF. Both are under severe threat at
present because of their inability to successfully address their substantive agendas.
    The Doha Round is at risk of total collapse, or at least indefinite suspension,
which would seriously undermine the entire WTO system and likely prompt its
erosion. This in turn would reduce the prospect of using multilateral liberalizing
negotiations to dilute future discrimination by a new East Asia Free Trade Area
against outsiders.
    The IMF has proven totally impotent--especially vis-à-vis the Asian surplus
countries, most notably China with its substantially undervalued exchange rate
and massive intervention to maintain that undervaluation--in addressing the


    23
         Wu (2006) in fact argues that "a vigorous APEC can contribute to the development of an
East Asian Community" through the standard logic of competitive liberalization. APEC's adoption
of its initial trade liberalization goals in the early 1990s clearly energized ASEAN to attempt to
accelerate its own integration process.
      24
         The most authoritative Chinese statement to date on these issues concludes that "if the
FTAAP unfortunately fails...China would continue to pursue its building of an RTA/FTA network
[and would] launch more RTAs/FTAs with other countries such as Brazil, Mexico, and Russia.
Particularly, it is highly likely that China will promote the establishment of an EAFTA." The paper
recognizes that "all these outcomes will exacerbate the U.S.-China confrontation in APEC,"
though also acknowledging that China might "join the FTAAP at a later time" if it proceeded
without China at the start. See Sheng (2006).
180 China and Economic Integration in East Asia


huge trade imbalances and currency misalignments that it acknowledges are a
major threat to the world economy.
    Even more fundamentally, the political legitimacy of both the WTO and IMF
is under intense challenge. Both have traditionally been dominated by the United
States and the European nations that created them in the immediate aftermath of
World War II. Both have been slow to adapt to the radical shift in global economic
power deriving from Asia's dramatic growth over the past few decades. The IMF
has proved to be particularly rigid in light of its more highly articulated quota
system and voting structure, as opposed to the consensus nature and one country­
one vote approach of the WTO (Truman 2006). The fund is now seeking to
realign its governance arrangements to provide a larger role for China and other
Asian countries, but the Europeans, who would have to give up most of the
representation that needs to shift to Asia, are resisting tenaciously. In the WTO,
Japan continues to participate periodically in the de facto steering committee of
six or seven key countries, but China, pleading its "new member" status, has
declined that responsibility, and no other East Asians are centrally involved.
    The United States has a major interest in maintaining the systemic primacy of
these global institutions. It has been making modest efforts to address the
problems cited here, but the importance of preventing the potentially adverse
implications that could flow from the emergence of a new Asian bloc should add
considerable urgency and emphasis to this U.S. policy effort over the period
ahead. If the global institutions continue to weaken, East Asian integration will
probably accelerate, and the risk of conflict with the United States will rise further.


What Lies Ahead?
As with many of the other key issues on the U.S.-China agenda, the impact of
China's regional participation and initiatives raises more questions than it
answers. An Asian bloc could significantly augment Chinese economic power and
perhaps its global political clout as well, but it could also constrain Chinese
behavior through moderating pressures from its neighbors. An Asian bloc could
have positive effects on the world economy, by accelerating trade liberalization
and providing additional financial resources to counter international monetary
disturbances, or it could divert substantial amounts of trade and dilute future
efforts to stabilize the financial system--thus adding to the backlash against
globalization in the United States and other non-Asian countries. China and Japan
could use the Asian integration dynamic to limit or at least contain their rivalry,
reducing the risk of future conflict for the United States as well as for the region,
or that dynamic could fuel new Sino-Japanese tensions that heighten their mutual
suspicion and even hostility.
    Given these uncertainties, the United States should proceed by trying to tilt the
outcomes in directions that would support its own interests and those of the
broader global system. This does not mean, however, that China and the rest of
Asia should be expected to uncritically accept existing U.S. and international
norms. They may bring valuable ideas to the work of constructing a "new
                                                             C. Fred Bergsten 181


international architecture"--one that reflects the rapid pace of change in the
agenda and geographic composition of the world economy itself.
    It is clear, however, that the time has come for the United States to take
seriously the likely construction of new Asian economic arrangements, as these
arrangements could well have important consequences for the United States itself
and for global economic (and possibly political) patterns and institutions. The
United States must therefore devise a coherent strategy to respond to this
evolution, in terms of its relationship with China (which will inevitably dominate
the Asian movement) as well as with the region as a whole. This topic needs to be
added to the list of issues to be addressed in the Strategic Economic Dialogue and
other ongoing efforts to deal constructively with the China­United States
relationship and its impact on the world economy.
182 China and Economic Integration in East Asia


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