Northeast Asia: Ripe for Integration?

The Political Economy of the Asia Pacific

Editor Vinod K. Aggarwal, University of California, Berkeley, CA, USA

Vinod K. Aggarwal Min Gyo Koo Seungjoo Lee Chung-in Moon ●

●

Editors

Northeast Asia Ripe for Integration?

Prof. Vinod K. Aggarwal University of California Berkeley Asia Pacific Economic Cooperation Study Center (BASC) 802 Barrows Hall Berkeley CA 94720-1970 USA [email protected]

Prof. Min Gyo Koo Yonsei University Dept. of Public Administration 134 Shinchon-dong, Seodaemun-gu Seoul 120-749 Korea [email protected]

Prof. Seungjoo Lee Chung-Ang University Dept. of Political Science 221 Heukseok-dong, Dongjak-ku Seoul 156-756 Korea [email protected]

Prof. Chung-in Moon Yonsei University Dept. of Political Science 134 Sinchon-dong, Seodaemun-gu Seoul 120-749 Korea [email protected]

ISBN 978-3-540-79593-3

e-ISBN 978-3-540-79594-0

Library of Congress Control Number: 2008932377 © 2008 Springer-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permissions for use must always be obtained from Springer-Verlag. Violations are liable for prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Printed on acid-free paper 987654321 springer.com

Preface

How will Northeast Asia’s economic and security institutional architecture evolve? Predicting the future is always hazardous business, often left to seers and wizards. Yet at the same time we believe that by examining the recent history of Northeast Asia from a theoretically informed perspective, while we may not always correctly forecast the future, this exercise can still provide useful insights for policymakers and academics. To this end, this book examines how critical changes over the last twenty or so years have transformed the institutional organization of the region. Specifically, we consider the impact of what we term the “triple shocks”: the Cold War’s end, the Asian financial crisis, and the terrorist attacks of September 11, 2001. We examine how the impact of these key changes has played out in the context of China’s rise, Japan’s economic problems, American neglect of Asian developments, the fall of the Soviet Union and subsequent resurgence of Russia, and the changing dynamics of the two Koreas. Examination of changes in Northeast Asia’s institutional landscape is not new. Yet we believe that this book breaks fresh ground by providing a theoretical framework that facilitates the exploration of key countries’ foreign economic and security policies in a comparable manner. By examining the significant variables that influence national responses to these individual shocks, and through consideration of the impact of cumulative changes in the region in the post-triple shocks period, we believe that we can better gauge likely future institutional trends in the region. The East Asia Foundation (EAF), based in Seoul, Korea, has generously supported this book. With its financial support, we were able to hold a conference at the University of California at Berkeley, cosponsored by the Berkeley APEC Study Center (BASC), in December 2005. This opportunity to discuss first drafts of our papers, and our subsequent interactions, have greatly benefited from the support of the EAF. It has proven instrumental in allowing us to clarify our thoughts

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Preface

and assemble this volume. Aside from the academic exchange supported by this funding, this meeting also allowed us to create a network of ties among the scholars who either contributed chapters to this volume or who commented on this work. Our meeting in Berkeley was extremely fruitful as a result of the comments that the book’s contributors received from Crystal Chang, Myung-koo Kang, Jin-Young Kim, Elaine Kwei, Kenji Kushida, Hong Yung Lee, and Jehoon Park. Without their incisive criticisms and suggestions for improvement, this book would have been much the poorer. We would like to particularly single out the help we have received from Seung-Youn Oh, who not only provided logistical and organizational support for the conference, but also lent her expertise as a discussant. The work of the staff at BASC proved crucial. Three former and current project directors—Jonathan Chow, Edward Fogarty and Kristi Govella—have shepherded the transformation of rough conference papers to carefully edited and structured book chapters. They not only furnished the contributors to this book with the collated comments of the discussants, but more importantly, with their own set of comments that pushed all of us to work harder and meet their high standards. Kristi’s management of the publication process has greatly eased the editors’ workload. In this task, she has been ably supported by the work of Robert Chen, Cindy Cheng, Ross Cheriton, Nathan DeRemer, Michelle Haq, Vaishnavi Jayakumar, Andrew Kim, and Anne Meng, undergraduates who work at BASC under the auspices of the Berkeley Undergraduate Research Apprenticeship Program. We would like to thank Niels Peter Thomas of Springer Verlag for supporting the publication of this book. We also hope that this volume will be a valuable edition to the book series entitled The Political Economy of the Asia Pacific that Vinod K. Aggarwal is editing for Springer. We, of course, remain responsible for any errors or omissions. Vinod K. Aggarwal Min Gyo Koo Seungjoo Lee Chung-in Moon

Berkeley, California Seoul Korea Seoul Korea Seoul Korea

Contents

Preface ...............................................................................................v Contributors.................................................................................... xi Abbreviations................................................................................ xiii 1 Economic and Security Institution Building in Northeast Asia: An Analytical Overview ....................................................1 VINOD K. AGGARWAL AND MIN GYO KOO 1.1 Introduction ............................................................................1 1.2 Northeast Asia’s Changing Institutional Map........................3 1.3 An Institutional Bargaining Game Approach and the Evolution of Northeast Asian Regionalism...............9 1.4 Overview of the Book ..........................................................27 1.5 Conclusion............................................................................30 2 South Korea’s Regional Economic Cooperation Policy: The Evolution of an Adaptive Strategy.......................37 SEUNGJOO LEE AND CHUNG-IN MOON 2.1 Introduction ..........................................................................37 2.2 Gains from Bilateral Security Alliance and Multilateral Trade Policy: Re-examining Cold War Legacies.................39 2.3 The Emergence of South Korea’s Regional Policy in the Early Post-Cold War Period: Achievements and Limitations.....................................................................40 2.4 The Asian Financial Crisis and Changes in South Korea’s Regional Policy ....................................................................43 2.5 The Roh Moo-hyun Government’s New Regional Policy...48 2.6 Conclusion............................................................................57

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3 Rhetoric or Vision? Chinese Responses to U.S. Unilateralism................................................................. 63 KUN-CHIN LIN 3.1 Introduction ......................................................................... 63 3.2 The PRC’s Position in the Cold War Institutional Equilibrium:1978-1989 ....................................................... 68 3.3 Negotiating New Regional Arrangements in the Post-Cold War Era: Sharpening the Survival Instinct of the Leninist Party-State................................................... 70 3.4 After the Financial Crisis: First Opportunities for Chinese Leadership of Asian Regionalism ....................................... 78 3.5 After 9/11: Broadening China’s Strategic Leeway ............. 83 3.6 Winding Roads Ahead: Scenarios for China’s Grand Strategy ............................................................................... 96 4 Under Pressure: Japan’s Institutional Response to Regional Uncertainty ......................................................... 109 SAORI N. KATADA AND MIREYA SOLIS 4.1 Introduction ....................................................................... 109 4.2 Economic Shocks and the Persistence of Security Constraints......................................................................... 110 4.3 Japan and the New Regional Trade Architecture.............. 118 4.4 Japan and the New Regional Financial Architecture ........ 130 4.5 Conclusion......................................................................... 140 5 North Korea’s Strategy for Regime Survival and East Asian Regionalism .................................................. 149 SANG-YOUNG RHYU 5.1 Introduction ....................................................................... 149 5.2 North Korea’s Development in the Cold War Equilibrium ....................................................................... 150 5.3 Early Attempts at Integration after the End of the Cold War................................................................. 151 5.4 Aftermath of the 1997 Asian Financial Crisis................... 155 5.5 Post-9/11 North Korean Regionalism: The Gaesong Special Economic Zone and the Six-Party Talks .............. 157

Contents

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5.6 Security and Trade: Reluctant Coexistence Under a Fragile Equilibrium .........................................................166 5.7 North Korea and East Asian Regionalism .........................174 6 Impassive to Imperial? Russia in Northeast Asia from Yeltsin to Putin ...............................................................179 TAEHWAN KIM 6.1 Introduction ........................................................................179 6.2 The International Domestic Nexus: An Analytical Framework .........................................................................180 6.3 Post-Cold War: Neofeudal Governance and External Drift ....................................................................................183 6.4 Post-Financial Crisis: Breaking Up the Neofeudal Coalition.............................................................................191 6.5 Post-9/11: The Neoabsolutist Coalition and Russian Neomercantilism in Northeast Asia ...................................196 6.6 Scenario Analysis...............................................................206 6.7 Conclusion..........................................................................208 7 Security in Northeast Asia: Time for New Architecture?............................................................................213 ELLEN L. FROST AND DAVID C. KANG 7.1 7.2 7.3 7.4 7.5 7.6

Introduction ........................................................................213 Changes in the External Environment................................216 Other Changes in the Regional Environment.....................221 The Adequacy of Existing Institutions...............................232 Institution-Building in Northeast Asia ...............................236 Conclusion..........................................................................240

8 The Future of Northeast Asia’s Institutional Architecture..............................................................................245 VINOD K. AGGARWAL, MIN GYO KOO, AND SEUNGJOO LEE 8.1 Introduction ........................................................................245 8.2 An Institutional Bargaining Game Approach: Initial Shocks, Goods, Individual Bargaining Situations, and Institutional Fit ............................................................247

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8.3 Cross-National Developments .......................................... 251 8.4 The Future of Economic and Security Institutional Building in Northeast Asia................................................ 257 Index ............................................................................................. 263

Contributors

Vinod K. Aggarwal is Professor of Political Science, Affiliated Professor at the Haas School of Business, and Director of the Berkeley APEC Study Center at the University of California at Berkeley. Ellen L. Frost is Adjunct Research Fellow at the National Defense University and a Visiting Fellow at the Peterson Institute for International Economics. David C. Kang is Professor in the Department of Government and Adjunct Associate Professor in the Tuck School of Business at Dartmouth College. Saori Katada is Associate Professor in the School of International Relations at the University of Southern California. Taehwan Kim is Research Professor in the Division of International Education and Exchange at Yonsei University and Managing Director of the East Asia Foundation. Min Gyo Koo is Assistant Professor in the Department of Public Administration at Yonsei University. Seungjoo Lee is Associate Professor in the Department of Political Science at Chung-Ang University. Kun-Chin Lin is Assistant Professor in the Department of Political Science at the National University of Singapore. Chung-in Moon is Professor in the Department of Political Science at Yonsei University.

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Sang-young Rhyu is Associate Professor in the Graduate School of International Studies at Yonsei University and Director of the Kim Dae-jung Presidential Library and Museum. Mireya Solis is Associate Professor in the School of International Service at American University.

Abbreviations

ABMI ABF ABM ACU ACFTA ADB AFC AMF AMU APEC APT ARF ASEAN ASEM BTA CIS CMEA CMI CNPC COMECON CPR CSCAP CSCE CSTO CTBT CVID DMZ DPRK

Asian Bond Market Initiative Asian Bond Fund Asian Bond Market Asian Currency Unit ASEAN-China Free Trade Area Asian Development Bank Asian Financial Crisis Asian Monetary Fund Asian Monetary Union Asia-Pacific Economic Cooperation Forum ASEAN Plus Three ASEAN Regional Forum Association of Southeast Asian Nations Asia-Europe Meeting Basic Telecom Agreement Commonwealth of Independent States Council for Mutual Economic Assistance Chiang Mai Initiative China National Petroleum Corporation Council for Mutual Economic Assistance common pool resource Council for Security Cooperation in the Asia-Pacific Council on Security Cooperation in Europe Collective Security Treaty Organization Comprehensive Test Ban Treaty complete, verifiable and irreversible dismantlement (nuclear weapons) demilitarized zone Democratic People’s Republic of Korea

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Abbreviations

EAEC EAEG EAFTA EAS EAVG EASG EFTA EOI ESFE EPA EVSL FDI FSA FSB FTA FTAA GATT GSP GWOT HEU IAEA IAP IFI IMF ITA ITAR JBIC JGB JSEPA KEDO KORUS LWR MANPADS METI

East Asia Economic Caucus East Asian Economic Group East Asian Free Trade Area East Asia Summit East Asia Vision Group East Asia Study Group European Free Trade Association export-oriented industrialization East Siberia and Russia’s Far East Economic Partnership Agreement Early Voluntary Sectoral Liberalization foreign direct investment Financial Services Agreement Federal Security Service (Russia) free trade area/agreement Free Trade Area of the Americas General Agreement on Tariffs and Trade Generalized System of Preferences Global War on Terror (US) highly enriched uranium International Atomic Energy Agency Individual Action Plan International Financial Institution International Monetary Fund Information Technology Agreement International Traffic in Arms Regulation Japan Bank for International Cooperation Japan Government Bonds Japanese-Singapore Economic Partnership Agreement Korean Peninsula Energy Development Organization South Korea-U.S. free trade agreement light-water nuclear reactor man-portable air defense systems Ministry of Economy, Trade and Industry (Japan)

Abbreviations

MITI MOF MOFAT MERCOSUR NATO NAFTA NEACD NEACI NEASD NEAFTA NIC NIE NPT NSC OMT OSCE PLA PRC PSI PTA ROK RTA SARS SCO SEANWFZ SEZ SDF SOC SPT STAR TAC TRADP UNDP

Ministry of International Trade and Industry (Japan) Ministry of Finance (Japan) Ministry of Foreign Affairs and Trade (South Korea) Southern Common Market North Atlantic Treaty Organization North American Free Trade Agreement Northeast Asia Cooperation Dialogue Northeast Asian Cooperation Initiative Northeast Asian Security Dialogue Northeast Asian Free Trade Agreement newly industrializing country newly industrialized economy Nuclear Non-Proliferation Treaty New Security Concept (China) Office of the Minister for Trade (South Korea) Organization for Security and Cooperation in Europe People’s Liberation Army (China) People’s Republic of China Proliferation Security Initiative preferential trade agreement Republic of Korea regional trade agreement Severe Acute Respiratory Syndrome Shanghai Cooperation Organization Southeast Asia Nuclear-Weapon-Free Zone Special Economic Zone Self-Defense Force (Japan) Social Overhead Capital Six-Party Talks Secure Trade in the APEC Region Treaty of Amity and Cooperation Tumen River Area Development Plan United Nations Development Plan

xv

xvi

Abbreviations

UNESCO UNIDO WMD WTO

United Nations Educational, Scientific and Cultural Organization United Nations Industrial Development Program weapons of mass destruction World Trade Organization

1 Economic and Security Institution Building in Northeast Asia: An Analytical Overview

Vinod K. Aggarwal University of California, Berkeley, CA, USA Min Gyo Koo Yonsei University, Seoul, South Korea

1.1 Introduction1 How has regionalism evolved in Northeast Asia? This chapter focuses on the new developments in the region in the post-triple shocks period – namely the post-Cold War, the post-Asian financial crisis of 1997–98, and the post-September 11, 2001 attacks. We argue that Northeast Asia’s new appetite for preferential economic arrangements and regional security dialogues reflects a convergence of interests in securing inclusive club goods as an insurance policy to realize free trade, financial stability, and collective security as traditional mechanisms under the so-called San Francisco system stall or are dismantled.2 The growth of economic and security interdependence of Northeast Asian countries has been remarkable during the postwar period. 1

We would like to thank Jin-Young Kim, Gilbert Rozman, and Peter J. Katzenstein for their valuable comments on earlier versions of this chapter. We are deeply indebted to Jonathan Chow, Edward Fogarty, and Kristi Govella for their editorial assistance. The analytical approach of this chapter has been developed in Aggarwal and Koo 2007a and 2007b. For a broader geographic and theoretical perspective, see Aggarwal and Koo 2007c. 2 The San Francisco system was codified through the 1951 San Francisco Peace Treaty between the Allies and Japan. For more details, see Calder 2004; and Hara 2001.

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Yet, seen in comparative regional perspective, Northeast Asia’s economic and security cooperation has lacked significant formal institutionalization at the regional level.3 During the Cold War period, the San Francisco system defined Northeast Asian economic and security relations. Against the background of bitter memories of Japanese colonialism, unresolved sovereignty issues, and ideological divides across the region, the San Francisco system offered America’s Northeast Asian allies access to the US market in return for a bilateral security alliance. At the same time, US allies were strongly encouraged to participate in broad-based, multilateral fora in areas of security (e.g., the United Nations, or UN), trade (e.g., the General Agreement on Tariffs and Trade, or GATT), and finance (e.g., the International Monetary Fund, or IMF). In recent years, however, the traditional institutional order that has governed economic and security relations in Northeast Asia has come under heavy strain. The geopolitical complexity surrounding the Korean Peninsula and the novel dynamics of Sino-Japanese rivalry with the rise of China are currently shaping a new regional institutional architecture in both economic and security issue areas. In the post-triple shocks period, the increasingly visible erosion of Northeast Asian countries’ confidence in the conventional approach has manifested itself in the proliferation of preferential trade agreements, financial arrangements, and minilateral security dialogues. This chapter proceeds as follows. Section 1.2 examines Northeast Asian regional trends and provides a systematic categorization of different types of economic and security arrangements. Section 1.3 develops an institutional bargaining game approach to analyze Northeast Asia’s new institutional architecture in trade, finance, and security. Section 1.4 lays out the structure of the book, highlighting the nexus between economics and security. Finally, Sect. 1.5 summarizes the argument and draws policy implications.

3

Katzenstein 1997 and 2005; Cumings 1997; Grieco 1998; Evans and Fukushima 1999; Duffield 2003; and Calder and Ye 2004.

Economic and Security Institution Building in Northeast Asia

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1.2 Northeast Asia’s Changing Institutional Map The San Francisco institutional architecture served Northeast Asia well for the Cold War period, while obviating the need for any significant regional arrangements. The US served not only as the principal architect of the regional order, but also as a power balancer between Japan and China, as well as between the two Koreas, and between China and Taiwan. US hegemony also played a critical role in gluing together its key allies through open access to its market, thus creating a unique mix of bilateralism and multilateralism. In contrast to the weakness of formal economic integration, the network of Japanese transnational corporations played a key role in forming a virtual economic community. By the early 1990s, under the rubric of the “flying geese” model, Japan exported many of its lower-tech industries to its neighbors, thereby creating concentric circles of investment, with South Korea and Taiwan in the inner circle, and Southeast Asia and China comprising the outer one.4 Alongside this Japan-centered economic system emerged an informal business network, often referred to as “Greater China,” in which Chinese communities in Hong Kong, Taiwan, and elsewhere in Asia promoted trade with, and investment in, China.5 These informal networks based on corporate and ethnic ties delivered unprecedented rates of growth during the 1980s and the first half of the 1990s. The openness of the US market, natural forces of proximity, and the vertical and horizontal integration of regional economies through Japanese investment and overseas Chinese capital seemed to have produced greater economic interdependence without substantial institutionalization at the regional level.6 Yet, more recently, the traditional institutional equilibrium in Northeast Asia has come under heavy strain. Although Northeast Asian countries continue to pay lip service to their commitment to transregional and global institutions such as Asia-Pacific Economic Cooperation (APEC), the GATT and the World Trade Organization (WTO), and the IMF, the erosion of their confidence is visibly indicated by 4 Bernard

and Ravenhill 1995; and Hatch and Yamamura 1996. Ernst 1997; and MacIntyre 1994. 6 Katzenstein 1997 and 2005. 5

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the proliferation of free trade agreements (FTAs) and currency swap agreements.7 In a similar vein, there have been various official and unofficial, formal and informal, and bilateral and minilateral dialogues to resolve regional security issues ranging from the rise of China, the Taiwan Straits issue, and the North Korean nuclear crisis. Certainly, the strength and effectiveness of these security fora remain unclear, falling short of filling the organization gap that has persisted in Northeast Asia. Nevertheless, the increasing number of channels for security dialogues and negotiations indicate positive and dynamic processes of exchanging information and opinions, which should be promising signs for regional peace and stability.8 As a basis for analyzing the dynamic process of institutional change in the post-triple shocks period, we systematically classify the types of arrangements that have been pursued in Northeast Asia, providing illustrating a snapshot of the institutional landscape in the region. In terms of the number of participants, these include unilateral, bilateral, minilateral, and multilateral arrangements; in terms of coverage, the range has been narrow in scope or quite broad. In addition, some arrangements tend to be focused geographically, while others bind states across long distances. Finally, other characteristics might include the strength and institutionalization of accords and their timing. Of these many possible dimensions, we focus on two in particular in order to simplify this narrative description, namely actor scope and geography.9 7

Aggarwal and Koo 2005; Pempel 2005; Aggarwal and Urata 2006; and Solis and Katada 2007. 8 Evans and Fukushima 1999; Buzan 2003; Job 2003; Prichard 2004; Park 2005; and Bullock 2005. 9 The question of how to define a region remains highly contested. Although we acknowledge that simple distance is hardly the only relevant factor in defining a geographic region, we maintain that geography matters and that a region is firmly rooted in territorial space. For us, the inverse relationship between distance and international trade/finance/security still holds due to transportation and deployment costs. Therefore, we define a pair of countries as geographically concentrated if they are contiguous on land or within 400 nautical miles (the sum of two countries’ hypothetical 200-nautical mile exclusive economic zones); otherwise, we view them as being geographically dispersed. According to our definition, Japan and Singapore are geographically dispersed although the two countries are traditionally considered “East Asian” countries. At the same time, China is geographically contiguous to both Southeast and Northeast Asian countries due to its huge land area. See Aggarwal and Koo 2005, 96.

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As shown in Table 1.1, we do not illustrate issue or product coverage and the strength or level of institutionalization of agreements for sake of presentation, although the authors of the case study chapters discuss these elements at length. Table 1.1 Modes of economic and security arrangements in Northeast Asia Number of Actors Unilateral (1) APEC Individual Action Plans (IAPs)

Bilateral Geographically concentrated (2) Japan– China, Japan– South Korea, and

Trade and Financial Arrangements

China– South Korea currency swap agreements Japan– South Korea FTA (under negotiation) China– South Korea FTA (under study)

Minilateral Geographically dispersed (3) Japan– Singapore EPA (2002) Korea–Chile FTA (2002) Taiwan– Panama FTA (2003) Japan– Mexico FTA (2004) Korea– Singapore FTA (2005) Japan– Malaysia FTA (2005) China–Chile FTA (2005) South Korea–US FTA (2007) Currency swap between Japan/South Korea and ASEAN

Geographically concentrated

Geographically dispersed

Multilateral

(4) TRADP (1992)

(5) APEC (1989)

(6) IMF (1945)

China– ASEAN FTA (2003)

EAEC (1994)

World Bank (1945)

Northeast Asian FTA (proposed)

ASEM (1996) AMF (1997) ASEAN Plus Three (1998)

GATT/WTO (1947/1995) ITA (1997) BTA (1998)

CMI (2000) FSA (1999) ABMI (2003) South Korea– EFTA FTA (2005) South Korea– ASEAN FTA (2006) Japan– ASEAN CEP (under negotiation) South Korea– EU (under negotiation) ACU (under study)

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Security Arrangements

Unilateral use of force Arms acquisition

Joint military exercises

US military treaties with Japan, South Korea, and Taiwan

CSCAP (1993) NEACD (1993)

UN operations (1945) NPT (1970)

ARF (1994) PSI (2003) SCO (2001) Six-Party Talks (2003)

*Adapted from Aggarwal 2001. Updated December 2007 with examples

The first column of Table 1.1 consists of unilateral measures. Unilateral trade and financial liberalization associated with Northeast Asian countries may include APEC-fostered efforts such as Individual Action Plans (IAPs).10 Yet, unilateral trade and financial liberalization efforts have been rare in Northeast Asia as in other regions. Meanwhile, unilateral security measures often involve actions that are detrimental to regional security. For example, China’s and North Korea’s respective threats of force in the Taiwan Strait and the Korean Peninsula have frustrated their neighbors as well as the US, destabilizing relations in the region. Along with the bilateral currency swap agreements between China, Japan, and South Korea, the prospective Japan–South Korea and South Korea–China FTAs fall into the category of geographically concentrated bilateral subregionalism. More often than not, such agreements indicate not only geographic, historic, and cultural affinity but also complementary industrial structures. Their counterpart in the security realm can be found in the formal talks about joint military exercises between South Korea and Japan, and South Korea and China.11 The category of geographically dispersed bilateral transregionalism in trade issue areas includes the bilateral FTAs between Japan– Singapore (2002), South Korea–Chile (2002), Japan–Mexico (2004), South Korea–Singapore (2005), China–Chile (2005), and South Korea–US (2007). Various bilateral currency swap agreements between Japan–South Korea and Southeast Asian countries represent bilateral financial transregionalism. Meanwhile, the most significant 10 We define IAPs as unilateral measures since they are prepared and implemented individually and voluntarily even if the initiative was suggested minilaterally. 11 On FTAs in the Asia-Pacific, see Aggarwal and Urata 2006; and Dent 2006.

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bilateral transregional defense ties exist between Northeast Asian countries and the US As noted previously, the post-World War II US grand strategy has revolved around bilateral security and economic ties with its allies in the region. The next category is geographically focused minilateral subregionalism. In the post-Cold War period, China presented one of the first proposals for Northeast Asian economic cooperation to develop the so-called golden delta of Tumen River in 1990. In the following year, the United Nations Development Plan (UNDP) accepted the proposal as the Tumen River Area Development Program (TRADP), leading to the participation of China, Russia, South Korea, North Korea, and Mongolia.12 In the meantime, the Japanese foreign minister first proposed the idea of a Northeast Asian Free Trade Agreement (NEAFTA) in August 1998, which was followed by a series of feasibility studies and tripartite summit meetings on the sidelines of the ASEAN Plus Three (APT). The ASEAN–China FTA framework agreement of 2002 falls in this category as well. In sharp contrast, there exist few examples of Northeast Asian initiatives for exclusively subregional minilateral security arrangements, reflecting the still-dominant role by an outside power – the US. The next category refers to geographically dispersed transregionalism or interregionalism. Such arrangements in economics include the East Asian Economic Caucus) (EAEC, 1994), APEC (1989), the (Asia–Europe Meeting (ASEM, 1996), the APT (1998), the ASEAN– Japan Closer Economic Partnership agreement (proposed in 2002), the South Korea–EFTA FTA (2005), and the South Korea–ASEAN FTA (2006). In the financial issue area, various transregional, minilateral arrangements include the ill-fated Asian Monetary Fund (proposed in 1997), the Chiang Mai Initiative (2000), an Asian Bond Market Initiative (ABMI, proposed in 2002), and an Asian Currency Unit (ACU, proposed in 2002). On the security front, Northeast Asia lacks the equivalent of the North Atlantic Treaty Organization (NATO) or the Organization for Security and Cooperation in Europe (OSCE) for the Euro-Atlantic region, leaving regional security coordination underinstitutionalized. 12 However, due to the first North Korean nuclear crisis in 1993 and the lack of coordination among participating local and national governments, this collective development plan failed to make any progress by the mid-1990s.

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The ASEAN Regional Forum (ARF, 1994) is virtually the only permanent regional security forum in which Northeast Asian countries and the US participate simultaneously.13 APEC remains a transregional economic forum although it has also been used as an arena in which to discuss security matters, particularly since the September 11 terrorist attacks. Yet, it is notable that non-governmental organizations are increasingly becoming active at the transregional level – the) Council for Security Cooperation in the Asia-Pacific (CSCAP, 1993) and the Northeast Asian Cooperation Dialogue (NEACD, 1993), for instance. In the meantime, China organized the Shanghai Cooperation Organization (SCO) in June 2001 to capitalize on earlier joint confidencebuilding efforts among China, Russia, Kazakhstan, Tajikistan, Kyrgyzstan, and Uzbekistan. Given that Central Asia is abundant in gas and oil deposits, China has recently put more of its diplomatic capital into the SCO due to concerns about a global energy shortage. Most recently, the Six-Party Talks (SPT, 2003) process, initiated to resolve the second North Korean nuclear crisis, has presented the possibility of evolving into a permanent security forum in the Northeast Asian region. The final category is multilateral globalism. Trade arrangements in this realm include broad-based accords such as the GATT of 1947 and its successor organization, the WTO of 1995. Their counterparts in the financial issue area have been the IMF (1945) and the World Bank (1945). Northeast Asian countries have also been participants in multilateral sectoral market opening agreements such as the Information Technology Agreement (ITA, 1997), the Basic Telecom Agreement (BTA, 1998), and the Financial Services Agreement (FSA, 1999). In pursuit of security assurances, all the Northeast Asian countries – with the exception of Taiwan – have become UN members in the postwar period. As a result of the North Korean nuclear crisis, the importance of sectoral security arrangements within and outside the UN 13

Given the heterogeneous policy preferences of the key players in Northeast Asia during the Cold War period, this was not surprising. The U.S. remained concerned about how such a regional dialogue might constrain its military forces and weaken bilateral alliances. Japan also remained reluctant about pushing hard for more substantive regional security dialogues. For fear of international pressure on its domestic affairs, China opposed any moves in this direction as well. See Duffield 2003.

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such as the Nuclear Non-Proliferation Treaty (NPT, 1970) and the Proliferation Security Initiative (PSI, 2003) has also grown in Northeast Asia. 1.3 An Institutional Bargaining Game Approach and the Evolution of Northeast Asian Regionalism To systematically analyze the evolution of new institutional architecture in Northeast Asia, we develop an institutional bargaining game framework, focusing on the interplay of four broadly defined causal elements, namely external shocks, goods, individual bargaining situations, and the existing institutional context.14

IMPETUS FOR NEW AGREEMENT

KEY FACTORS IN RESPONSE

NEGOTIATING AGREEMENTS

GOODS: Externalities and goods (public, CPR, club, and private) 1) Participants Initial impetus from changes in institutions and interactions

2) Geography INDIVIDUAL SITUATIONS: Different national reactions based on political and economic capabilities, domestic coalitions, and beliefs

3) Nature 4) Scope 5) Strength

EXISTING INSTITUTIONS

Adapted from Aggarwal (1998). Fig. 1.1 The evolution of economic and security arrangements

The process of a shift from an initial institutional equilibrium to a new one generally comes about with some external shocks that create pressure for change. External shocks may stimulate or impede the 14

Aggarwal 1998.

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supply of certain types of goods that pertain to either economics or security, or both. While there are many factors that might affect national responses to external shocks and subsequent change in the provision of goods, the most significant elements are countries’ individual bargaining positions, consisting of their international position, domestic power structures, and elite beliefs. Finally, if countries choose to create new regional institutions or modify existing ones, they must decide whether and to what extent those institutions will be linked to global multilateral institutions. Figure 1.1 illustrates the key elements and process of our institutional bargaining game approach. 1.3.1 The Post-Triple Shocks In Northeast Asia, the pressure for a shift from traditional to new institutional equilibrium has come about through three major external shocks, including the end of the Cold War, the Asian financial crisis, and the September 11 attacks. The Post-Cold War Shock

The aforementioned San Francisco system began to undergo a gradual modification from the early 1970s with the inclusion of China and other communist countries, but retained to a remarkable degree the Japan-centered and Washington-dominated form throughout the Cold War period.15 In the post-Cold War era, however, the fissure in the system became increasingly visible as a result of the changing regional balance of power. In Northeast Asia, the Sino-Soviet-American strategic triangle has now been replaced by a new triangular relationship between the US, Japan, and China. For all the power of the US and Japan, the past two decades have been most notable for China’s dramatic rise, and the resultant complexity of the regional power equation does not allow for a single pacesetter.16 The Cold War bipolarity in Northeast Asia acted as the source of regional reluctance to institutionalize economic and security relations, but its abrupt end has made it politically easier for Northeast 15 16

Calder 2003. Buzan 2003; Friedberg 2005; and Christensen 2006.

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Asian countries to consider institutionalizing their economic and security ties.17 The end of the Cold War reduced the significance of ideological divisions and has broken down the problem of, in Gowa’s term, the “security diseconomy” that had precluded tighter institutional integration between and within capitalist and communist blocs.18 As noted earlier, the early 1990s produced an outpouring of proposals aimed at developing economic regionalism in Northeast Asia. Various attempts focused on geographically contiguous parts of national economies located in the Russian Far East, Northeast China, Japan, North Korea, South Korea, and Mongolia. Meanwhile, the first North Korean nuclear crisis in the early 1990s called for collective efforts at persuading North Korea to abandon its secret nuclear weapons program. Aside from existing multilateral institutions such as the NPT and the International Atomic Energy Agency (IAEA), the Korean Peninsula Energy Development Organization (KEDO) – based on the 1994 Agreed Framework between the US and North Korea – assumed the important role of providing North Korea with two light water reactors and heavy fuel oil in return for North Korea’s proposal to freeze its nuclear weapons program. Despite sometimes ambiguous mandates and responsibilities of participating countries including the US, Japan, South Korea, and the European Union, KEDO functioned relatively well in fulfilling its objective of defusing the proliferation issue and providing Pyongyang with alternative energy supplies until it was suspended in summer 2003 as a result of the second nuclear crisis.19 The contribution of the end of the Cold War to Northeast Asia was more visible in the security issue area. Certainly, the potential problem of a security diseconomy has yet to be resolved in Northeast Asia. There is a deepening concern that China’s growing trade surplus with the US and Japan has yielded hard currency with which to buy weapons, foreign investment for the expansion of strategic infrastructure, and technology transfer that may improve Chinese military capabilities. As a potentially dissatisfied rising power, China would most likely challenge the existing regional order if these arrangements continued 17

Breslin and Higgott 2000; and Ravenhill 2006. Gowa 1994. 19 Stanley Foundation 2006. 18

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to favor the US and Japan. Also, China’s authoritarian regime is vulnerable to unconstrained ultra-nationalism thanks to its legitimacy deficit. At the same time, however, the presence of a security diseconomy may motivate the three major powers to promote an appropriate minilateral venue for directly or indirectly reassuring each other as well as their neighbors about their security and economic policies, while maximizing their respective national interests. During the Cold War period, the US opposed an Asian equivalent of the Council on Security Cooperation in Europe (CSCE), primarily due to Soviet support for the idea. The US feared that the Soviet Union would use a multilateral security forum to drive a wedge between the US and its Asian allies. Japan followed the American lead in opposing proposals for establishing regional multilateral security cooperation fora in East Asia. Yet, by 1990, Japan began to fear that its fundamental security interests, including the US alliance, would be seriously undermined if Japan did not participate in the emerging process of the post-Cold War institution building in the region. Against this backdrop, Japan proposed its own initiative for a multilateral security forum – the Nakayama proposal.20 For its part, China has made a serious effort to engage the East Asian region, partly to discourage Taiwan’s quest for diplomatic recognition and partly to neutralize the possibility that international organizations might undermine China’s national sovereignty. As the 1990s unfolded, China’s relations with East Asian countries were manifested in a mix of unilateral assertiveness (over Taiwan and the inhabited islands in the East and South China Seas) and increasingly confident use of multilateral economic and security fora such as APEC and the ARF to mitigate the region-wide concern about the rise of China.21

20 In July 1991, Japan abruptly reversed its longstanding opposition to regional security institutions and proposed a minilateral security dialogue within the Association of Southeast Asian Nations (ASEAN) Post-Ministerial Conference. This initiative, known as the Nakayama proposal, represented a bold departure from Japan’s conservative regional security policy under America’s nuclear umbrella. Although it did not materialize as proposed, the Nakayama proposal did encourage the formation of the ARF by promoting the idea of a multilateral security dialogue connected with ASEAN. See Midford 2000, 367-8, 387. 21 Foot 1998; Dittmer 2002; Buzan 2003; and Shambaugh 2004/05.

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Despite its operational feebleness as a security regime, the ARF binds Japan and China together into a regional institutional framework, as does APEC. In addition, “Track Two” initiatives – involving government officials in their private capacities, academics, journalists, and others – proliferated during this period. For example, the Canadian-initiated the North Pacific Cooperative Security Dialogue (NPCSD), the first major Track Two program, began in 1990. The University of California’s Institute on Global Conflict and Cooperation initiated the Northeast Asia Cooperation Dialogue (NEACD) in October 1993. And the Council for Security Cooperation in the AsiaPacific (CSCAP) is another prominent example of Track Two arrangements.22 The Post-Asian Financial Crisis Shock

The second turning point came in the wake of the Asian financial crisis of 1997–98 followed by the debacle of the 1999 WTO ministerial meeting in Seattle. The financial crisis and the institutional crisis of the WTO revealed a number of shared weaknesses among Northeast Asian economies.23 With respect to informal market integration, the unprecedented economic shocks proved that the seemingly dense networks of Japanese and overseas Chinese business were quite vulnerable.24 Asian economies could delay the ultimate bursting of their bubble as long as they were able to find export markets where they could sell the investment-fueled output that vastly exceeded the absorption capacity of domestic consumers. However, the structural problems finally exacted a heavy toll in the closing years of the 1990s. Concurrently, Northeast Asian countries’ commitment to a broadbased, multilateral trade regime eroded significantly. Although the July 2004 Geneva meetings restarted the Doha Round of WTO negotiations, the riots in Seattle in 1999 and the failed 2003 ministerial 22

Buzan 2003, 156; and Evans and Fukushima 1999. Aggarwal and Koo 2005. 24 Some scholars go a step further and argue that the impact of the particular pattern of Japanese and overseas Chinese investment contributed to the damaging crisis. The rapid expansion of Japanese and overseas Chinese regional production networks in East Asia in the 1980s and early 1990s began to show a tendency to follow investment fads rather than market demand, creating overcapacity in similar manufacturing sectors such as electronics and automobiles. See Hatch 1998. 23

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meeting in Cancun continued to cast their shadow over negotiations for global trade liberalization. With respect to finance, aside from many structural problems underlying the Asian model of capitalism such as its cronyism, unsound investments and overcapacity, many in Asia found fault with the adoption of Western financial liberalism, which allegedly reinforced credit bubbles, empowered currency speculators, and created unstable collective irrationalities. This concern was only heightened by the IMF’s role in the Asian financial crisis, which Asian leaders and even Western economists heavily criticized.25 At the transregional level, APEC as a formal mechanism to facilitate economic integration came under fire for its inability to deal with the financial crisis. Many in the region believed that US pressure slowed APEC’s response to the crisis. At the November 1997 APEC summit meeting, US President Bill Clinton described the Thai and Malaysian currency crises as “a few small glitches in the road.”26 But the US strategy appeared to backfire almost immediately, as the currency crisis spread beyond Thailand and Malaysia, quickly moving to the larger economies of Indonesia and South Korea. Japan took the lead in September 1997 with a proposal for an AMF, to be backed by $100 billion that they had lined up in commitments in the region. However, the IMF, supported by the US and European countries, resisted any effort to find an “Asian” solution to the crisis. In particular, the US viewed such regional funds as undercutting its preferred approach of IMF loans accompanied by strict conditionality.27 Not surprisingly, Northeast Asian countries came to recognize that tighter institutionalization of intraregional commercial and financial ties might be a better commitment mechanism for providing economic 25

Stiglitz 1998; Bergsten 2000; and Wade 2000. David Sanger, “One year later, Asian economic crisis is worsening.” The New York Times, 6 July 1998. 27 It is in this broad context that the Chiang Mai Initiative (CMI) was developed, by the APT Finance Ministers. The accord started at a meeting in May 2000 and created a network of bilateral swap arrangements to provide short-term liquidity for countries facing financial pressures. It has continued to grow, with a host of agreements concluded by Japan and other East Asian countries. Currently, APT finance ministers have set a target of $70 billion and called for the purely bilateral accords to be multilateralized. For more details, see Chap 4 of this volume by Katada and Solis. 26

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security, and started to weave a web of preferential arrangements. The conclusion of Japan’s first post-World War II PTA, the Japan– Singapore Economic Partnership Agreement (JSEPA), came at this critical juncture in October 2001. Aside from standard welfare calculations, emerging interest in PTAs reflects their role as a convenient venue in which Japan and China can vie for regional economic leadership. This point was driven home most dramatically with regard to ASEAN. China signed a surprise agreement in 2003 with the 10 ASEAN countries, pledging free trade by 2010. Challenged to demonstrate a continued Japanese capability to lead within East Asia by doing the same, Japan proposed a Japan–ASEAN FTA shortly thereafter.28 The impact of the Asian financial crisis on Northeast Asian security is seemingly unclear, but the role played by South Korean President Kim Dae-jung needs to be underscored. Kim pursued a drastic reform agenda in the wake of the financial crisis. In particular, his conciliatory engagement policy toward North Korea, which culminated in the June 2000 inter-Korean summit, created a great deal of diplomatic capital for South Korea to address proactively Northeast Asia’s delicate issues of peace and stability.29 Kim also proposed a six-nation Northeast Asian Security Dialogue (NEASD) involving the two Koreas, the US, China, Japan, and Russia. The proposal was an extension of the Four-Party Talks to reduce tension on the Korean Peninsula and to establish a peace regime there. While Japan and Russia (excluded from the Four-Party Talks) naturally supported the six party NEASD forum, this and similar proposals for collective or cooperative security failed to gain Chinese and American approval.30

28

Aggarwal and Koo 2005; and Pempel and Urata 2006. In February 1998, Kim announced that he would pursue what he called the “sunshine policy” with North Korea, in hopes of encouraging greater discussion and cooperation with Pyongyang. The policy was inspired by the old Aesop’s fable about the sun getting more results than the fierce wind. In December 2000, the Norwegian Nobel Committee, in recognition of Kim’s “extraordinary and lifelong works for democracy and human rights in South Korea and East Asia in general, and for peace and reconciliation with North Korea in particular,” awarded him the Nobel Peace Prize. 30 Kim 2004, 15. 29

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The Post-September 11 Shock

The most recent turning point for the security order in Northeast Asia came with the September 11 terrorist attacks. Among the more fundamental shifts produced by 9/11, the American global war on terror has called into question the future of Asia’s balance of power politics. With its counterterrorism initiative, the US began reconfiguring its traditional security policy in Northeast Asia for strategic and logistical reasons, thereby significantly departing from its conventional emphasis on bilateral security ties under the San Francisco system. First, the US now solicits multilateral cooperation against terrorism. In May 2003, for instance, President George W. Bush announced the establishment of the Proliferation Security Initiative (PSI), which created international agreements and partnerships that allowed the US and its allies to search planes and ships carrying suspect cargo and to seize illegal weapons or missile technologies. Existing regional institutions such as APEC and the ARF, encouraged by the US, have also adopted a series of counter-terrorism measures. Although anti-terrorism cooperation undertaken by Northeast Asian countries focuses on intelligence and information exchanges rather than substantive measures, these changes constitute a symbolically important move toward a regional security dialogue.31 Second, two key developments in the US defense posture, which had begun in the post-Cold War period, clearly accelerated in the post-9/11 period. The first defense transformation sought to shift US defense planning from the clear threat-driven model of confronting the Soviet Union in the Cold War to a capability focus that would allow the US to respond to unknown future threats. The second shift came with the 2002 Global Posture Review, which focused on realigning the positioning of US forces to cope with these unknown threats. Together, these two elements brought about significant changes in the US deployment of troops in both Japan and South Korea. Unmistakably, the issue of repositioning US forces – and possibly using these forces for intervention in hot spots in the region or elsewhere – has created tensions in US alliances with Japan and South Korea. In particular, the US decision to move away from a “tripwire” strategy by shifting 31

Dittmer 2002; Acharya 2003; and Buzan 2003.

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troops away from the demilitarized zone (DMZ) to south of Seoul has raised questions about joint command issues, and the eventual number of troops in South Korea. In the case of Japan, the US focus has increasingly shifted from its current deployment of troops in Okinawa (always a sensitive domestic political issue in Japan) to its forward deployment in Guam. In a region with an already awkward balance between the US, Japan, and China, the second North Korean nuclear standoff, which culminated in Pyongyang’s announcement on October 9, 2006 that it had successfully conducted an underground test of a nuclear device, has set everyone scrambling. From an institutional point of view, the second North Korean nuclear crisis reflects the mixed results of previous multilateral efforts – such as the NPT, the IAEA safeguards agreement, and KEDO. In the wake of the 9/11 attacks, therefore, the US shifted its focus on North Korea from preserving the international nuclear nonproliferation regime to preventing terrorist groups and rogue states from acquiring nuclear weapons or fissile material. Yet, the US was soon to find itself lacking the support of China and South Korea, both of which preferred a conciliatory approach to the North. On the one hand, the impact of America’s neoconservative foreign policy since 2001 has accelerated Sino-American rivalry, while consolidating Washington’s relations with Tokyo and Taipei in spite of Beijing’s grievances. On the other hand, 9/11 (and the North Korean nuclear crisis) provided a convenient pretext for both the US and China to restore the minimum cordiality necessary to maintain regional stability, as a result of Beijing’s support for the grand coalition for anti-terrorism.32 In the meantime, the US focus on terrorism, combined with President’s Bush’s characterization of North Korea, Iraq, and Iran as an “axis of evil” in his 2002 State of the Union address and his neglect of President Kim’s Sunshine Policy, created a rift in US–South Korean relations. Set against this backdrop, China began to host the Six-Party Talks (SPT) in Beijing in August 2003 by extending an invitation to South Korea, Japan, and Russia to join the earlier ad hoc trilateral negotiations between the US, China, and North Korea. China’s new and 32

Dittmer 2002, 64-5.

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remarkably proactive role sits in direct contrast to its hands-off approach during the first North Korean nuclear crisis. Beijing has been particularly motivated this time, not only by its desire to pacify Pyongyang’s nuclear program, but also to constrain Washington in a regional minilateral process and prevent it from taking unilateral action as it did in Iraq.33 As such, the current SPT process has demonstrated cooperative relationships, particularly between the US and China. Certainly the SPT has yet to produce concrete results. A core stumbling block in the talks remains the question of who takes the first step. China and the two Koreas emphasize the Ukrainian example of extending security assurances and economic incentives first. In contrast, the US and Japan contend that the ball is in the North Korean court to completely dismantle its nuclear weapons infrastructure, just as Libya did, before concessions can follow.34 Such complexities notwithstanding, the current nuclear crisis on the Korean Peninsula and the formation of the SPT process to deal with the issue has given rise to the possibility that a more formal organizational framework for multilateral cooperation in Northeast Asia could be established, likely in the form of a Northeast Asian Security Dialogue (NEASD).35 Indeed, the breakthrough made in the SPT in February 2007 gives rise to the promise of a more permanent minilateral dialogue mechanism in Northeast Asia.36 In economic relations, trade policy has changed dramatically in the post-September 9/11 world, although the changes in Northeast and

33

Park 2005, 76-84. Ibid, 85. 35 Pritchard 2004, 1-3. 36 On February 13, 2007, after marathon negotiations, the six parties reached an agreement that could lead North Korea to dismantle its nuclear facilities in return for the other parties’ provision of fuel oil and other aid. Although the accord left the actual removal of North Korea’s nuclear weapons and nuclear fuel to an undefined moment in the future, five working groups would separately negotiate the details of denuclearization, normalization of North Korea-U.S. and North KoreaJapan relations, economic and energy cooperation, and regional peace and security mechanisms. See Jim Yardley and David E. Sanger “In Shift, a Deal is Being Weighed by North Korea,” The New York Times, 14 February 2007 34

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East Asia were not originally related to the terrorist attacks.37 Most notably, America’s new trade policy has become the driving forces behind the changes in trade dynamics in Northeast Asia. Until the end of the 1990s, the US only had FTAs with Israel (1985) and Canada (1988), the latter evolving into NAFTA with the inclusion of Mexico. In 2002, however, President George W. Bush obtained trade promotion authority (TPA) from Congress, and in 2003 completed FTAs with Chile and Singapore, which Congress passed by substantial margins.38 Although the US was slower off the mark than the and countries such as Chile and Mexico, its actions have inspired fear in Asia of a return to a bilateral world, causing Northeast Asian governments to accelerate their rapid turn toward bilateral accords. Concluded on April 1, 2007, the South Korea–US (KORUS) FTA aptly shows how the US and its Northeast Asian counterparts can simultaneously, albeit implicitly, pursue economic benefits and strategic interests in trade negotiations. In addition to the goal of maximizing the gains from trade and investment, the US realized that an FTA with South Korea would give Washington a strong foothold to maintain its strategic and economic presence in Northeast Asia, while South Korea wanted to hedge against the growing strategic uncertainties in the region by cementing its economic ties with the US. Furthermore, the KORUS FTA has the potential to alter the dynamics of the diplomatic and security relations in Northeast Asia where the balance of power is shifting due to the rise of China, the normalization of the Japanese state, and the nuclear adventurism of North Korea.39 1.3.2 Goods: Trade Liberalization, Financial Stability, and Regional Security An external shock may create either positive or negative externalities for countries that are not immediate participants in the precipitating 37 For example, the Japan-Singapore agreement was concluded in October 2001, but had already been in motion for some time. 38 The U.S. has since negotiated, or is in the process of negotiating or ratifying FTAs with Australia, Morocco, the South African Customs Union (SACU), Central America (including the Dominican Republic, Panama, Chile, Colombia, and Peru), South Korea, and Thailand. 39 Lee and Koo 2006; and United States Trade Representative 2007.

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event, thereby stimulating or impeding the supply of certain types of goods that pertain to regional institutional settings. The four types of goods are: public goods, common pool resources (CPRs), inclusive club goods, and private goods.40 Northeast Asia’s new appetite for PTAs and regional security dialogues reflects a convergence of interests in securing inclusive “club goods” in the face of growing economic and security uncertainties.41 Put differently, the political initiatives and intrinsic interest in creating regional economic and security arrangements reflect the growing need for an insurance policy to realize free trade, financial stability, and regional security when traditional mechanisms under the San Francisco System stall or continue to be steadily dismantled in the posttriple shocks period.42 By the mid-1990s, the “trade triangle” that had linked Japanese and overseas Chinese capital, developing Asian manufacturing capacities, and the US market appeared to be in trouble. One major option for the crisis-ridden countries and their affected neighbors was to secure preferential access and create a more diversified export market. With traditional mechanisms within the WTO and APEC offering no salient

40

The distinction between different types of goods is made along two dimensions: rivalry, which refers to the extent to which one actor’s consumption of goods affects that of the other; and excludability, which refers to the possibility of excluding non-contributors to the provision of goods from consuming them. For a discussion of each type of goods and actors’ motivations to provide them, see Aggarwal 1998; and Keohane and Ostrom 1995. 41 There is significant debate about how to characterize trade liberalization and international security. From one perspective, both international trade liberalization and security are seen as a public good since they are non-rival and non-excludable in consumption. Others, such as neoliberal institutionalists, see the game of trade liberalization and peace as a Prisoner’s Dilemma (PD) game, where everyone could be better off if cooperation is achieved, but where the dominant strategy is to defect. In this view, international regimes provide an institutional basis for fostering cooperation and peace that accrues only to the participants to the agreement as a club good. 42 Our claim reflects an important assumption that Northeast Asian countries have an implicit sense of their shared fate or indivisibility, which makes them seek club goods that all regional partners can benefit from, as opposed to seeking competitive, private goods. We thank Edward Fogarty for this point.

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solutions, these countries quickly turned toward FTAs to assure a market for their products.43 In the financial issue area, the success of the US and the IMF in forestalling creation of a rival financial institution, the AMF, was embodied in the November 1997 Vancouver APEC summit meeting leaders’ endorsement of the so-called Manila framework. The framework called for the IMF to take the lead in providing emergency loans to Thailand, Indonesia, and South Korea, with APEC member countries taking only a secondary role, if necessary, to supplement IMF resources on a standby basis without any formal commitment of funds. Thus, with APEC’s action providing a seal of approval for the US–IMF backed plan, the AMF idea was put on hold. Along with severe austerity programs imposed by the IMF, a conspiracy theory that the US was behind the IMF-led Asia bashing heightened Asian countries’ deep distrust of the “global public good” exclusively provided by the IMF. In the security issue area, the San Francisco system provided Northeast Asian countries with security as a club good made available through their alliances with the US (and the Soviet Union as well). In a post-Cold War and post-September 11 era, however, it is unclear whether the provision of this particular type of club good would continue. Whether or not security relations in Northeast Asia evolve in a cooperative or conflictual direction will depend on how the questions of North Korean nuclear adventurism and the rise of China are managed. Although this does not mean that the web of bilateral security alliances will be terminated any time soon, the traditional provision of regional security is increasingly falling short of meeting new collective security needs. As such, a variety of regional alternatives are now being considered, among which the Six-Party Talks process offers a prototype of a collective regional mechanism to deal with common security problems in Northeast Asia.

43

In theory, the WTO and APEC are club goods to the extent that they require membership to benefit from trade liberalization that they materialize. Yet with the former’s global membership and the latter’s spirit of “open regionalism,” their provision of the broadest club good virtually serves as provision of global public goods. As we have argued elsewhere in more detail, the weakness of these two institutions encourages the pursuit of club goods. See Aggarwal and Koo 2005.

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1.3.3 Individual Bargaining Situations While there are many factors that might affect state actors’ individual preferences and strategies for choosing between different institutional alternatives, the most significant elements that determine national responses to external shocks and the changes in the provision of goods include: (1) an actor’s relative position within the international distribution of capabilities; (2) domestic power structures that reflect coalitions and political regime type; and (3) elite beliefs and ideas about issue linkages. International Positions

In Northeast Asia, two aspects of shifting international context have been the basis for exploring institutional cooperation in trade, finance, and security. The first international factor concerns the rise of China within the international continuum of economic development. In general, a country with a large market – either actual or potential – is more likely to entice others to seek it out as an economic partner rather than the other way around. Many East Asian countries’ approach to China as a PTA partner illustrates the importance of a large market in enticing the negotiation of trading arrangements, which in turn provides China with a stronger bargaining position.44 As to the second international factor, collective security concerns may also drive an interest in institutionalizing trade, finance, and security management. Again, the rise of China provides a focal point. More often than not, countries tend to prefer preserving trade and financial relations with their (potential) allies, while avoiding such ties with enemies because the relative gains resulting from economic interdependence can cause changes in the relative distribution of power.45 As noted earlier, the rise of China has pushed its neighbors to reformulate their trade and security policy to respond to the shifting regional balance of power. From this perspective, the question of alliance in Northeast Asia and a prospective NEAFTA really comes down to whether China and Japan could form a substantial entente through a Franco-German type of rapprochement. For Japan, the China threat 44 45

Kwei 2006. Gowa 1994; and Mansfield, Milner, and Bronson 1997.

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may reinforce its interest in the economic and security ties with the US. Yet, the greater uncertainty concerning America’s willingness to sustain its defense commitment to Northeast Asia in a post-September 11 world might prevent Japan from adopting an assertive defense strategy that would include a nuclear arsenal as well as power projection capabilities. Instead, Japan is likely to engage China more deeply in economic and security relations. Domestic Coalitions and Political Regime Type

In Northeast Asia, individual bargaining situations in terms of domestic coalitions and political regime type have changed significantly as a result of the post-triple shocks. Domestic political structures vary widely, ranging from highly democratic – that is, the US, Japan, and South Korea – to highly authoritarian – that is, China and North Korea. Though to different degrees, the governments in the region have experienced challenges to their political legitimacy and actual political turnover, albeit peaceful, by opposition groups.46 From one perspective, such developments have altered the economic and security payoffs confronting individual countries, as many, if not all, of them move toward liberalization, rendering cooperative outcomes at the regional level more likely and the requirements of institution-building less daunting. For instance, the democratic political systems of the US, Japan, and South Korea are most likely to enable business communities to pressure their respective governments not to contain China for fear of losing lucrative economic interests. To a lesser degree, the Chinese government would also be pressured by its domestic economic interests to maintain good relations with its rich neighbors.47

46

In Japan, the ruling Liberal Democratic Party’s electoral dominance was terminated (albeit temporarily) in 1993. In South Korea, the military rule ended in the same year and the opposition party seized power for the first time five years later in the middle of the Asian financial crisis. In the meantime, political leadership changes toward a more conservative direction coincided in the U.S., China, Japan, and South Korea in 2001-2003. 47 For more details about the positive role of internationalist coalitions in creating a regional zone of peace, see Solingen 1998.

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By contrast, recent research suggests that countries with more veto players – including a legislature, an independent judiciary, an independent central bank, and the military – are less likely to cooperate. Where leaders confront an array of domestic groups with diverse preferences and the ability to block policy initiatives, it is difficult to forge international agreements.48 As Northeast Asian countries move from authoritarianism toward greater political pluralism, the twin challenges of responding to nationalist sentiments and maintaining political legitimacy may constrain the political leeway with which to deal with complex economic and security interdependence and institution-building processes.49 Elite Beliefs and Ideas

The third factor concerns elite beliefs and ideas about the causal connections among issues and the need to handle problems on a multilateral, minilateral, bilateral, and/or unilateral basis. As noted earlier, the triple shocks have significantly eroded the traditional confidence held by Northeast Asian political and business leaders regarding global economic and security institutions. At the same time, the erosion of America’s military commitment to Northeast Asia in the post-9/11 period has made led to a scramble for alternative security mechanisms. These changes have led to the construction of new ideational formulas that support regional alternatives for economic and security cooperation. To be sure, new perceptions and ideas alone will not settle all of the enduring disputes and confrontations in Northeast Asia in the short run.50 In light of the rising pressure of assertive nationalism 48

Mansfield, Milner, and Peevehouse 2004, 3. Furthermore, the advent of the Internet and information technology has not only made national political leaders less capable of censuring the dissemination of news that might provoke ultranationalist sentiments, but also made it easier for small, poorly financed activist groups to mobilize support for their nationalist agenda. The brief but intense dispute between China and Japan in spring 2005 over Japanese history textbooks, the sovereignty question of the offshore islands in the East China Sea, and the gas deposits in their vicinity highlighted how domestic nationalist groups can hijack otherwise closer Sino-Japanese relations; see Koo 2005, 184-191. 50 Indeed, the political cleavages between China and Japan over territorial issues and historical animosities pose critical obstacles to deeper regional institutionalization. Moreover, China and Japan offer different visions of a regionally integrated economic 49

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and fluid geopolitics in the post-triple shocks period, even the mere containment of economic and security tensions, both old and new, would require the skillful diplomacy and tireless efforts of political and business leaders. Such ideational and perceptional changes will nevertheless provide Northeast Asian countries with the basic conditions for improving their relationship in the long run and lay the groundwork for a potentially robust regional institutional architecture. In this regard, there is a growing consensus that the best strategy to hedge against potentially disruptive behaviors is to engage more with each other and to empower internationalist interests by institutionalizing economic and security interdependence.51 Many experts in the region are part of an epistemic community and Track Two organizations, and share the view that regional arrangements can be trade-, investment-, and securityenhancing rather than diverting.52 As highlighted in previous sections, various formal and informal regional arrangements have provided a more pragmatic means than global multilateralism or traditional bilateralism to address regional issues. For instance, China’s nationalist domestic audience is more likely to disapprove of any bilateral compromises that China would make with the US and Japan than a diplomatic bargain in a regional minilateral setting. Similarly, the South Korean government is less likely to be constrained in Track Two diplomacy than in bilateral or multilateral interactions with the US, Japan, and/or China. In addition, Japan’s drive to become an international power is more likely to succeed without setting off regional alarm bells if such growth is managed within regional minilateral frameworks. Although their strength and effectiveness remain unclear, the variety of channels for economic and security interactions in Northeast Asia certainly indicates promising signs for regional cooperation.53

community, with Japan advocating the inclusion of external actors such as Australia, New Zealand, and India, and China preferring a more exclusively East Asian membership. See Oba 2007, 111-114. 51 Koo 2005, 252-256. 52 Job 2003; and Tsunekawa 2005. 53 Ye 2007, 148-149.

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1.3.4 Demand for Institutional Fit Our institutional bargaining game approach posits that, as countries attempt to meet their trade, financial, and security needs in a new environment, they often negotiate the number of participants, geographic coverage, scope, and strength of new arrangements or modify existing ones. At the same time, they strategically interact with each other within the context of broader institutional arrangements such as the GATT/WTO, the IMF, and the UN. The latest enthusiasm for preferential economic institutions in Northeast Asia and, more broadly, in East Asia seems to revolve around bilateral arrangements (such as FTAs and currency swap agreements) as a popular mode of participation, while there are also strong indications of minilateral participation such as the APT, the ASEAN–China Free Trade Area (ACFTA) , the CMI, and the ABMI. To this point, Northeast Asia’s new appetite for FTAs is geographically open with a focus on both intra- and extra-regional arrangements.54 Also, many of them attempt to cover broader areas and elements beyond trade – such as labor, environment, investment, government procurements, and harmonization of standards – indicating their nature of WTO-plus or institutional division of labor. At the same time, however, these arrangements are potentially incompatible with the WTO provisions since some sensitive sectors – such as agriculture – are deliberately excluded, thereby setting up the possibility of institutional conflict.55 In the financial issue area, Northeast Asia’s nascent but promising efforts at institutionalizing their financial and monetary relations revolve around a more exclusively “Asia”-focused institutions such as the CMI, the ABMI, the ACU, and the AMF, all of which implicitly challenge the IMF-centered US dollar-based financial system. In Northeast Asia, the geographic scope of regional security dialogues is mixed. Some prominent examples – such as the ARF, CSCAP), and the NEACD – have broad-based membership beyond the geography of Northeast Asia, although the Northeast Asian membership outweighs its non-Asian counterpart – except for the US – in terms of political significance. Despite potential tensions stemming from 54 55

Solis and Katada 2007. Ravenhill 2006.

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the shifting global and regional balance of power, the goals and operations of these institutions are not necessarily incompatible with US designed global security architecture. Aside from the deep US engagement in the North Korean nuclear crisis, the invocation of the NPT and the IAEA system of safeguards in the latest breakthrough of the Six-Party Talks indicates collective efforts at nesting the regional minilateral process within a broader security regime. 1.4 Overview of the Book In the previous sections, we argued that the post-triple shocks have further enhanced a substantial degree of autonomy in regional dynamics in Northeast Asia. The authors of the country chapters in this volume conduct in-depth analysis of each of five Northeast Asian countries – Japan, China, South Korea, North Korea and Russia – and the US. In what follows, we summarize these empirical chapters and highlight that the conditions for institutionalization of trade, finance, and security affairs in Northeast Asia are more favorable now than ever before in the postwar period. In Chap. 2, Seungjoo Lee and Chung-in Moon explore South Korea’s perspective on community-building in Northeast Asia. After reviewing its global and regional strategies in the postwar period, Lee and Moon examine how and why South Korea shifted its policy focus away from multilateralism to regionalism in the post-triple shocks period. They highlight that South Korea’s dramatic policy changes have taken place at the intersection of economic and security concerns and uncertainties, as a result of the country’s unusually high trade and security dependence on the outside world. In Chap. 3, Kun-Chin Lin addresses the impact of the rise of China for the US and Northeast Asia’s institution building process. In the post-triple shocks period, China has talked a big game about Asian regionalism. Yet, according to Lin, it is not just talk: China is thinking big and pulling together elements of a grand strategy in the Asian regional context with the long-term goal of disrupting US-centered alliances in the region. He shows how China has increasingly varied its diplomatic and institutional strategies to achieve this long-term

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goal while maintaining pragmatism in pursuing opportunities to promote a regional image of China as a pacifist multilateral player. Lin argues that Chinese activism at bilateral, minilateral, and multilateral negotiations of trade and investment, energy, and security cooperation in the past five years shows a pattern of China’s opportunism in exploiting US weaknesses – particularly those revealed by American unilateral actions and the consequent willingness of Asian countries to consider changes in the nature of regional cooperation. In Chap. 4, Saori N. Katada and Mireya Solis examine Japan’s responses to growing uncertainties as a result of the “triple shocks,” focusing on trade and financial institutions. They argue that various domestic, regional, and international motivations have influenced the Japanese government’s approach to regional institutional building. Such motivations include: the domestic struggle to garner private sector support, the need to accommodate the rise of China, and Japan’s concern about the American reaction to the development of exclusively Asian regional institutions. They also explore the similarities and differences between Japan’s efforts in trade and financial issue areas, and highlight that financial institution building in Northeast and East Asia has produced a more inclusive region-wide set of nascent institutions, whereas the trade institution building process has generated a more fragmented network of bilateral FTAs linking Japan on preferential terms not only to Asian countries but also to countries outside the region. In Chap. 5, Sang-young Rhyu shows how North Korea has attempted to institutionalize its regime survival through a Special Economic Zone (SEZ) initiative. He argues that Northeast Asian regionalism cannot be completed nor sustained without resolving various economic and security issues surrounding North Korea. In contrast to the conventional wisdom, Rhyu argues that there exist various factors that have led North Korea to seek engagements with its neighbors. He then analyzes the Kaesong Industrial Complex as a pioneering project and its significance for Northeast Asian regionalism. In so doing, he stresses the interplay between security and trade as goods, which cannot be fully provided by the traditional institutional mechanisms in Northeast Asia. In Chap. 6, Taehwan Kim focuses on President Putin’s neo-mercantilist policy and its implications for Northeast Asia. Moscow has

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recently shown growing assertiveness in its foreign policy behavior, while more actively participating in regional affairs and institutions than ever before. In his analysis of this policy shift, Kim utilizes the concepts of “feudalism” and “absolutism/mercantilism” as experienced by the medieval and early modern West Europe. That is, the neo-feudal governance of the Yeltsin regime caused fragmentation of the Russian state, which in turn incurred inconsistency and drifting in its external behavior in general, and Northeast Asia policy in particular. He argues that it is only after neo-absolutism replaced neo-feudal governance that Russia began to make its headway into the region in a neo-mercantilist way. In Chap. 7, Ellen Frost and David Kang analyze Northeast Asia’s security institutions from a US perspective. For the US, Northeast Asia is home not only to two of the world’s most dangerous trouble spots (the Taiwan Strait and North Korea), but also to burgeoning non-traditional security threats such as terrorism and energy-related conflicts. The operating assumption of Frost and Kang’s analysis is that, as a hedging strategy, most Asian countries have strengthened rather than weakened their military ties with the US As such, the authors assess the prospects for “soft” institutionalization in Northeast Asia – that is, dialogue, community-building, and norms that emphasize the peaceful resolution of disputes – rather than Western-style “hard” institutionalization with legally binding rules and procedures. Despite their cautious view, Frost and Kang acknowledge that the trend toward “community-building” in Northeast and East Asia as a whole is unmistakable. Finally, in the concluding chapter, Vinod K. Aggarwal, Min Gyo Koo and Seungjoo Lee evaluate the prospects for Northeast Asian regional integration in trade, finance, and security in a rapidly changing context. In particular, the authors highlight the key links between trade, finance, and security issues in the formation and evolution of new institutions. In a more speculative vein, the authors consider likely trends and its implications for both Northeast Asia and other regions of the world.

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1.5 Conclusion We began our analysis with the observation that the postwar trade, financial, and security order in Northeast Asia remained multilayered under the San Francisco system, involving elements of bilateral alliance structures, global institutions for managing economic and security problems, and long-standing informal alternatives. In the wake of the three major external shocks of the past two decades, however, the traditional institutional equilibrium in Northeast Asia has come under heavy strain. As a result, principal actors are now pursuing greater institutionalization at the regional level, actively weaving a web of preferential economic arrangements and security dialogues. Explaining the emerging institutional architecture in Northeast Asia poses a challenge. In an effort to understand the shifting institutional dynamics, we examined external shocks, goods, countries’ individual bargaining situations, and the fit with existing arrangements. We focused on the triple shocks: the end of the Cold War, the Asian financial crisis, and the September 11 attacks. With respect to goods, we noted that the disturbances in the tradition mechanisms for providing trade liberalization, financial stability, and regional security motivate countries to seek for club goods as a viable alternative. In looking at countries’ individual bargaining situations, we focused on their international strategic and economic interests, domestic power dynamics, and elite beliefs about the value of pursuing regional alternatives. We also showed how the changing nature of broader institutions interacted with country characteristics to alter institutional payoffs in the region. Our central claim is that the pursuit of club goods replaced a more generalized commitment to public goods in the post-triple shocks period, thereby undermining the myth that the combination of bilateral and multilateral arrangements under the San Francisco system and loose-structured production networks could be a viable alternative to formal institutionalization at the regional level. With respect to trade liberalization, the weakness of the WTO and APEC opens up institutional space for a Northeast Asian trade forum like the NEAFTA by affecting the provision of public goods and thus the incentives for club goods. In a similar vein, the eroding confidence of Northeast Asian countries in the IMF-centered US dollar-based financial system

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has motivated them to seek alternative regional club goods such as the CMI, the ABMI, the ACU, and the AMF. Finally, the erosion of America’s military commitment to Northeast Asia in the post-triple shocks period has led to a search for alternative security mechanisms. In a nutshell, much of their future developments depend on the possibility of a tripartite entente among the US, China and Japan, and the resolution of the North Korean issue in both economic and security terms. In view of the tremendous political and economic uncertainties in the contemporary period, the path to deeper and wider economic and security integration in Northeast Asia is likely to be complex. We do not claim by any means that regional institutions are a magical formula for transforming power politics and economic competition into cooperative internationalism in Northeast Asia. They need to go hand in hand with greater democracy and deeper economic interdependence to generate sufficient liberal momentum. That said, we believe that they are becoming viable means for creating norms and rules of interstate behavior that are essential for establishing regional institutional architecture to manage collective trade, financial, and security issues. Yet this process is likely to evolve over decades, not years. References Acharya, Amitav. 2003. Asian Security after September 11: A View from Southeast Asia. Paper prepared for the Asia Pacific Foundation of Canada’s Roundtable on the Foreign Policy Dialogue and Canada-Asia Relations, March. Aggarwal, Vinod K. 1998. Institutional Designs for a Complex World: Bargaining, Linkages, and Nesting. Ithaca, New York: Cornell University Press. Aggarwal, Vinod K. and Shujiro Urata, eds. 2006. Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications. New York: Routledge. Aggarwal, Vinod K. and Min Gyo Koo. 2005. Beyond Network Power? The Dynamics of Formal Economic Integration in Northeast Asia. The Pacific Review 18 (2):189-216. ———. 2007a. Northeast Asia’s Economic and Security Regionalism: Withering or Blossoming?” In Cross Currents: Regionalism and Nationalism in Northeast Asia, edited by Gi-Wook Shin and Daniel C. Sneider. Washington D.C.: Brookings Institution Press.

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———. 2007b. An Institutional Path: Community-Building in Northeast Asia. In The United States and Northeast Asia: Debates, Issues, and New Order, edited by G. John Ikenberry and Chung-in Moon. Boulder, Colo.: Rowman & Littlefield Publishers. ———. 2007c. Asia’s New Institutional Architecture: Evolving Structures for Managing Trade, Financial, and Security Relations. New York: Springer. Bergsten, Fred. 2000. East Asian Regionalism: Towards a Tripartite World. The Economist (July 15): 23-26 Bernard, Mitchell and John Ravenhill. 1995. Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy, and the Industrialization of East Asia. World Politics 47 (2):171-209. Breslin, Shaun and Richard Higgott. 2000. Studying Regions: Learning from the Old, Constructing the New. New Political Economy 5 (3):333-352. Bullock, Todd. 2005. U.S. Hopes Six-Party Talks Can Be Model for Northeast Asia: State’s Hill Says Talks on North Korea’s Weapons Programs Strengthen Ties. The Washington File. Washington, D.C.: U.S. Department of State. Buzan, Barry. 2003. Security Architecture in Asia: The Interplay of Regional and Global Levels. The Pacific Review 16 (2):143-173. Calder, Kent and Min Ye. 2003. Northeast Asia: Ripe for Regionalism? BASC News 6 (1):1-8. Calder, Kent. 2004. Securing Security through Prosperity: The San Francisco System in Comparative Perspective. The Pacific Review 17 (1):135-157. Christensen, Thomas. 2006. Fostering Stability or Creating a Monster? The Rise of China and U.S. Policy toward East Asia. International Security 31 (1):81-126. Cumings, Bruce. 1997. Japan and Northeast Asia into the Twenty-First Century. In Network Power: Japan and Asia, edited by Peter Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell University Press. Dent, Christopher. 2006. New Free Trade Agreements in the Asia-Pacific. Basingstoke, UK: Palgrave Macmillan. Dittmer, Lowell. 2002. East Asia in the ‘New Era’ in World Politics. World Politics 5:38-65. Duffield, John S. 2003. Asia-Pacific Security Institutions in Comparative Perspective. In International Relations Theory and the Asia-Pacific, edited by G. John Ikenberry and Michael Mastanduno. New York: Columbia University Press. Ernst, Dieter. 1997. Partners for the China Circle? The Asian Production Networks of Japanese Electronics Firms. BRIE Working Paper 91. Berkeley, Calif.: University of California, Berkeley. Evans, Paul and Akiko Fukushima. 1999. Northeast Asia’s Future Security Framework: Beyond Bilateralism? Tokyo, Japan: National Institute for Research Advancement. Available from: .

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Foot, Rosemary. 1998. China in the ASEAN Regional Forum. Asian Survey 38 (5):425-441. Friedberg, Aaron. 2005. The Future of U.S.-China Relations: Is Conflict Inevitable?” International Security 30 (2):7-45. Gowa, Joanne. 1994. Allies, Adversaries, and International Trade. Princeton, New Jersey: Princeton University Press. Grieco, Joseph, M. 1998. Political-Military Dynamics and the Nesting of Regimes: An Analysis of APEC, the WTO, and Prospects for Cooperation in the AsiaPacific. In Asia-Pacific Crossroads: Regime Creation and the Future of APEC, edited by Vinod K. Aggarwal and Charles E. Morrison. New York: St. Martin’s Press. Hara, Kimie. 2001. 50 Years from San Francisco: Re-Examining the Peace Treaty and Japan’s Territorial Problems. Pacific Affairs 74 (3):361-382. Hatch, Walter and Kozo Yamamura. 1996. Asia in Japan’s Embrace: Building a Regional Production Alliance. New York: Cambridge University Press. Hatch, Walter. 1998. Grounding Asia’s Flying Geese: The Costs of Depending Heavily on Japanese Capital and Technology. NBR Briefing. Seattle, Wash.: The National Bureau of Asian Research. Job, Brian. 2003. Track Two Diplomacy: Ideational Contribution to the Evolving Asia Security Order. In Asian Security Order: Instrumental and Normative Features, edited by Muthiah Alagappa. Stanford, Calif: Stanford University Press. Katzenstein, Peter. 1997. Introduction: Asian Regionalism in Comparative Perspective. In Network Power: Japan and Asia, edited by Peter Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell: University Press. ———. 2005. A World of Regions: Asia and Europe in the American Imperium. Ithaca, New York: Cornell University Press. Keohane, Robert and Elinor Ostrom, eds. 1995. Local Commons and Global Interdependence. London, UK: Sage Publications. Kim, Samuel S. 2004. Northeast Asia in the Local-Regional-Global Nexus: Multiple Challenges and Contending Explanations. In The International Relations of Northeast Asia, edited by Samuel S. Kim. New York: Rowman & Littlefield. Koo, Min Gyo. 2005. Scramble for the Rocks: The Disputes over the Dokdo/ Takeshima, Senkaku/Diaoyu, and Paracel and Spratly Islands. Ph.D. diss., University of California, Berkeley. Kwei, Elaine. 2006. Chinese Bilateralism: Politics Still in Command. In Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications, edited by Vinod Aggarwal and Shujiro Urata. New York: Routledge. Lee, Seungjoo and Min Gyo Koo. 2006. South Korea’s Multi-Track FTA Strategy: Moving from Re-active to Proactive. Paper presented at the 2006 Annual Meeting of the American Political Science Association, Philadelphia. MacIntyre, Andrew. 1994. Business, Government and Development: Northeast and Southeast Asian Comparisons. In Business and Government in Industrializing Asia, edited by Andrew MacIntyre. Ithaca, New York: Cornell University Press.

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Mansfield E, Helen Milner and Rachel Bronson. 1997. The Political Economy of Major-Power Trade Flows. In The Political Economy of Regionalism, edited by Edward Mansfield and Helen Milner. New York: Columbia University Press. Mansfield, Edward, Helen Milner and Jon C. Pevehouse. 2004. Vetoing Cooperation: The Impact of Veto Players on International Trade Agreements. Unpublished manuscript. Available from: . Midford, Paul. 2000. Japan’s Leadership Role in East Asian Security Multilateralism: The Nakayama Proposal and the Logic of Reassurance. The Pacific Review 13 (3):367-397. Oba, Mie. 2007. Regional Arrangements for Trade in Northeast Asia: Cooperation and Competition between China and Japan. In Asia’s New Institutional Architecture: Evolving Structures for Managing Trade, Financial, and Security Relations, edited by Vinod K. Aggarwal and Min Gyo Koo. New York: Springer. Park, John S. 2005. Inside Multilateralism: The Six-Party Talks. The Washington Quarterly 28 (4):75-91. Pempel, T.J., ed. 2005. Remapping East Asia: The Construction of a Region. Ithaca, New York: Cornell University Press. Pempel, T.J. and Shujiro Urata. 2006. Japan: The Politics of Bilateral Trade Agreements. In Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications, edited by Vinod K. Aggarwal and Shujiro Urata. New York: Routledge. Pritchard, Jack. 2004. Beyond Six Party Talks: An Opportunity to Establish a Framework for Multilateral Cooperation in the North Pacific. Paper presented at the Hokkaido Conference for North Pacific Issues, October, Hokkai Gakuen University. Ravenhill, John. 2006. The Political Economy of the New Asia-Pacific Bilateralism: Benign, Banal, or Simply Bad? In Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications, edited by Vinod K. Aggarwal and Shujiro Urata. New York: Routledge Shambaugh, David. 2004/05. China Engages Asia: Reshaping the Regional Order. International Security 29 (3):64-99. Solingen, Etel. 1998. Regional Orders at Century’s Dawn: Global and Domestic Influences on Grand Strategy. Princeton, New Jersey: Princeton University Press. Solis, Mireya and Saori N. Katada. 2007. Understanding East Asian CrossRegionalism: An Analytical Framework. Pacific Affairs 80 (2):229-258. Stanley Foundation. 2006. What did we learn from KEDO? Policy Dialogue Brief. Muscatine, Iowa: The Stanley Foundation. Available from . Stiglitz, Joseph. 1998. The Role of International Financial Institutions in the Current Global Economy. Address to the Chicago Council on Foreign Relations, Chicago, February. Tsunekawa, Keiichi. 2005. Why So Many Maps There? Japan and East Asian Regional Developments. In Remapping East Asia: The Construction of a Region, edited by T.J. Pempel. Ithaca, New York: Cornell University Press.

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United States Trade Representative. 2007. United States and Korea conclude historic trade agreement, April 2. Available from . Wade, Robert. 2000. Wheels within Wheels: Rethinking the Asian Crisis and the Asian Model. Annual Review of Political Science 3:85-115. Ye, Min. 2007. Security Institutions in Northeast Asia: Multilateral Responses to Structural Changes. In Asia’s New Institutional Architecture: Evolving Structures for Managing Trade, Financial, and Security Relations, edited by Vinod K. Aggarwal and Min Gyo Koo. New York: Springer.

2 South Korea’s Regional Economic Cooperation Policy: The Evolution of an Adaptive Strategy

Seungjoo Lee Chung-Ang University, Seoul, South Korea Chung-in Moon Yonsei University, Seoul, South Korea

2.1 Introduction1 South Korea has emerged as the world’s eleventh largest economy less than four decades after the devastation of Japanese colonial rule, the Korean War, and protracted poverty and underdevelopment. Several factors account for its stellar economic performance, including the availability of qualified human capital, a timely transition to an exportled growth strategy, and the guidance of a developmental state. But few have appreciated the merits of South Korea’s external ties. A strong bilateral alliance with the United States allowed South Korea to enjoy the enormous benefits of free riding in both security and economic areas. While American troop presence and massive military assistance eased its security concerns and budgetary burdens, South Korea’s timely access to American markets within the framework of the Generalized System of Preferences (GSP) served as the engine of its manufactured exports. The alliance with the United States and the status of a developing country within the GATT system powerfully aided South Korea’s economic ascension. 1

We would like to thank Jonathan Chow, Edward Fogarty, and Kristi Govella for their comments and editorial assistance. We also thank Hyun Park for his research assistance.

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However, such benefits could not last forever. As South Korea began to enjoy increasing wealth (and balance of payment surpluses) after the mid-1980s, it became subject to various external constraints. Bilateral pressures from the United States and the European Union (EU) for market opening, regional integration in Europe and North America (the North American Free Trade Area, or NAFTA), and challenges of globalization forced South Korea to realign its regional economic strategy.2 After the mid-1990s, stalled trade cooperation at the WTO level and divisions among members of the Asia-Pacific Economic Cooperation (APEC) forum on trade liberalization further demanded policy realignment in Seoul. Meanwhile, the 1997 Asian financial crisis highlighted the importance of regional economic cooperation and integration: South Korea under the presidency of Kim Dae-jung initiated the ASEAN Plus Three (APT) process, which has the potential to become an “East Asia-wide” free trade area or East Asian community.3 President Roh Moo-hyun, who succeeded Kim in 2003, went further by proposing the Northeast Asian Cooperation Initiative, which aims to institutionalize a specifically Northeast Asian community. This chapter explores the evolutionary dynamics of South Korea’s regional economic cooperation policy within this historical context. More specifically, our chapter will address the following issues: How have external factors, such as the collapse of the Cold War structure in East Asia, the region’s gradual process of institutionalization, and the Asian financial crisis of 1997, affected South Korea’s regional strategy? What domestic factors have been responsible for shaping South Korea’s regional economic policy shift? And how has the interplay of external and domestic factors influenced the formation and evolution of Seoul’s regional policy? Section 2.2 of the chapter provides a brief overview of the global and regional strategies that South Korea pursued in the postwar period. Section 2.3 examines how and why South Korea shifted its policy focus away from multilateralism to regionalism in the post-Cold War period. Section 2.4 highlights South Korea’s policy changes in the 2

Moon and Park 2000, 6; and Aggarwal and Koo 2005. Initially launched in 1998, ASEAN Plus Three has gradually turned into a formal venue for more institutionalized regional cooperation. See Stubbs 2002.

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wake of the 1997 Asian financial crisis. Section 2.5 looks into the case of the Roh Moo-hyun government’s Northeast Asian Cooperation Initiative. The final section discusses some theoretical and comparative implications of South Korea’s regional community building strategy. 2.2 Gains from Bilateral Security Alliance and Multilateral Trade Policy: Re-Examining Cold War Legacies After World War II, the United States emerged as the hegemonic leader in shaping the regional order governing Northeast Asian security and trade relations.4 With access to the US security umbrella and domestic market, South Korea was a primary beneficiary of these institutional arrangements and regarded them as the mainstay of its foreign policy during the Cold War period. Regionalism – regional cooperation and integration – was not yet on the table. The Cold War system polarized the Northeast Asian region into two competing ideological camps, and collective memory of Japanese colonialism prevented countries in the region from accepting or participating in a regional cooperation and community-building scheme, particularly under Japan’s leadership.5 South Korea was not an exception to this general trend. Lacking a regional option, South Korean trade policy during the Cold War period centered on multilateralism, particularly following its admission to the GATT in 1967. It was a natural outgrowth of South Korea’s export-oriented industrialization (EOI) strategy. Throughout the postwar period, South Korea utilized EOI as a policy tool to catch up with advanced industrial countries in the West.6 The GATT was a double blessing for South Korea’s export promotion strategy: while facilitating South Korea’s manufactured exports through preferential treatment (i.e., GSP), the GATT allowed it to protect its domestic import markets as a developing country. In this way, the GATT assisted South Korea’s further integration into the world economy.

4

Hemmer and Katzenstein 2002; and Calder 2004. Katzenstein 1997. 6 Amsden 1989; and Shin and Chang 2003. 5

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By contrast, South Korea was lukewarm toward building regional institutions to ease security tensions and facilitate economic integration in the region. South Korea’s response to Malaysian Prime Minister Mahathir bin Mohamad’s proposal for forming an East Asian Economic Group (EAEG), the first initiative for building a formal East Asian regional economic institution, underscored its tepid interest in East Asian regionalism.7 The EAEG’s rationale reflected the changing political and economic dynamics in East Asia, such as the expansion of Japanese production networks into Southeast Asia after the Plaza Accord of 1985, growing trade conflicts across the Pacific, and newly emerging anti-American sentiment in the region. However, South Korea was reluctant to embrace the idea not only because Mahathir’s scheme excluded the United States, but also because it could have paved the way to the formation of a yen bloc under Japan’s leadership. 2.3 The Emergence of South Korea’s Regional Policy in the Early Post-Cold War Period: Achievements and Limitations The impact of the Cold War’s end did not materialize immediately in Northeast Asia, with its legacies undermining South Korea’s pursuit of regionalism. Despite the Roh Tae-woo government’s ambitious Northern policy, designed to normalize diplomatic relations with China and former communist regimes and to reduce security tensions on the Korean peninsula, the overall security milieu in Northeast Asia was not conducive to promoting South Korea’s regional cooperation strategy. While the first nuclear crisis in 1993–94 derailed Seoul’s engagement policy with North Korea, the bilateral security alliance between Seoul and Washington remained intact.8 Meanwhile, a more positive legacy of the Cold War – the GATT – also limited the scope of Seoul’s regional policy. The successful conclusion of the Uruguay Round and the establishment of the WTO maintained South Korea’s support for multilateral trade institutions. Together with Japan and

7 8

The EAEG was quickly renamed the East Asian Economic Caucus (EAEC). Suh 2004, 136.

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China, South Korea remained one of the very few WTO member countries that did not enter into any preferential trading agreements.9 While the bilateral security alliance and multilateralism continued to guide South Korea’s foreign economic policy, a variety of developments prompted South Korea to seek more diversified strategies. First, the combined strategy of GATT-centered multilateralism and EOI resulted in an excessive reliance on the US market, which in turn deepened its structural vulnerability. Even a modest slowdown of the US (and world) economy led to a substantial decline of South Korean exports, destabilizing its economic performance. Second, Washington’s trade policy increasingly demanded strict reciprocity, further strengthening South Korea’s incentives to find alternative export markets. In order to overcome chronic bilateral trade deficits with South Korea, the United States aggressively pressured Seoul to open its import markets to American firms, while imposing import restrictions, mostly non-tariff barriers, on South Korean manufactured goods.10 Equally important were the advent of the European Union and the formation of NAFTA. With trade conducted within the framework of such regional preferential agreements growing from 22.5% in 1955 to 66.3% in 1997, South Korea faced increasing fears of exclusion, particularly with respect to these two huge markets. In this rapidly changing environment, East Asian countries realized that they needed to foster intraregional economic cooperation in order not to fall behind the new trend of regionalism elsewhere. Seen from this perspective, time ripened for establishing an inclusive regional framework – namely APEC – rather than a more exclusive regional grouping such as Mahathir’s )EAEG. Along with Australia, Japan was active in creating APEC. Though traditionally maintaining a low-key posture in foreign policy rather than taking leadership,11 Japan played a crucial leading role in creating APEC by not only resuscitating the APEC agenda but also by bridging differences between the United States and East Asian countries. 9

Koo 2005, 142-143. For a concise summary of deteriorating trade relationship between South Korea and the United States, see Moon 1987; Wade 1993; and Bayard and Elliott 1994. During the same period, Japan also faced U.S. pressure for market opening. See Lincoln 2001; Schoppa 1997; and Pekkanen 2005. 11 Doner 1997; and Krauss 2000. 10

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South Korea also welcomed the creation of APEC and participated actively, hosting one of its annual meetings in Seoul in November 1991. Seoul’s rationale was clear. On the one hand, APEC retained a multilateral character with the participation of a large number of countries, attenuating its exclusivity.12 The creation of an Asia-Pacific free trade area would provide South Korea with new access to export markets and resource-rich countries such as ASEAN countries, Australia, and New Zealand. On the other hand, APEC was an institutional choice that could accommodate South Korea’s interests in regionalism as well. APEC possessed a regional character, aiming to serve as a preliminary consultative mechanism for creating a free trade agreement in the Asia-Pacific region. South Korea’s participation in APEC meant that it could gradually free itself from the legacies of Cold War and begin to explore the possibilities of regionalism. However, APEC would not prove an equilibrium regional solution. In the mid-1990s, South Korea was forced to reassess its policy in the face of APEC’s internal troubles. The roadmap adopted by the 1994 Bogor Declaration, which set trade liberalization for developed countries by 2010 and for developing countries by 2020, aroused dissension among the membership. At the 1997 APEC summit in Vancouver, two opposing camps, led by North American and East Asian corps respectively, came into conflict over Early Voluntary Sectoral Liberalization (EVSL). While the United States and Canada introduced an EVSL initiative to put selected sectors on a faster track toward liberalization, South Korea, Japan, and ASEAN countries strongly opposed this plan. This conflict was symbolic in demonstrating that East Asian countries’ advocacy of an informal and consensual approach clashed with the formal and institutionalized approach favored by the United States, Australia, and New Zealand. Unable to effectively coordinate conflicts among member countries, APEC lost its appeal as a transregional cooperative body. Amidst APEC’s internal divisions, Mahathir’s vision of )EAEC was resurrected in the form of the ASEAN Plus Three (APT) dialogue. The idea of APT was first floated by Singapore’s Prime Minister 12

John Ravenhill argues that it would be more precise to define APEC as a “transregional” body rather than a regional organization equivalent to the EU. Ravenhill 2000, 329.

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Goh Chock Tong in October 1994 when he proposed to hold the inaugural meeting of the Asia–Europe Meeting (ASEM).13 ASEAN countries immediately approved the proposal, demanding that South Korea, China and Japan join ASEM as well. In response to ASEAN’s request, all three Northeast Asian countries participated in a series of preliminary meetings for ASEM during the second half of 1995, setting the tone for the creation of the APT.14 2.4 The Asian Financial Crisis and Changes in South Korea’s Regional Policy The outbreak of the Asian financial crisis in 1997 forced South Korea to reevaluate the efficacy of the regional economic policies it had pursued in the post-Cold War period. The way the United States and the IMF handled the crisis generated deep uneasiness throughout East Asia. Initially, American disinterest renewed concerns about the lack of US policy engagement with the region; later, the United States and East Asian countries differed on how to manage the spreading crisis.15 The IMF eventually intervened by imposing its stringent conditionalities on beneficiaries of standby loans – and in the process precipitated immense dissatisfaction with the solutions emanating from Washington. The crisis had a profound impact on East Asian regionalism. It is said that the region’s resentment over American and IMF management of the Asian financial crisis made East Asian countries aware of the need to set up regional cooperative mechanisms.16 Moreover,

13

Hoa 2003, 10. The Asia-Europe Meeting was an initiative of ASEAN to institutionalize cross-regional economic cooperation with the European Union. The first ASEM meeting was held in Bangkok in December 1997. On ASEM, see Gilson 2004. 14 Stubbs 2002, 442. 15 Higgott 1998. 16 For example, Japan floated the idea of an Asian Monetary Fund (AMF) in 1997 by expressing its willingness to contribute more than half of the resources for a US$100 billion fund. Hong Kong, Taiwan and Singapore also indicated their intent to participate in the AMF, and South Korea and most other East Asian countries agreed to the idea. Even China, which was against the idea at first, changed its attitude.

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as mentioned above, APEC’s incapacity to advance cross-Pacific trade liberalization encouraged some of its member states, including South Korea, to search for alternatives.17 It is in this context that the Kim Dae-jung government began to shift its foreign trade policy from multilateralism and transregionalism, such as APEC, to regional and bilateral trade policies. The most pronounced policy initiatives were APT and free trade agreements. 2.4.1 ASEAN+3 Since its inception, thirteen nations in East Asia – the ten members of ASEAN and China, Japan, and South Korea – have striven to expand the scope of APT, rather than utilizing it merely as a preparation session for ASEM.18 The meeting was quickly elevated to the summit level in Kuala Lumpur during the annual ASEAN leaders’ meeting in December 1997. After a second ASEAN leaders’ meeting in 1998, the group turned the meeting into an annual affair. Given that the Kim Dae-jung government was beginning to contemplate a regional strategy, APT seemed to be a proper venue for South Korea to project its ambitious visions. During the 1999 APT summit, the Kim government played a pivotal role in establishing and operating the East Asia Vision Group (EAVG) and the East Asia Study Group (EASG). Seoul’s initiative derived from a number of factors. First, East Asian countries, still suffering in the wake of the 1997 Asian financial crisis, shared a common interest in consolidating regional economic cooperation. Second, East Asia lacked a regional bloc comparable to those in Europe and North America. Third, Kim sought an institutionalized venue for China–Japan–South Korean summits. And finally, Kim had a strong conviction that regional economic integration and cooperation would lead to common prosperity and peace in the region.19 Nonetheless, the AMF did not make any tangible progress, due to strong opposition from the United States. See Harvie and Lee 2003, 43. 17 Bergsten 2000, 20-22. 18 As a consequence, separate ministerial meetings were held under the rubric of ASEAN+3. See Stubbs 2002, 442. 19 For a concise summary of Kim Dae-jung’s policy toward APT, see Kim 2006, 11.

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Seoul’s initiative produced some meaningful changes. The EAVG and EASG set out to examine how to utilize APT as a mechanism to forge regional cooperation and ultimately transform it into a more permanent regional institution. In particular, the EAVG is credited with providing key concepts for regional integration and cooperation. For example, after conducting studies about a joint surveillance of shortterm capital movements and an early warning system in East Asia, the group proposed the establishment of an East Asian Monetary Fund and a regional exchange rate coordination mechanism, which would be geared to the creation of a common currency area in the long run. The EAVG’s principal accomplishment came at the finance ministers’ meeting at Chiang Mai, Thailand, in 2000. The Chiang Mai Initiative worked out a series of agreements among Asian central banks to lend foreign exchange reserves to one another via “swap” agreements to help them protect their currencies on foreign exchange markets.20 Since then, there has been much discussion about creating an Asian Monetary Fund (AMF) and common currency baskets.21 In November 2000, heads of member countries gathered in Singapore and agreed to explore the possibility of formalizing their ties and forming an East Asian Free Trade Area (EAFTA). This agreement quickly paved the way for others. During the 2004 summit in Vientiane, the ASEAN+3 nations signed thirty-five bilateral or multilateral agreements, including the landmark free trade agreement between China and ASEAN. These agreements are seen as the building blocks toward an eventual region-wide free trade area. Finally, the leaders of the thirteen East Asian nations agreed at a meeting in Laos in December 2004 to hold the first East Asian Summit in Kuala Lumpur in 2005. The launch of the East Asian Summit signifies the beginning of a historic process with the objective of transforming the APT arrangement into an East Asian community.

20 For further details on the Chiang Mai Initiative, see Chap 4 by Katada and Solis in this volume. 21 See for example, Lamberte et al. 2001.

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2.4.2 Reactive Approach to FTAs Apart from APT, free trade agreements provided another alternative for South Korean policymakers.22 South Korea’s heightened interest in FTAs was prompted by a new understanding of their positive effects. The South Korean government previously held the view that FTAs created trade diversion and were not desirable for a trade dependent country such as South Korea. Because of concern over the negative effects of FTAs, South Korea took a passive approach to them in the 1990s. In the aftermath of the financial crisis, however, the Kim Dae-jung government began to claim that FTAs could serve as ‘building blocks’ toward multilateral trade liberalization. Because South Korea was a trading state and many of its largest trading partners had already jumped on the bandwagon, FTAs might have been an unavoidable choice. Indeed, the Kim Dae-jung government’s trade policy remained reactive, aiming to counter others’ FTAs.23 These proliferating FTAs generated a shared concern among the government and private firms that South Korea should not be left behind in the new fad. However, the majority of policymakers still considered multilateralism the best strategy for South Korea, and regarded FTAs as essentially an insurance policy in the case of failure of the multilateral trading regime. It is against this background that the Kim Dae-jung government began to deliberate on FTAs. Immediately after taking office in 1998, its first measure was organizational reform related to foreign economic policy. The Kim government created the Office of the Minister for Trade (OMT) under the Ministry of Foreign Affairs and Trade (MOFAT).24 Mandated to streamline bureaucratic coordination among multiple government agencies and thereby facilitate negotiations with foreign countries, the OMT had authority over a broad scope of foreign economic policies. Particularly noticeable was the establishment of an FTA bureau within the OMT to facilitate FTA negotiations.

22

Aggarwal and Urata 2006 and Dent 2006 explore FTAs in Asia. Kim and Lee 2003. 24 Koo 2006, 141. 23

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Along with the organizational reform, the Kim Dae-jung government took concrete actions for bilateral FTAs. In November 1998, the Inter-Ministerial Trade Policy Coordination Committee formally announced that South Korea would start FTA negotiations with Chile, while conducting feasibility studies with other prospective FTA partners such as the United States, Japan, New Zealand, and Thailand. Shortly after the announcement, the Kim government created a special task force on a South Korea–Chile FTA, under which five working groups were established to deal with a variety of issues such as market access, trade rules, services, intellectual property and legal procedures.25 The Kim Dae-jung government’s negotiation strategy vis-à-vis FTAs was motivated by its efforts to minimize the negative effects of FTAs on the domestically oriented, import-competing sectors, rather than to maximize positive effects. FTAs are generally expected to generate substantial economic gains over the long run if increased competition leads to improved productivity. However, South Korea has faced two serious challenges in the process of initiating, negotiating, and concluding FTAs with its major trading partners. The first challenge was political, involving a trade-off between short-term political loss and long-term economic gains. Managing the political drama of winners versus losers posed the most critical challenge. The key point was how to deal with the visible costs to certain domestic actors that would appear in the short- to medium-term, before the long-term benefits of FTAs ultimately materialized. Second, heightened competition from imports could bring negative repercussions to inefficient sectors as well as even relatively competitive export-oriented sectors. The thrust of the Kim Dae-jung government’s FTA strategy was reflected in the profile of South Korea’s FTA partners. The Kim government aimed to form FTAs primarily with faraway countries with which South Korea had modest trade volumes. Chile ranked thirtieth among South Korea’s trading partners, accounting for a mere 0.63% of its overall trade. Seoul also negotiated or conducted joint studies with lightweight partners such as India (its sixteenth largest trading partner, with a 1.23% share) and Canada (its twenty-first largest

25

Sohn 2001, 7.

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trading partner, with a 1.11% share).26 Singapore, South Korea’s eleventh largest trading partner (2.33% share), was regarded as an ideal partner because it does not have competitive agricultural sector.27 Chile has a highly competitive and export-oriented agricultural sector, but it was assumed that seasonal difference between the two countries would mitigate negative effects on the Korean agricultural sector.28 2.5 The Roh Moo-hyun Government’s New Regional Policy The Roh Moo-hyun government initially approached the region through its Northeast Asian Cooperation Initiative for Peace and Prosperity but later shifted to a more proactive FTA strategy as a more effective mechanism for realizing its strategic goals. 2.5.1 Northeast Asian Cooperation Initiative for Peace and Prosperity Upon its inauguration in February 2003, the Roh Moo-hyun government proposed an ambitious regional plan, the Northeast Asian Cooperation Initiative (NEACI). The initiative was intended to build a regional community of mutual trust, reciprocity, and symbiosis. Given developments in other regions of the world, the Roh government saw Northeast Asian regional integration as a justifiable solution to cope with the challenges of globalization and as a way to accomplish the globalization process more efficiently. With Northeast Asia trailing in the regional institution ‘game,’ the initiative aimed to facilitate an expedited process of community-building in economic and security domains. NEACI was a break from previous South Korean policy. The Roh Tae-woo and Kim Young-sam governments undertook “internationalization” and “globalization” campaigns, and the Kim Dae-jung 26 KITA homepage. Available from . Accessed on 15 February 2006. 27 Ibid. 28 Yoo 2002.

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government championed the idea of a broad East Asian community within the APT formula. In contrast, the Roh Moo-hyun government’s initiative was much narrower in scope, focusing solely on Northeast Asia. The Roh government thought it inconceivable to assure an East Asian, Pacific, and global reach without settling immediate political, economic, and socio-cultural challenges arising from its proximate region, Northeast Asia. However, the initiative did not ignore the world beyond Northeast Asia; it foresaw a Northeast Asian focus that would be naturally tied to South Korea’s active involvement East Asia through APT, in the Pacific through APEC, and internationally through multilateral cooperative structures. What motivated the Roh government to propose the NEACI? The most critical impetus was the continuing security dilemma in the region. The dismantling of the Cold War structure led to an end to bipolar military confrontation and improved diplomatic relations among countries in the region. Yet, unlike Europe, the end of the Cold War has not brought about tangible peace dividends in Northeast Asia. The North Korean nuclear quagmire, tensions over the Taiwan Strait, major realignments of US strategic posture in the region, the ascension of China as a global power, and Japan’s move to resuscitate its military power have profoundly complicated the security landscape in Northeast Asia. The economic situation is also complex. Beneath a growing intraregional economic interdependence and division of labor lies a new pattern of intensified competition. Most East Asian countries, regardless of their developmental level, have been moving into more valueadded, capital- and technology-intensive industries. Japan, the newly industrialized economies (NIEs), and ASEAN countries have all promoted cutting-edge industries such as semiconductors and computers. As a result, in contrast to the traditional , “flying geese” model, which was predicated on a harmonious intra-industrial division of labor among countries in the region, a “swarming sparrow” pattern of development has become more prevalent, further deepening economic competition among regional rivals.29 In particular, China, Japan, and South Korea compete head-to-head in terms of export items and destinations, causing a major coordination dilemma. Despite increasing 29

Bernard and Ravenhill 1995; and Rhyu and Lee 2006.

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concerns over fierce competition, duplicated investments, and surplus capacity, the region still lacks both the institutional mechanisms to address such problems and a leading nation to furnish public goods for regional economic cooperation and integration. There also remain socio-cultural challenges. The cultivation of a common regional identity continues to be hampered by lingering parochial nationalism and deepening mutual distrust.30 Bitter historical memories of domination and subjugation still haunt the region, particularly among the people of China and South Korea. As ongoing disputes over historical distortion among Korea, China and Japan demonstrate, nationalism and subsequent cognitive dissonance pose a critical obstacle to region-building in Northeast Asia.31 These cognitive barriers, emanating from a history of bitter enmity, generate real ambivalence regarding intraregional cooperation. NEACI is intended to minimize the negative effects of old and new challenges while maximizing benefits of new opportunities. The Roh government proposed several policy measures in order to implement the initiative. It made diplomatic efforts to transform the Six-Party Talks for the North Korean nuclear crisis into a viable and lasting multilateral security regime. It not only proposed the institutionalization of the China–Japan–ROK summit apart from the ASEAN+3 process, but also initiated a Northeast Asian defense ministers’ meeting. To facilitate this process, it has been strengthening bilateral and multilateral military cooperation and expanding confidence-building measures, such as joint naval exercises, exchange of military personnel, and coordination of training programs among the Northeast Asian countries. The Roh government has also proposed several cooperative projects potentially conducive to Northeast Asian community building. They include cooperation on energy and transportation, the environment, and regional economic development, as well as social and cultural cooperation. However, these ambitious projects have not yet proceeded past the planning phase. Most importantly, failure to resolve the North Korean nuclear problem through the Six-Party Talks process 30 On the role of ideas and norms in the formation of regionalism in East Asia, see Acharya 2004. 31 Kim and Moon 1997; and Funabashi 2003.

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has not only critically undermined inter-Korean relations, but also derailed efforts to institutionalize multilateral security cooperation in the region. Moreover, precarious inter-Korean relations have blocked the implementation of such cooperative regional projects as energy and transportation networks. Unpredictable external events have also prevented the Roh government’s Northeast Asian Cooperation Initiative from making meaningful progress. For example, in December 2005, deteriorating Sino-Japanese relations culminated in a clash at the ninth APT summit at Kuala Lumpur, which was followed by the first East Asian Summit (EAS). Seoul’s relations with Tokyo have also deteriorated in recent years. Aside from the thorny issues such as Japanese history textbooks and Japanese Prime Minister Koizumi’s visits to the Yasukuni shrine, the perennial territorial dispute over the Dokdo/Takeshima islands has plagued bilateral relations.32 2.5.2 Proactive FTA Strategy With its ambitious regional vision in trouble, the Roh government realized that FTAs might be a more effective mechanism for achieving its strategic goals. Although the policy shift toward FTAs under President Kim Dae-jung had marked a dramatic departure from South Korea’s traditional trade policy, it was not until President Roh entered office in 2003 that the roadmap for FTAs and detailed action plans for its FTA strategy were prepared.33 The Roh Moo-hyun administration consolidated Kim’s FTA agenda by outlining a comprehensive roadmap for South Korea’s multitrack FTAs. Under the roadmap, South Korea’s FTA partners are classified into three broad groups: (1) immediate FTA partners such as Chile, Singapore, the European Free Trade Association (EFTA), and Japan; (2) mediumterm FTA partners such as Mexico, Canada, ASEAN, and China; and (3) long-term FTA partners such as the United States, the EU, and India. The roadmap emphasized that FTAs were an important part of South Korea’s goal to become an “open trading state.”34 In 32

Rozman 2006. Lee 2006, 5; and the Ministry of Foreign Affairs and Trade of Korea 2006. 34 The Ministry of Foreign Affairs and Trade of Korea 2006. 33

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contrast to its rather peripheral status in President Kim’s economic and strategic agenda, FTA policy became a core element of President Roh’s foreign economic policy vision. As shown in Table 2.1 below, South Korea’s FTA track record has been remarkable. After ratification of the South Korea–Chile FTA in 2004, South Korea signed and ratified FTAs with Singapore, the EFTA, and ASEAN in 2004–2005. These four FTAs would likely cover about 14% of South Korea’s total trade, if fully implemented.35 South Korea also signed an FTA with the United States in 2007, which currently awaits ratification, and has been negotiating FTAs with Japan, Canada, and Mexico. In addition, a number of feasibility studies are currently underway with China, India, the EU, South Africa, and MERCOSUR. If these prospective FTAs were concluded successfully, they would likely cover up to 65% of South Korea’s total trade.36 Table 2.1 Current status of South Korea’s FTAs37 Under joint study

Under negotiation

Korea–China Korea–China–Japan Korea–GCC Korea–MERCOSUR Korea–SACU

Korea–Canada Korea–EU Korea–Japan Korea–India Korea–Mexico

Awaiting ratification Korea–US

Concluded Korea–Chile Korea–EFTA Korea–Singapore Korea–ASEAN

A careful examination of the Roh Moo-hyun government’s FTAs reveals two interesting anomalies. One is the lack of policy efforts to expedite a FTA among China, Japan, and South Korea, and the other is an unexpectedly early push for the ROK–US FTA. One might expect rapidly rising intraregional trade and FDI in Northeast Asia to spur South Korea to prioritize institutionalized economic cooperation with China and Japan. South Korea is expected to realize significant tangible and intangible benefits from bilateral and/or trilateral FTAs among the three countries. Nonetheless, it has 35

KITA homepage. Available from . Ibid. 37 MOFTA FTA Homepage. Available from . 36

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made very little progress on these fronts, which is puzzling given these countries’ geographic proximity and economic interdependence. Three factors have combined to hinder the formation of FTAs in Northeast Asia. The first and most important factor is historical animosity and its legacies lingering in the minds of the people in the three countries.38 One might think that this antipathy would not have a direct impact on the creation of a China–Japan–Korea FTA. In reality, however, the success of a trilateral FTA depends on domestic consensus and the absence of veto players. Collective memory of the past and clashes of national identities can easily disrupt efforts to institutionalize the trilateral FTA by mobilizing political opposition. It took about five years for South Korea and Japan to launch formal government-level negotiations in 2003. Bilateral talks stopped after the sixth round of negotiations in November 2004.39 Second, rivalry between China and Japan is another obstacle. China and Japan have not yet entered a head-to-head collision, but a delicate pattern of rivalry between the two countries has hampered the formation of a trilateral FTA. Whereas Beijing has favored the FTA approach, Tokyo has been reluctant due to fear that China would be the major beneficiary. Likewise, intensified rivalry between the two countries can severely hurt the momentum for institutionalizing broader economic integration in East Asia, as illustrated by their competitive efforts to attract ASEAN as an FTA partner. This rivalry is highly likely to mitigate against the formation of a Northeast Asian FTA for the foreseeable future. Third, countries are concerned about the distribution of benefits from bilateral FTAs in the region (see Table 2.2). A China–Japan FTA would make South Korea a loser, and a Korea–Japan FTA would hurt China. But a China–Japan–South Korea trilateral FTA is expected to produce positive-sum outcomes for all, even though there is a problem of relative gains. Judged from the matrix of mutual gains emerging from the Northeast Asian FTA, it seems irrational for the three countries not to expedite the formal institutionalization of regional cooperation through an FTA. In South Korea, it is generally believed that an FTA in Northeast Asia would balance its trade profile, while reducing 38 39

Ikenberry and Mastanduno 2003; and Pempel 2005. MOFTA FTA Homepage. Available from .

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its trade deficits with Japan and at least maintaining the status quo with China. Table 2.2 Balance sheet of FTAs between and among Korea, Japan, and China (%, millions of US dollars)40 Korea–Japan FTA China–Japan Korea–China– Korea–China FTA FTA Japan FTA GDP* Economic GDP* Economic GDP* Economic GDP* Ecogains gains gains nomic gains Korea 3.2 12644.5 2.4 10687.8 1.1 3682.8 −0.2 −1189.6 China 1.3 8191.2 0.2 917.0 0.0 1.1 7335.3 −358.0 Japan 0.2 12265.1 0.0 119.9 0.0 2184.7 0.2 10289.8 * Effect on GDP growth rates in percentage

But some pessimists in South Korea claim that a Northeast Asian FTA would sandwich South Korea between horizontal competition with China and vertical pressures from Japan. This concern is particularly palpable in the agricultural sector, in which liberalization seems inevitable in the formation of the Northeast Asian FTA. Given that political opposition from the agricultural sector still remains quite formidable, it is a daunting task for the South Korean government to push for the Northeast Asian FTA. Competitive economic structures create another hurdle to intraregional cooperation. China, Japan, and South Korea have maintained rather complementary economic structures in the past. In 1996, for example, there was no overlap among the top ten export items among the three countries. Only five items overlapped in the top 50 export items, and eight in the top 100. But by 2002, two items overlapped in the top ten, ten items in the top 50, and 15 items in the top 100. Japan and South Korea have shown a relatively steady trend in overlapped export items (e.g., from four to five in the top ten export items, and from 34 to 39 in the top 100 export items). But China is changing the overall landscape of East Asian competition. China’s ascension is literally threatening Japan and South Korea. There were no overlapping items between the two pairs of countries in their top ten export items in 1996, but this rose to four items in 2002. In short, the number of competing items in the top 100 also increased from 15 40

Japanese Cabinet Secretariat. Quoted in Dong-A Ilbo, 11 January 2002.

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in 1996 to 29 in 2002.41 The increasingly competitive nature of these countries’ economic structures has made the subregional idea less attractive to them. Table 2.3 Overlapping export items between and among Korea, Japan, and China Overlapping top export items 1996 2002 0 2 China–Japan–ROK 4 5 Japan–ROK 0 4 China–Japan + China–ROK Countries

10Overlapping top export items 1996 2002 8 15 34 39 15 29

100

Under these conditions, China, Japan, and South Korea have adopted an “ASEAN first, and Northeast Asia later” posture. Because China and Japan were each more interested in an FTA with ASEAN, South Korea had to follow the path they set. This “detour regionalism” is likely to delay the process of Northeast Asian economic community building. With Northeast Asian regionalism stagnating, in February 2006 the Roh government surprised the Korean public by announcing that it would embark on FTA negotiations with the United States, becoming the first Northeast Asian country to do so. South Korea’s entrance into the “KORUS” FTA negotiations signaled that the focus of its FTA policy had profoundly changed from a reactive and gradualist strategy to minimize the negative effects of FTAs, to a proactive and aggressive strategy aimed to maximize their benefits. Overall, the two countries’ complementary industrial structures suggest that South Korea is not likely to suffer serious negative repercussions. Benefits would be concentrated in South Korea’s major industries such as auto and other manufacturing products, realized at the expense of South Korea’s less competitive agricultural and service sectors.42 Yet despite the political sensitivity of issues such as screen quotas in the film industry, government subsidies to farmers, and restructuring of the financial sector, the Roh Moo-hyun government pressed forward with the negotiations.

41 42

KITA press release, 12 September 2002. Schott and Choi 2001.

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What accounts for the policy shift? First, the Roh government believed that the KORUS FTA has the potential to improve not only economic ties but also overall diplomatic and security relations between Seoul and the Washington. In light of the changing security outlook in Northeast Asia – China’s growth, Japan’s normalization, and most importantly North Korea’s nuclear adventurism – the Roh government might have seen few options but to strengthen its ties with the United States. Second, an ideological shift within the South Korean government also played a role. Traditionally, South Korean bureaucrats have had a mercantilist mindset. Although bureaucrats in the Kim Young-sam and Kim Dae-jung governments championed globalization and neoliberal reforms, their mercantile ethos remained rather intact. But under the Roh Moo-hyun government, economic policymakers have become sufficiently liberal to proactively initiate FTA negotiations with a government that would clearly demand greater market access. Kim Dae-jung’s neoliberal reforms focused on the domestic arena, clearly articulating the linkage between these domestic reforms and foreign economic policy; Roh’s government used the FTA negotiations to expedite this restructuring of the Korean economy by introducing new competition in inefficient sectors. This view – that FTAs can be tied explicitly to the purpose of locking in economic reform – has become prevalent within the Roh Moo-hyun government.43 For this purpose, the Roh government highlighted the previously undersold potential benefits of FTAs: decreasing prices of imported goods, increasing productivity, growing employment, attracting foreign capital, and so on. Third, reflecting this ideological shift, the OMT emerged as the chief government agency in charge of FTA policymaking within the government. Its institutional legitimacy was not firmly established under the Kim Dae-jung government. But with its enhanced status under the Roh Moo-hyun government, OMT gradually took a leadership role in foreign trade affairs that in turn led to changes in the bureaucratic balance of power. Furthermore, as a champion of neoliberal economic ideas, the OMT was well positioned to fend off domestic 43

Indeed countries often use FTAs to expedite the economic adjustment process. See Pempel and Urata 2006; Solis and Katada 2005; and Ravenhill 2006.

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opposition as well. As an agency in charge of foreign economic policymaking, the OMT is relatively free from pressure from special interest groups.44 In addition, when NGOs and interest groups from sensitive sectors, such as the film industry, agriculture, and service sectors, raised their voices opposing the KORUS FTA,45 the Roh government responded by establishing a presidential committee to effectively shield the OMT from mounting domestic opposition in August 2006.46 To summarize, South Korea’s FTA strategy under the Roh Moohyun government has turned more proactive, as evidenced by its efforts to conclude FTAs with a number of countries, including the United States. In contrast to the reactive approach taken by the Kim Dae-jung government, the Roh government consciously attempted to link a KORUS FTA to domestic economic reforms, while placing it within a broader context of bolstering strategic partnerships between the two countries. 2.6 Conclusion We have examined how South Korea’s regional policy has evolved in the face of external factors such as the collapse of the Cold War structure in East Asia, the region’s slowed progress of institutionalization, and the Asian financial crisis of 1997. As a primary beneficiary of the Cold War structure, epitomized by the bilateral security alliance with the United States and GATT-centered multilateralism, South 44 Of course, this does not mean that the OMT operates in a political vacuum. Aside from its critics and public opinion, the OMT closely consults various private business councils as well as the National Economic Advisory Council under the President’s Office. Yet in contrast to its counterpart ministries in the government, such as the Ministry of Finance and Economy (MOFE), the Ministry of Commerce, Industry, and Energy (MOCIE), and the Ministry of Agriculture and Forestry (MOAF), the OMT rarely consults small firms and individual farmers directly, while putting much more emphasis on the feedback from big business and industry associations, such as the Federation of Korean Industries, the Korea International Trade Association, and the Korea Federation of Small and Medium Business. See Lee 2006, 7. 45 Joongang Daily, 3 February 2006. 46 Chosun Daily, 24 July 2006.

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Korea took a passive approach to building regional institutions to ease security tensions and to facilitate economic integration in Northeast Asia. After the end of the Cold War, the lethargic progress of multilateral trade liberalization spurred South Korea to explore complementary strategies. At the time, APEC was an optimal choice: a regional body with a multilateral character. But the Asian financial crisis prompted South Korea to make another policy turn. The region’s resentment over American and IMF management of the crisis prompted East Asian countries to pursue cooperative mechanisms at the regional level. In accordance with this changing milieu, the Kim Dae-jung government became keenly interested in a new version of East Asian regionalism. Specifically, the Kim government took initiative in institutionalizing the ASEAN+3 process, expecting that it had a potential to lead to an East Asia-wide free trade area or East Asian community. With the international trading environment in flux, the Kim government also embraced bilateral FTAs. Inspired by its predecessor’s vision and strategy, the current Roh Moo-hyun government has actively explored ways to build and enhance a regional community in Northeast Asia, while redefining FTA strategies in a more proactive way. The Roh government has aimed to solve perennial regional problems, such as palpable security tensions, economic competition, and socio-cultural conflicts, by unveiling an ambitious plan for a peaceful and prosperous Northeast Asia. However, this ambitious regionalist vision withered in the face of stalemate in the Six-Party Talks, Sino-Japanese rivalry, and deteriorating bilateral relations between South Korea and Japan. In the face of policy gridlock, the Roh government decided to take advantage of FTAs as a policy tool for realizing its strategic goals. With this policy objective in mind, the Roh government took a proactive approach to FTAs, in stark contrast to its predecessor.

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———. 2006. The Political Economy of the New Asia-Pacific Bilateralism: Benign, Banal or Simply Bad? In Bilateral Trade Agreements in the AsiaPacific: Origins, Evolution, and Implications, edited by Vinod K. Aggarwal and Shujiro Urata, 27-49. London, UK: Routledge. Rhyu, Sang-young and Seungjoo Lee. 2006. Changing Dynamics in Korea–Japan Economic Relations: Policy Ideas and Development Strategies. Asian Survey 46 (2):195-214. Rozman, Gilbert. 2006. South Korean-Japanese Relations as a Factor in Stunted Regionalism. Paper presented at a conference entitled “Northeast Asia’s Economic and Security Regionalism: Old Constraints and New Prospects,” Center for International Studies, University of Southern California. Schoppa, Leonard. 1997. Bargaining with Japan: What American Pressure Can Do and Cannot Do. New York: Columbia University Press. Schott, Jeffrey and Inbom Choi. 2001. Free Trade between Korea and the United States? Washington, D.C.: Institute for International Economics. Shin, Jang-Sup and Ha-Joon Chang. 2003. Restructuring Korea Inc. London, UK: Routledge. Sohn, Chan-hyun. 2001. Korea’s FTA Developments: Experiences and Perspectives with Chile, Japan, and the U.S. Paper presented at a conference entitled “Regional Trading Arrangements: Stocktake and Next Steps,” Trade Policy Forum, Bangkok. Solis, Mireya and Saori Katada. 2005. The Japan-Mexico FTA: A Cross-regional Step in the Path towards Asian Regionalism. Paper presented at a conference entitled “East Asian Cross Regionalism,” Center for International Studies, University of Southern California. Stubbs, Richard. 2002. ASEAN Plus Three: Emerging East Asian Regionalism? Asian Survey 42 (3):440-455. Suh, J. J. 2004. Bound to Last? The U.S.-Korea Alliance and Analytical Eclecticism. In Rethinking Security in East Asia: Identity, Power, and Efficiency, edited by J. J. Suh, Peter J. Katzenstein, and Allen Carlson, 131-171. Stanford, Calif.: Stanford University Press. Wade, Robert. 1993. Managing Trade: Taiwan and South Korea as Challenges to Economics and Political Science. Comparative Politics 25 (2):147-167. Yoo, Hyun Seok. 2002. Han-cheele jayoomooyeokhyeopjeongui gooknaejeongchi: gooknaehyeopsangui ihaejipdangwa gooknaejaedoreul joongsimeuro [The Domestic Politics of Korea-Chile Trade Agreement Negotiation: Interest Groups and Domestic Institutions in Domestic Negotiations]. Korean Political Science Review 36 (3):198-221.

3 Rhetoric or Vision? Chinese Responses to U.S. Unilateralism

Kun-Chin Lin National University of Singapore, Singapore

3.1 Introduction1 In the post-Cold War era, and in particular with the onset of the USled global War on Terrorism, the People’s Republic of China (PRC) has talked a big game about Asian regionalism. But it is not just talk: the PRC is thinking big and pulling together elements of a grand strategy in the Asian regional context. Its core foreign policy interests in the post-Cold War era derive directly from the post-Mao political elite’s formative experience of witnessing the collapse of international communism and fellow communist regimes, and have remained constant to the present.2 These core interests center on the long-term goal of disrupting US-centered alliances in the Asia-Pacific, as these structures are perceived to restrain China’s inevitable rise to great power status. Beijing sees this primary goal as necessarily long-term because in its own estimation it is weak in both hard and soft power and continues to face enduring American ties in the region. However, 1

I would like to thank Jonathan Chow, Edward Fogarty, and Kristi Govella for their comments and editorial assistance on this chapter. 2 For more information about Chinese leaders’ nationalism and self-understanding as a rising power since the Tiananmen Square Incident in 1989, see Friedman 2005. I have benefited greatly from discussions with Professor Friedman (University of Wisconsin). Yuen-Foong Khong at Nuffield College also offered helpful insights, drawing on his expertise at The Institute of Defense and Strategic Studies, NTU, Singapore.

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in the punctuated “post-triple” period, China has increasingly varied its diplomatic and institutional strategies to achieve this long-term goal while maintaining pragmatism in formulating its short-term or corollary goals and promoting a regional image of China as a pacifist multilateral player. This chapter examines variations in these goals and tactics in the context of the Asian Financial Crisis and the War on Terrorism. Chinese activism in bilateral, minilateral, and multilateral negotiations on trade and investment, energy, and security cooperation in the past five years shows a pattern of PRC opportunism in exploiting US weaknesses – particularly those revealed by American unilateral actions during the above crises, and the consequent willingness of Asian countries to consider changes to the nature of regional cooperation. Indeed, China’s specific preferences regarding Japan’s remilitarization, the Korean Peninsula face-off, and the Taiwan question – issues often discussed separately with much cultural or historical gloss – are embedded in the long-term goal of overcoming US-based obstacles to China’s rise to regional hegemony. Generally speaking, in the short run, Chinese initiatives have generated welfare gains for all actors in Asia. Nonetheless, Beijing’s essentially Cold War mentality – even in its latest doctrine of China’s “peaceful rise” – will undercut its own efforts at multilateralism and reduce the likelihood of peaceful solutions to the most explosive situations in the region. The current positive-sum game will fall apart with increasing power asymmetries between China and the rest of Asia. 3.1.1 A Process Framework for Analyzing Chinese Strategies The analytical framework for this chapter stresses the centrality of the PRC–US relations in motivating China’s efforts to shape the regional architecture. The PRC’s relationship with the United States looms large in conventional accounts of uneasy stability across a wide range of issues in Asia, whereas China’s relations with other countries are accorded a second-order importance. This premise remains largely accurate. It follows that over time changes in China’s intentions and strategies toward regional arrangements will reflect Chinese responses

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to perceived inadequacies in US-centered relationships and institutions in Asia. Drawing on social mobilization theories and insights from gametheoretical institutional analysis, I argue that ideational and institutional adaptations may neither have clear nor beneficial payoffs for the innovating state in the short-run (per realist theories), nor represent genuine, substantive changes in belief systems (per liberalcosmopolitan theories).3 Instead, they may constitute time-contingent framing and signaling devices useful for Beijing to explore opportunities to project power amid regional dissatisfaction with US leadership. For China, cultivation of a pacifist multilateral image opens up maximally flexible margins for testing issue linkages previously nested under Cold War security alliances and thus immune from its manipulation. In the social movement literature, “framing” is a process through which policy entrepreneurs or activists produce and disseminate meanings that differ from and often challenge the status quo in order to “mobilize potential adherents and constituencies, to garner bystander support and to demobilize antagonists.”4 To increase the scope and commitment of the mobilized coalition, as well as their influence over multiple movements, activists construct “master frames.” These are broad frameworks that articulate shared understandings of problem diagnostics, attribute reward or blame, and generate desirable solutions, 3

Here I differ from Kang 2003, who also argues against realist predictions of arms races and power politics in post-Cold War Asia, noting instead that China’s neighbors have chosen to bandwagon rather than balance against China. Similarly invoking deep-rooted cultural memories of a hierarchical and informal regional order in Asia, Teo 2004 claimed that imperial China gave more to its tributary states than it received from them. I doubt that this asymmetry characterizes contemporary China-Southeast Asian relations, and caution against adopting this debatable historical characterization of China as a soft-power hegemon, with the implication that smaller Asian countries must choose allegiance between China and the United States. 4 Snow and Benford 1988, 198. Also see McAdam, McCarthy and Zald 1996; and Tarrow 1998 for background concepts and theories. Tarrow 2001 applies framing analysis to anti-globalization social movements; there is no reason why states cannot apply the same techniques, or their words cannot be assessed closely for attempts to provoke others to act on their behalf, which would accord with the classic definition of power.

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alternatives, and arrangements to coordinate collective action.5 Adroit application of framing in the international arena helps to reveal other players’ preferences and options and assess how far and fast China could advocate changes in regional organizations. To ground the framing innovations in tangible form, China attempts through overlapping bilateral and multilateral negotiations to manipulate “self-reinforcing institutional dynamics” through repeated games and trust mechanisms that support its posture as a rising power without overt hegemonic ambitions.6 Framing issues in a way that highlights US neglect or indifference can allow China to forge new relationships with its neighbors and alter the “quasi-parameters” of existing regional institutions. Over time, such interactions will reduce the range of situations in which the pre-existing behaviors are self-reinforcing, allowing China to “condition” Asian economic and security arrangements to react to an exogenous shock in a favorable path-dependent manner. 3.1.2 Basic Components of Chinese Strategic Innovation I argue that the PRC’s emerging grand strategy did not gain coherence until after the Asian Financial Crisis. Since then, it has consisted of: (1) disarming regional fears of a rising China, (2) gathering information about former members of the US-led Cold War coalition, and (3) creating a new regional dynamic accommodative of China’s great power aspirations. First, China expresses a formal doctrinal acceptance of American global hegemony, the liberal nature of the global trade, investment, and finance regimes, and their associated environmental, human rights, and equity qualifications. Within this context, it advertises a new, postCold War security paradigm emphasizing China’s “peaceful rise” as a historical inevitability. An open declaration that China does not oppose American hegemony also implies that it does not seek to upset the regional balance of power – that is, no new arrangements are necessary to help China ascend the regional hierarchy, become the hub of regional trade and investment pacts, or gain decisive control over the 5 6

Benford and Snow 2000, 613. Greif and Laitin 2004.

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Korean Peninsula and the Taiwan Strait. To the extent that it can persuade the United States and others of this vision, China gains room to formulate new linkages between the emerging non-traditional security concerns and conventional economic issues.7 This is the psychological disarming component of China’s grand strategy. Second, China expresses confidence that time is on its side, touting Asian countries’ mutual interests in fostering economic interdependence while brushing off tough questions of relative gains, trade and investment diversion, and power asymmetries between itself and others. Since the early 1990s, the growth of the Chinese domestic market has created favorable interdependencies with neighboring countries: a surge in trade and investment flows with Japan; investment outflows from Taiwan; increasing reliance of the Republic of Korea’s (ROK’s) economy on Chinese growth; lock-in of Hong Kong’s special role in promoting coastal growth; and (politically favorable) trade deficits with Southeast Asian countries. Furthermore, the first wave of China’s outward FDI has motivated intensified diplomacy. Economic interdependence centered on the differentiation and expansion of the Chinese domestic market draws immediate cooperation from Asian countries even as they risk “obsolescent bargaining” (to liberally apply Raymond Vernon’s term) in face of China’s economic boom.8 Waiting for its neighbors to come to grips with its rising economic influence, China commits to regional institutionalization to help consolidate its position. This is the preference revealing and preference formation component of China’s grand strategy. Third, after two decades of participation in liberal IOs, China has acquired sufficient experience to emulate a certain sophistication regarding regime building. This sophistication involves a keen awareness of the relative costs and benefits of tinkering with perceptions and institutions and their underlying power and social relations – in contrast to a crude attitude of merely choosing to follow, opt out, or

7

As Alastair Johnston has noted, “security dilemmas are socializing experience” through which leaders of nations redefine their interests, the nature of security goods in contention, and issue linkages. Johnston 2003, 56. 8 Obsolescent bargaining refers to a situation where the original agreement between parties becomes obsolescent as one or more parties seek to improve their position.

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sit on the fence.9 Beijing has showed an understanding of other actors’ needs and sensitivities to Chinese initiatives in its framing efforts, exploiting ambiguities in Asian countries’ support of the US dominant roles in the Asian Financial Crisis and War on Terrorism. China realizes that while all have chosen to bandwagon, they would prefer to hedge if given a feasible option safe from American retaliation. At a minimum, China’s neighbors would be willing to explore the tactical linkages of non-US alliances; at most, they would shift from hedging to bandwagoning with China. Drawing on strong substantive linkages established by the Association of Southeast Asian Nations (ASEAN) and Asia-Pacific Economic Cooperation (APEC) experiences, and galvanized by shared formative experiences during the Asian Financial Crisis and the rise of China, Asian countries express more than a passing curiosity in redirecting the “tactical linkages” of issues and the “nesting” order of institutional forums.10 China has taken advantage of this creative reality, making strides in the power realignment component of China’s grand strategy. The following sections trace how the Cold War, the Asian Financial Crisis, and the War on Terrorism created enabling conditions for a new Chinese approach to regional order. External security shocks, along with China’s economic expansion and the region’s growing interdependence, created uncertainties that pressured Asian countries to reexamine their conceptions of transnational issues such as security, trade and investment, energy, and territorial disputes. China has steered these explorations toward new relations and institutions that challenge the power structures based on US-centered alliances. 3.2 The PRC’s Position in the Cold War Institutional Equilibrium: 1978–1989 After the Maoist era and prior to the implosion of the Soviet bloc, China maintained a critical attitude toward institution building in Northeast Asia. Its disengagement stemmed from a Cold War understanding of itself as a victim of American-based alliances in 9 See Medeiros and Fravel 2003 for an alternative view of China’s “sophistication” in regional diplomacy. 10 On tactical linkages and nesting, see Aggarwal 1998.

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Asia.11 Preoccupied with normalizing relations with the two superpowers, China interpreted its diplomacy toward Japan, the ROK, and North Korea (the Democratic People’s Republic of Korea, or DPRK) largely through the calculus of these countries’ contributions to stabilizing Sino-American and Sino-Soviet relations.12 In the first ten years of the post-Mao reforms, China was not susceptible to forces of interdependence or globalization. China’s trade dependency ratios (export/GDP and import/GDP) ranked second lowest in East Asia after Japan, and the proportion of net FDI inflows to total investment in China was the lowest among newly industrializing countries.13 Interregional income multiplier effect analysis shows that China was somewhat affected by investments within Taiwan, the ROK, the United States, and Hong Kong, but hardly affected by investments within ASEAN countries. At the same time, Chinese domestic investment affected income growth in Japan and the United States, but hardly anywhere else. Overall, the newly industrializing countries (NICs) – Hong Kong, Singapore, Taiwan, and the ROK – had a far greater impact on the region than did China. As compared to the period after the late-1990s, growth in China and other East Asian countries helped to spread economic clout more evenly across the region. The PRC managed its economic vulnerability through the partystate’s default option of scaling back market incentives and open borders and reimposing planning mechanisms at the first signs of economic trouble. It also lacked sensitivity from reliance on crude oil and other raw material from abroad, and on foreign capital and tourism to generate urban growth. It took US sanctions after the 1989 Tiananmen Square Incident to make policymakers aware that China’s

11

For basic texts on Chinese foreign policy, see Ross 1995; and Dittmer 1992. For further reading, see Dittmer 2005; Mann 1999; and Dittmer and Kim 1993. “Stabilizing” by no means implied conflict avoidance or moderation in negotiations— as evidenced by China’s demand that Gorbachev remove the “three fundamental obstacles” (Sino-Russian border disputes and the Russian military presence in Mongolia and Afghanistan) and its attempts to pressure the United States to adopt the PRC’s version of the One China Policy and reduce military support for Taiwan. 13 The following analysis is based on Osada 1997/8. 12

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continuing reform was in fact dependent on an export-oriented sector within a mercantilist framework. During this time, the PRC’s approach to regional and international organizations was a “mini-max” strategy of minimizing commitments and maximizing gains (ideally, through free-riding).14 The strategy drew on extreme suspicion and pessimism regarding organizations in which the United States participated.15 While IOs were considered to be instruments of “peaceful evolution” by the United States and its allies, China viewed its relations within all of Asia through a particular realist lens that ignored the dynamics of interactions between members of cooperative institutions. Prior to the end of the Cold War, China preferred to act on a bilateral basis. In the 1970s, Japan was the first country to approach China with the market in mind, largely due to its relative security under the US alliance as well as Japanese and Chinese leaders’ recognition of the complementarities in their economies.16 In the 1980s, while being wooed by both the United States and the Soviet Union, China started moving toward a “no-nuke” stance for the Korean Peninsula and commenced bilateral negotiations that would lead to the settlement of most border disputes within twenty years. To achieve economic development and social stability at home, China maintained three main foreign policy goals of reducing border tensions, espousing a peaceful environment under the superpower détente, and deterring US interventions on behalf of Taiwan. The Chinese Foreign Ministry pursued these goals almost exclusively through bilateral ties or through the exercise of veto powers in a handful of global forums. 3.3 Negotiating New Regional Arrangements in the Post-Cold War Era: Sharpening the Survival Instinct of the Leninist Party-State The following section addresses the fall of the Soviet Empire from the perspective of Chinese leaders and China’s early participation in regional organizations during the 1990s. 14

Kim 1994. Pearson 1999. 16 For an excellent analysis of China’s economic diplomatic history, see Reardon 2002. 15

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3.3.1 The Fall of the Soviet Empire and the Worldview of Chinese Leaders The end of the Cold War hit home for China’s political leadership. The spontaneous mass support of students’ protests coinciding with Gorbachev’s visit of Beijing, and the aftermath of the brutal crackdown in Tiananmen Square, instilled a powerful sense of vulnerability in the Chinese national consciousness.17 Chinese leaders reacted by shutting the gates to the Middle Kingdom and spewing vitriol against the US-led trade sanctions and the regular condemnations of its human rights record. Edward Friedman has persuasively demonstrated that the near simultaneity of the international communist bloc’s collapse and the domestic uprising profoundly shaped the basic worldview of Deng Xiaoping’s successors.18 In contrast to the marked cognitive flexibility and cosmopolitanism of the first generation of Chinese leaders such as Mao Zedong, Zhou Enlai and Deng Xiaoping, Jiang Zeminand his cohort fundamentally interpreted world events from a fixed metanarrative of deliberate American efforts to contain China’s return to the world stage.19 The triumphalism of neoliberal market ideology and expectations for an inevitable sweep of non-democratic regimes, as captured in Fukuyama’s “The End of History,” further confirmed this harsh worldview.20 It would be fair to say that China might have 17

For cultural and psychological analyses of the Tiananmen Square Incident, see Wang 2004; Fewsmith 2001; and Mila 1996. It could be argued that the lasting impact of 1989 was even more concentrated on the elite consciousness, as the populace was deprived of information, legitimacy, or social space to grieve, soulsearch, and mobilize in commemoration. The elite continue to grapple with the implications of a nationally repressed memory, as indicated by their caution in honoring the passing of the disgraced leader Zhao Ziyang in 2005. 18 Friedman 2005. 19 See Reardon 2002 for documentation of Mao’s and Zhou’s pragmatism in the early-1970s in engineering China’s exit from the self-imposed autarkic order. Going back to the first few years of the PRC, the CCP made efforts to lure Japan away from alliance with America, including making historical revisions to blame the Nanjing Massacre on the American missionaries who set up the safety zone which saved Chinese lives. (Author’s email correspondence with Edward Friedman, 10 August 2006.) One simply cannot imagine similar flexibility from Jiang Zemin or Hu Jintao toward Japan. 20 Fukuyama 1992.

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regressed to near-autarky for an extended period if it were not for the sober commitment of Deng Xiaoping to the continuation of export-oriented reform as symbolized by the special economic zones.21 Certainly, no politician spoke positively of international engagement, and the campaign to join the World Trade Organization (WTO) was unceremoniously dropped.22 At the same time, the reality of the US preponderance of economic and military might, and even ideological persuasion, demanded a new Chinese strategic response. Rudely awakened after its dalliance with the two superpowers in the early 1980s, and with Russia incapacitated by its own transition, China found a renewed justification for seeking a “multipolar world.” Beyond frequent exegeses in the People’s Daily and Xinhua wires to the foreign media, however, there appeared no obvious and feasible steps to realize this global power realignment.23 Even as Japan quickly resumed economic relations with China, it did not seriously consider forsaking its security pact with the United States. The Gulf War of 1991 demonstrated American military superiority and its willingness to use this superiority in regions of strategic importance. As a result, Chinese leaders muddled along with defensive foreign policy reactions in a security environment perceived as latently uncertain and hostile, while focusing on developing domestic economic strength and military capabilities, and on repairing the party-state controls over the administrative apparatus and social interests.24 Starting in 1989, China reversed its decade-long downgrading of military spending, posting double-digit annual growth rates in the People’s Liberation Army (PLA) budget.25

21

Gallagher 2005. For a catalogue of key events, see “China’s Long March to WTO Entry.” Available from . Accessed 10 December 2001. 23 Kim 1991. 24 Osada 1997 and 1998 shows that trade dependency ratios and the weight of FDI net inflows to the overall investment amount scaled new heights after 1993—the former increased more rapidly and the latter doubled in that year. 25 For exact estimates, see “China’s Defense Budget—China’s ‘Official’ Budget.” Available from . 22

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3.3.2 Early Participation in Regional Organizations: Toward Greater Multilateralism Chinese leaders displayed lukewarm interest and cautious involvement in regional economic and security institutions in the first half of 1990s. At this point, the Chinese understood cooperation on security, trade, investment, and energy issues to be approximating “club” goods under US control. In China’s public statements, the desire for multipolarity translated into a unifying theme reiterating China’s perception of the Asia region as “relatively peaceful” and deserving of a more multilateral approach to regional security issues – that is, one less dominated by Washington. Based on this understanding, China relied strongly on unilateral actions and bilateral agreements that emphasized state sovereignty and expressed wariness of multilateralism. On Northeast Asian security issues, China expressed little willingness to compromise, insensitivity to differentiations among the interests of US allies, and a lack of readiness to work collectively to provide solutions. China upset Japan by conducting nuclear testing before signing the Comprehensive Test Ban Treaty in 1996, leading the latter to suspend the grant portion of its loans to China from 1995–97 and to seek closer ties with the United States.26 As a result, the April 1996 US–Japan Declaration on Security went beyond bilateral cooperation to cover defense cooperation in the Asia-Pacific region and justify a Japanese military buildup. Meanwhile, by conducting missile launches in the Taiwan Strait during Taiwan’s March 1996 presidential election, China triggered US defensive responses and galvanized Taiwanese voters to vote for the pro-independence Democratic Progressive Party. Furthermore, during various negotiations among the DPRK, ROK, and United States in 1991–1996, China declined to participate, leaving Washington in the pivotal role of sole intermediary.27 A 1993 statement in the Beijing Review illustrated Beijing’s typically aloof attitude, proclaiming, “the [denuclearization] issue was a direct matter between DPRK and the three sides – the International Atomic Energy Agency (IAEA), the United States, and the Republic of Korea.”28 China declined to participate in the Korean 26

Dittmer 2005, 11. Pritchard 2005. 28 Cited in Wu 2005, 36. 27

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Energy Development Organization (KEDO), established in 1994 to engage DPRK with incentives of heavy oil and light water reactors.29 Even after it joined the Four-Party Talks upon the Clinton Administration’s invitation in 1996, China acted as if it were an intruding outsider in an informal process controlled by the United States. Ok-Nim Chung characterizes China’s participation in multilateral security forums in the mid-1990s as follows: In principle, Chinese officials support the idea of multilateral dialogues to exchange views and promote mutual understanding. In practice, they have been cautious at multilateral meetings, acutely sensitive to perceived intrusions into Chinese sovereignty, sometimes rigid in presenting their views, and frequently anxious about perceived coalitions operating against them. China’s participation in any kind of multilateral regimes tended to be reluctant and defensive. Frequently China wants a seat at the table but attempts to limit the pace and scope of discussions, especially in areas related to transparency and specific regional conflicts.30

Alternatively, China’s relationships with Russia and Central Asia were reviving.31 Russia found it profitable to outfit the PLA with its military hardware, and revived consultation with Beijing after President George H.W. Bush’s declaration of a New World Order in 1991.32 China held up the Sino-Russian partnership as a model of its new strategic relationship with regional powers. The 1996 formation of the “Shanghai Five” consisting of China, Russia, and the Central Asian republics of Tajikistan, Kazakhstan, and Kygyzstan offered a confidence-building measure in which member states could cooperate on border delineation issues.33 The association did not produce any significant norms or institutional dynamics, but established the platform for the Shanghai Cooperation Organization in 2001, discussed in detail later in this chapter. While Southeast Asian countries did not yet figure prominently in China’s worldview, the reverse was not true. Plagued with historical 29

Chung 2000. Chung 2000. 31 See Tang 2000 regarding the “post-Cold War conundrum.” 32 Dittmer 2005. 33 Yom 2002. 30

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memories of Chinese border incursions, intervention in domestic ethnic politics, promotion of Maoist radicals, and unresolved territorial disputes, Southeast Asian countries held decidedly negative opinions of China.34 While these countries expressed muted opinions of the Tianan-men Square Incident, the unfolding of conflicts across the Taiwan Straits and the PLA’s 1995 seizure of Mischief Reef in the South China Sea caused widespread alarm.35 Southeast Asian countries saw regional institutions such as ASEAN, the ASEAN Regional Forum (ARF) and APEC as venues to lock the PRC into consultative and peaceful dispute settlement mechanisms.36 While its Track Two dynamics gained some momentum in building trust and facilitating the exchange of ideas, however, ARF made few inroads in affecting China’s priorities or actions, beyond occasional agenda-setting agreements.37 It was only when China was granted admission into the most dynamic of Track Two groups – the Council for Security Cooperation in the Asia-Pacific (CSCAP) – that Beijing began to upgrade its engagement with ARF.38 Within two years of participation, representatives from the Chinese Foreign Ministry became “more agnostic and more open to learning about [ARF institutions],” in particular after realizing that American involvement in ARF was erratic and dismissive.39 While China resumed its bid for WTO membership in the mid1990s by unilaterally reducing tariffs and liberalizing its trade policies, the United States and other regional powers were caught up in the fever of regionalism and pushed for progress through APEC. China grudgingly accepted its admission in 1991 alongside Taiwan and Hong Kong. Until the late-1990s, China expressed no significant independent initiative and harbored reservations about deeper integration and institutional development beyond the soft parameters of “open regionalism” 34

Shambaugh 2004/5. For an overview of regional debates on China’s rise and impetus for collective action, see Roy 2002. 36 Simon 2004, 263; and Johnston and Evans 1999. 37 Foot 1998. 38 Cossa 1998 of the Pacific Forum Center for Strategic and International Studies (CSIS)—a founding member of CSCAP—offers a detailed insider’s analysis from the US point of view. 39 Shambaugh 2004/5, 69. 35

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and “Asian style” state-centric, voluntary, consensus-based and consultative processes.40 As with their colleagues at ARF, Chinese representatives learned that the United States might not be effectively using APEC to promote China’s “peaceful evolution.” Instead, Washington seemed curiously uninvolved, under-publicizing Sino-American relations in this context and even showing signs of being flustered by institutional dynamics beyond its control.41 These observations lent credence to “Asian-style” institutions in the eyes of Beijing. Beijing’s attitude toward regional cooperation warmed somewhat in the second half of the 1990s. Prompted by its own rapid economic growth, China plugged into regional production networks, expanded competition with the NICs, and increased exports to the US market, leading to heightened interests in liberal trade and investment regimes. As Deng Xiaoping lived out his last years, his emphasis on the need for a peaceful international environment for China’s development took root in Chinese foreign policy. By 1997, the PLA expressed a notably different assessment of regional security needs that emphasized sufficient grounds for the PRC and United States to work on issues of mutual interests:42 The Chinese probably judge that direct opposition to a developing US.-Japan security tie would only increase Beijing’s current strategic liabilities and set it in opposition to the thinking of most regional states. On the other hand, a softer, more indirect approach [of advocating multilateralism and wooing individual countries to act more independently from the constraints of the US.-centered alliance system], which is in any case the only practical option, might pay some future strategic dividend.43

However, I would underline once more that the Chinese proved bounded by their Cold War mentality in focusing on relationships with Washington and worrying about US containment through US– Japan and US–ROK ties.44 40

Morrison 2002, 125–130. Ibid., 126. 42 See Montaperto and Binnendijk 1997 for a summary of the PLA position. They argue that this novel position reflected an evolving party-state consensus for a new security paradigm. 43 Montaperto and Binnendijk 1997. 44 Of course, the US mentality was no different in trying to strengthen its bilateral security ties. 41

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The New Security Concept (NSC), unveiled in 1997, marked a substantive departure from China’s past operational principles in foreign policy, even if it had no immediate impact. Reworking Zhou Enlai’s Five Cardinal Principles from 1955, the NSC advocated cooperative security, mutual benefit in economic relations, respect for sovereignty, and reliance on consultative and trust-building mechanisms to settle disputes.45 Critically, this “pitch for multipolarity” claimed respect for international organization norms established under US hegemonic leadership and did not explicitly challenge the existing global order.46 Despite several reiterations by Chinese leaders in international forums, the NSC lacked influence until 2002.47 The key operational challenges to this framing device were: How would China solicit cooperation given a paucity of formal security institutions in Asia? How could China bring about change within institutions such as APEC and ARF founded on the basis of US alliances? Most Asian regional institutions excluded China, India, and Russia at their formation, or implicitly held balancing goals against China (e.g., ASEAN). Should China invest in maintaining and improving the current order or attempt to create a new one? More importantly, an underlying cognitive barrier needed to be overcome before China could even begin to address the above institutional challenges. As long as Chinese policymakers failed to critically reassess their perception that international institutions were thinlyveiled mechanisms through which the United States and its allies checked expanding Chinese power, it would be difficult not to create a self-fulfilling prophecy of perpetuating implied hostility and fragility of regional forums. To make a credible commitment to multilateralism, China needed to reframe its expressed worldview in a fashion accommodating its strategic mindset and capable of rallying other countries around its leadership.

45

Shambaugh 2004/5, 69; and Roy 2003a. Shambaugh 2004 and 2005 places a different interpretive emphasis on NSC as an alternative to traditional alliances. 47 Roy 2003a. 46

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3.4 After the Financial Crisis: First Opportunities for Chinese Leadership of Asian Regionalism This section discusses the effects of the Asian Financial Crisis on China and the country’s subsequently deepening engagement with minilateral institutions. 3.4.1 Silver Linings of the Asian Crisis for China The Asian Financial Crisis of 1997–98 left three legacies favorable to the PRC’s drive to promote its regional role and institutional vision. First and foremost, China’s apparent immunity to the contagion effect and quickly resurgent growth rates boosted the confidence of Chinese leaders. Witnessing the once-racing East Asian tigers hobbled by global markets’ attacks on their developmental states’ frailties, China strengthened its resolve to deepen market reform and attract foreign capital through enterprise restructuring, massive layoffs, banking sector discipline, stock market regulations, and currency controls.48 Notably, China did not resort to protectionism and competitive devaluation, hence gaining the appreciation of its crisis-ridden neighbors.49 China also began to relax restrictions on outward FDI in 1999 to take advantage of asset acquisition opportunities at fire-sale prices, opening the floodgates for the first wave of outward Chinese investments that would later prove influential on its regional diplomacy.50 Second, Washington’s heavy-handed actions and unilateral expectations reinforced region-wide resentment of American disrespect for the economic diversities and “soft” institutional norms of Asia. The United States soured its Asian relations by rejecting the Asian Monetary Fund and defending the IMF’s centrality (and imperiousness). Concurrently, US attempts to arm-twist weaker partners on EVSL initiatives halted the momentum of sectoral liberalization negotiations generated by the

48 For closer analysis of Chinese domestic responses to the Asian Financial Crisis, see Lin 2003; Rudolph 2002; and Shih 2004. 49 Shambaugh 2004/5, 68. 50 On the evolution of the Chinese FDI regime, see Gallagher 2005. Zweig and Bi 2005 focus on outward FDI trends.

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1996 Information Technology Agreement.51 Indeed, the United States may simply have run out of ideas for its regional diplomacy, and moved toward a more reactive posture.52 A 1999 report by the National Intelligence Council of the CIA characterized the regional situation as “static but stable,” predicting that Asian countries would “actively pursu[e] additional options and sources of security in the event the status quo changes… [resulting] in high-level diplomatic and military interchange among regional powers that arguably increases mutual understanding but thus far does not provide sufficient common ground for institutionalized multilateral security mechanisms.”53 Third, the crisis precipitated a structural shift away from the Japanled , “flying geese” pattern of regional growth inputs and supply chains and toward what a 2003 ADB Institute Research Paper termed “bamboo capitalism,” based on horizontal networks of trade and capital leading to a new division of labor and production centered on China.54 As a result, China’s steady economic growth increasingly generated spillover effects for the ROK and Southeast Asian economies, aiding their recoveries as well as Japan’s emergence from a decade-long slump.55 In addition, as an IMF report argues, since 1993 China’s trade competitiveness (measured by shifts in market share) had come at the expense of newly industrialized economies rather than of Indonesia, Malaysia, the Philippines, and Thailand.56 The crisis also exacerbated interstate differences in Southeast Asia. The Indonesian economy and society suffered tremendously and Thailand and Malaysia also fell on hard times, with politicians taking draconian measures and religious politics gaining salience. As a result, Singapore found itself threatened from all sides by instabilities that could very well spill over.57 51

Aggarwal and Lin 2002, 106-110. However, the State Department and Office of the US Trade Representative sensed the political risks pressing forward with the US conception of regional integration, showing restraint in the face of separate Chinese and Japanese proposals for the expansion of the ASEAN bloc. Author’s interview of a senior Japanese diplomat in London, October 2004. See Severino 2005. 52 Aggarwal and Lin 2002; and Sutter 2004. 53 National Intelligence Council 1999. 54 As discussed in Teo 2004a. 55 Shambaugh 2004/5, 85. 56 Loungani 2000, 35. 57 Sanders 2000.

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Meanwhile, ASEAN was expanding rapidly, which had complex implications for China–ASEAN relations.58 On the one hand, the consolidation of Southeast Asia created the potential for a united front against China on disputes over the South China Sea and trade and investment diversions. On the other hand, ASEAN’s enlargement diluted the organization’s anticommunist tradition and offered China potential allies.59 Nevertheless, in the short run, all could agree that regional trade and investment cooperation urgently needed a new impetus, starting with the opening of Japan and China’s markets to their crisis-ridden neighbors.60 3.4.2 China’s Deepening Engagement with Minilateral Institutions The Asian Financial Crisis created opportunities for China to test its new framing devices and explore cracks in the traditional hierarchy of issues for US allies in East Asia. From 1998 to 2001, China attempted to de-link as many issues as possible from the region’s post-Cold War security framework, even as Washington assiduously updated its security ties with Northeast and Southeast Asian allies and continued implementing the “places not bases” deployment.61 China continued to perceive key transnational goods of security (both traditional and nontraditional), trade and investment, and energy cooperation as chiefly private or club goods, but no longer demonstrated wariness or reactive posturing toward regional institutions. The American loss of interest in regionalism, combined with China’s market expansion and rising interdependence with Asian neighbors, induced a sense of cautious 58

Against its founding anti-communist ethos, ASEAN admitted Vietnam in 1995 and Cambodia, Burma, and Laos in 1997, despite their authoritarian and communist regimes and the Clinton Administration’s sanctions against Burma. See Dalpino and Lin 2003. 59 Phillip Bowring “ASEAN shouldn’t admit Cambodia, Laos and Burma Now,” International Herald Tribune, 21 April 1997. 60 Dalpino and Lin 2003; and Roy 2002. 61 Simon 2004. This notion came into being since the closure of US’ Subic Bay base in the Philippines in 1992. In 2001, Singapore built the Changi naval base, at which aircraft carrier Kitty Hawk of the US 7th Fleet docked. See Trish Saywell, “Will New Naval Base Cause Waves?” Far Eastern Economic Review, 17 May 2001.

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optimism among the Chinese about realizations of regional ambitions through a position of relative regional strength. On the security front, China stepped up its constructive engagement in the Korean Peninsula multilateral talks, joined a long-standing Southeast Asian anti-nuclear regime, and co-organized a new Central Asian forum with Russia. In marked contrast to Beijing’s lackluster presence during the US-mediated Korean dialogues the early-to-mid 1990s, China accepted “in principle” South Korean President Kim Dae-jung’s invitation in 1998 to participate in the June 2000 Summit, gaining further involvement when Kim Jong-il visited Beijing just days before the Summit.62 While China’s basic objectives for the Korean Peninsula cannot be said to have changed significantly in the second half of the 1990s, its cost–benefit analysis of entering into a multilateral forum with Japan and the United States seems to have tipped in favor of greater involvement. Earlier Chinese apprehensions of American ulterior motives in multilateralism and of Japan’s direct role in Northeast Asian security negotiations apparently gave way to a more realistic calculus of the economic and refugee-related costs and regional military tensions if the United States were to strike the DPRK. China was hoping for tactical gains from its involvement – reducing perceptions of the “China threat,” loosening US bilateral alliances, and supporting its multipolar vision for Northeast Asia.63 However, China’s participation at this point did not amount to leadership or even brokering, as the 2000 Joint Declaration primarily represented ROK– DPRK efforts mediated by Washington.64 China expressed support for the Treaty on the Southeast Asia Nuclear-Weapon-Free Zone (SEANWFZ), signed in Bangkok in 1995, but did not actually sign the protocol on security assurances to the Treaty’s signatories. China’s basic objection was that the treaty’s geographical scope included portions of the South China Sea, which it claims as its territorial waters.65 However, at the 1999 ARF meeting in Singapore, China adjusted its position and signed the protocol, making 62

Chung 2000. Ibid. 64 Kim 2001. Pritchard 2005 argues that DPRK was mainly interested in improving relations with the United States. 65 “Spokesman Assesses Support For Southeast Asian Nuclear Free Zone,” Kyodo, 7 December 1995. 63

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it the first declared nuclear weapon state to do so. This represented the “early harvest” of a long negotiation process to settle disputes over the South China Sea, which would culminate in a 2002 agreement discussed in the next section. Finally, during the summer of 2001, China and Russia took a big step forward in regional cooperation by forming the Shanghai Cooperation Organization (SCO). Comprising the “Shanghai Five” plus Uzbekistan, SCO aimed to strengthen members’ ties toward collective security in Central Asia. Yom argues that SCO reflected the convergence of Russian and Chinese interests in crushing internal Islamist and separatist movements, to use their outsized economic and military powers to bring smaller states in line with their goals such as anti-US hegemony, territorial sovereignty, and energy cooperation.66 To further consolidate the relationship between China and Russia, Jiang Zemin and Vladimir Putin concluded a Twenty-Year Friendship Treaty that contained provisions for common defense, technological cooperation, coordination in international organizations, and further high-tech weapons sales.67 On the economic front, China and Japan each rallied Asian countries to create new regional trade and investment institutions. Beijing and Tokyo pushed the ASEAN Plus Three (APT) agenda at the Second ASEAN Informal Summit in Malaysia in 1997. Two years later, with Washington adopting a more passive stance, the ASEAN summit produced a Joint Statement on East Asia Cooperation, institutionalizing the APT process (consisting of 48 mechanisms) and laying out a framework for cooperation across a broad range of issues (comprising 16 areas).68 China and Japan competed for leadership within this framework. Building on the goodwill of its neighbors toward its currency stability and its extension of low-interest loans to Indonesia and Malaysia, China moved rapidly to discuss bilateral ties and ASEAN–China arrangements that would support its centrality in a “hub and spoke” formation of a Northeast and Southeast Asian trading zone.69 Japan 66

Yom 2002. Dittmer 2005, 14. 68 Available from . 69 Shirk 2003. 67

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countered with its own assiduous cultivation of bilateral ties (starting with negotiation of a PTA with Singapore), also proposing a regionnal currency swap arrangement (the Chiang Mai initiative) and an ASEAN–Japan FTA. Officially, Japan expressed confidence that overlapping bilateral FTAs would yield (or yield to) a multilateral framework for regional integration.70 Despite its regional networking, China focused mainly on negotiating its accession to the World Trade Organization. After the deep freeze in the early 1990s, China started unilaterally pursuing tariff and trade regime reforms to increase its WTO chances. US President Clinton responded, leading to the signing of a joint statement committing the United States and China to complete a WTO deal by the end of 1999. This expectation was derailed temporarily with the bombing of the Chinese embassy in Belgrade in May 1999, but at the APEC meeting in September, Jiang Zemin and Bill Clinton agreed to resume negotiations; as a result, a WTO pact was announced in November 1999. However, US domestic debates over farm subsidies and permanent normal trade relations with China delayed entry until two years later. While China staked its future economic success on the global multilateral regime and its foundational bilateral agreements with the EU and United States, APEC stagnated. 3.5 After 9/11: Broadening China’s Strategic Leeway This section examines the effects of the 9/11 attacks on China’s strategy with specific reference to tensions in the Sino-American and SinoJapanese relationships, changing mindsets and Chinese responses to the attacks, and China’s new initiative in regional arrangements. 3.5.1 Tensions in Sino-American and Sino-Japanese Relations Prior to 9/11 In the periods after and immediately preceding the 9/11 attacks, both the Bush Administration in the United States and Koizumi government in Japan found themselves at odds with China. Although the Bush 70

Mochizuki 2004, 126.

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Administration did not come to office proclaiming China as an adversary, early signs did not bode well for Sino-American relations. On the Taiwan issue, Bush stated on television in April 2001 that he would do “whatever it takes to help Taiwan defend herself,” and more generally replaced Clinton’s “comprehensive engagement” with a posture of wary detachment.71 Meanwhile, the Koizumi administration expressed its intention to participate in the US missile defense program and develop its nuclear-weapons capability with potential uses of deterring China and North Korea.72 Japan also incurred the displeasure of China in obliquely expressing security interests over Taiwan.73 Tensions between these two powers threatened to derail Beijing’s plans for regional institution building, given other East Asian countries’ longstanding ties to each of them. Since 2001, Sino-American relations have been beset by asymmetric perceptions. In a interview with the Wall Street Journal in 2004, US Secretary of State Colin Powell claimed that relations were “the best…that the United States has had with China in over 30 years.”74 Chinese Foreign Minister Qian Qichen had made a similar assessment in November 2003, but published a byline in the China Daily on November 1, 2005 condemning the United States for aggressive expansionism based on unreformed hegemonism.75 Beijing’s persistent Cold War mentality emerged in a speech on Taiwan by Minister of Defense General Chi Haotian at a Central Military Commission (the top military policymaking body) meeting in November 2003: 71

Johnson 2005. Taniguchi 2005. 73 Roy 2004a. 74 Secretary Colin L. Powell, Interview on The Wall Street Journal Report, November 13, 2004. Available from. 75 Given the Bush administration’s relative equanimity toward China and concessions to China’s position on Taiwan in 2004, Qian’s forthright anti-Americanism was remarkable. Qian stated, “The troubles and disasters the United States has met do not stem from threats by others, but from its own cocksureness and arrogance. The 21st Century is not the American Century. That does not mean that the US does not want the dream. Rather, it is incapable of realizing the goal.” Quoted from “The Qian Qichen Op-ed: Official Discontent or Just one Man’s Opinion?” by Harvey Stockwin for Association for Asian Research, 1 November 2005. Available from . 72

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If war in the Taiwan Straits erupted, the power to make decisions would not be in our hands, nor in the hands of those who advocate Taiwanese independence, but in the hands of the United States and Japan. If such a war erupted, it would not be simply a war of unification, as the deeper implication is that the United States and Japan are determined to deprive China of its right to development… If we failed to win the Taiwan Straits war, the results would be worse than those following the Sino-Japanese War. Therefore, there must be no war, or we will have to comprehensively destroy Japan and cripple the United States, and this could only be achieved with a nuclear war.76

These public relations fluctuations and strategic volatility over Taiwan became linked to US–PRC bargaining on other matters.77 But their consequences were not entirely negative: mutual insecurities over Taiwan’s assertiveness might have helped at times to nudge Washington and Beijing to engage in multilateral talks on the Korean Peninsula. 3.5.2 Changing Mindsets and Chinese Responses in the Aftermath of the 9/11 Attacks The events of 9/11 focused East Asian countries’ attentions on their vulnerabilities to similar attacks.78 While conflicts on the Korean Peninsula and across the Taiwan Strait remained at the forefront, Asian countries began to shift security priorities toward transnational 76

According to La Nueva Cuba, “The War Is Approaching Us” was first posted on the Internet in January 2003 with title “A recent speech from a high ranking official in PLA” on web sites such as . On 11 October, it was published at with the title “The War Is Approaching Us—Chi Haotian.” It was also posted with the title “China, do you still have ten years’ peace time?” It was most recently published on 23 April 2005 at . I obtained the version published online by La Nueva Cuba on 6 October 2005. 77 For further development of this thesis, consistent with or deviating from mine, see articles by Thomas Christensen and Robert Suettinger in various issues of China Leadership Monitor from 2002–2005, available from . It is arguable that Taipei’s leverage vis-a-vis Beijing suffers a decline when PRC–US interests on Taiwan can be horse-traded over other issues. See Sutter 2004, 48, 52. As a result, US support for Taiwan fluctuated dramatically, increasing in 2003, then declining after Chen’s reelection in 2004. See Roy 2003b. 78 Tellis 2004.

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terrorist threats in the form of local conflicts with spillover effects and related threats such as maritime disruptions and proliferation of WMDs. One could say that “substantive linkages” gained importance across a wide range of transnational exchanges. The high global price of crude oil and rising regional economic interdependence stacked the cards further in favor of collective or coordinated solutions. On the economic front, East Asian interdependencies increasingly tipped in China’s favor. Continuing competitiveness in labor-intensive goods and rapid upgrading in technological and production processes in electronics and machineries intensified China’s regional trade impact.79 Between 2000 and 2004, Japan became increasingly reliant on trade with China, while the opposite was true for China. As regional production networks became more vertically integrated and China sought raw materials from its neighbors, Southeast Asian countries increased exports to China and welcomed the first wave of Chinese FDI.80 Yet China was diversifying not only its production profile and composition of trade but also its trading partners: by 2004, the EU had emerged as China’s biggest trading partner.81 At the same time, China’s growing demand for energy led to active diplomacy in North Africa, Latin America, and the Middle East, often with countries deemed troublemakers by the United States. This post-9/11 political and economic climate presented China with a strategic opportunity to advocate a new paradigm of regional relationships. With the United States deeply engaged first in Afghanistan and then Iraq, China had an opportunity to consolidate its position by exploiting the declining American political, ideological, and military capital in the region.82 Manifesting a first-level compliance with the US-led War on Terror, China engaged in second-level competition with 79

For a detailed analysis of trends in China’s trade with Asia in 2000-2003, see Prasad 2004. Updates for 2003–2004 are provided by the US–China Business Council website. Available from . 80 Dalpino and Lin 2003; and Prasad 2004. On Chinese outward FDI and the increasing trade deficit with Southeast Asia, see Xinhua 15 May 2004; and ARFCCPIT 2005. 81 Nevertheless, the EU denied China the largely symbolic “market economy” status. See Wong 2005 for an analysis of prospects for a common European policy on China. 82 Tellis 2004, 25.

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Japan over regional leadership and institutional reform. As the US global campaign seemed to take on an anti-Muslim, unilateral, and militaristic form with the invasion of Iraq, Asian countries harbored mixed feelings about American intentions and showed willingness to hedge their bets.83 Instead of rallying its neighbors under the old banners of sovereignty, multipolarity, and consensual-voluntaristic Asian norms to counter American unilateralism, China employed a pathbreaking framing strategy emphasizing the reality of China’s rise and the utility of binding multilateral solutions. Party Secretary Hu Jintao’s “peaceful rise” doctrine, still very much in effect today, is a brilliant framing device by any measure. Expressly acknowledging U.S. leadership in Asia and the world for the foreseeable future, the doctrine explains why China’s rise will have a benign impact on the global security climate and why China will seek to promote partnerships (as opposed to Cold War-type alliances) consistent with the New Security Concept.84 The doctrine simultaneously argues on one hand that China’s profile stance follows from its cultural-historical identity and current preoccupation with economic development, and on the other that future Chinese leadership would differ markedly from the American variety. Accordingly, China showed a genuine effort to tone down its anti-American tendencies even as complaints increased in 2004 over Taiwanese politics. China held further military exchanges and displayed acceptance toward provocative US actions in the name of counterterrorism.85 Susan Shirk described China as “bending over backward to accommodate the U.S.”86 More accurately, applying a classic Chinese adage, China “backed up a step, and found the horizon opening before it.” The doctrine seemed to have the desired 83

Wadi 2004. See Sutter 2004, 49–51 for a recapitulation of the “imperial overreach” thesis. 84 The doctrine did not escape domestic debates and manipulations by factions. Swaine 2004, 73. 85 Roy 2003. See Van Ness 2004/5 for specific Chinese responses to the Bush Doctrine. For insights into the adaptation of the PLA to the new frame, see “China's National Defense,” White Papers published in 2000, 2002, and 2004 by the Information Office of the State Council of the People’s Republic of China. Available from . 86 Shirk 2003.

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effect on the United States: the Bush Administration started to pay attention to China as a major contributor to its War on Terrorism.87 Scholars debate whether China’s nominal bandwagoning stance bought any favors with Washington or offered any additional flexibility for Chinese leadership in Asia. Some have argued that mobilization for wars abroad readied the United States for interventions anywhere, rejuvenated alliances with or military presence in Northeast and Southeast Asian countries, undermined any semblance of American respect for international institutions and norms, and increased its sensitivity to any signs of counter-hegemony.88 Security concerns might also bring Russia back into the Asian arena and reduce the threshold for Japanese rearmament. If so, China’s bandwagoning strategy would prove counterproductive. However, the Chinese gambled on the following payoffs: (1) an opportunity to vie with Japan for regional influence, and more generally to probe tensions among traditional US allies without incurring US retaliation; (2) improved legitimacy in advancing Chinese interests such as quelling irredentism and opening regional investment opportunities, (3) gains from cooperation with Washington on issues of common interest such as antiterrorism and WMD controls, (4) an increase in China’s experience and capacity for leadership in international institutions, and (5) concessions on the Taiwan issue, such as getting Washington to explicitly withhold political (and potentially military) support from any Taiwanese independence movement.89 China’s capacity to achieve these objectives, and more generally disarm suspicion and potential mobilization against the perceived “China threat,” depends on its capacity to sell its peaceful rise doctrine. The PRC signaled its readiness to assume the mantle of a responsible power by offering settlements to territorial disputes, new options in multilateral negotiations, and support for existing norms and institutions. China has made progress in resolving territorial conflicts in South and Southeast Asia. In 2007, China and India initiated drafting principles to resolve all aspects of their boundary disputes together with a security and foreign policy dialogue to consolidate discussions 87

Sutter 2005, 42. Baviera 2004, 3-6; and Swaine 2004, 75. 89 Swaine 2004, 76. 88

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related to the boundary issues, regional nuclear proliferation, and tensions in Kashmir.90 In 2002, China and ASEAN issued a “Declaration on the Conduct of Parties in the South China Sea,” which created a basis for easing tensions in the Spratly Islands, although it did not provide for a legally-binding code of conduct. In practice, Chinese national oil companies have entered into joint projects with their counterparts in the Philippines and Vietnam on marine seismic activities. Concurrently, China and Vietnam made gradual progress in demarcating their boundary. And, much to the chagrin of its nationalists, China settled for a division of the islands in the Amur, Ussuri, and Argun Rivers to end a long-lasting border dispute with Russia. Given the presence of major powers and/or alliances to its north and east, China has good reason to consolidate its relations with Southeast Asian countries. Ideally from a Chinese perspective, Southeast Asian countries will naturally lean toward China, offering it a free trade zone, secure sea routes, and collective weight in international forums. A supportive ASEAN coalition could free Beijing’s hands to launch bolder actions on the Korean Peninsula and, even more critically, on Taiwan and the Senkaku/Diaoyu Islands.91 Any crises in the Taiwan Strait, trade and pipeline security, or even Chinese naval presence in the Malacca Strait would alter the US calculus greatly.92 In this dynamic security context, China has strong incentives to prioritize and redefine non-traditional security issues as club goods or common pooled resources, which also offers a politically appealing contrast to US unilateral actions and beefing up of military presence in Philippines and Indonesia.93 90

For information on the current status of the following disputes, see . 91 China’s disputes with Japan over these islands remain outstanding. Japan has complained bitterly to Washington about China’s establishment of at least one drilling platform patrolled by warships, while the Chinese denounced the Japanese government for issuing an exploration license to Teikoku Oil Company. Both countries characterized these moves as encroachments on national sovereignty, and bilateral talks to construct a framework for cooperation have faltered. See “The Japan-China Oil Slick,” BusinessWeek Online, 7 Nov 2005. 92 Given the collective patrol of the Malacca Strait by Indonesia, Malaysia, and Singapore, China is also exploring alternative transport routes through Thailand and Burma. 93 Sutter 2004, 57.

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In fact, China’s signaling games aim in part to play upon the increasing perception of American alienation in Asia after the disintegration of the fragile regional consensus for the War on Terrorism after the US invasion of Iraq.94 One observes among US analysts a near-universal critique of the Bush Administration’s Asia policy, blaming the United States’ inattentiveness to national regional trends in Asia for its marginalization in regional forums such as ARF, the defection of North Korea from negotiations, proliferating feuds between Asian states after the Asian Financial Crisis, and inability to predict the sentiments of a new generation of Asian voters.95 In this climate of discontent, China finds receptivity to its advocacy for new bilateral and multilateral relationships. 3.5.3 China Takes Charge: New Initiatives in Regional Arrangements The PRC’s goals in the Korean Peninsula are complex. Despite the declining importance of North Korea in the post-Cold War era, Beijing seeks the survival of the DPRK regime and overall stability on the peninsula.96 China does not necessarily intend to remove WMDs, as long as their proliferation can be contained, but is even less likely to defend the DPRK ideologically and pledge unconditional support.97 While agreeing broadly with US aims, China has criticized the Bush Administration’s rhetorical framing of the “axis of evil”, as well as its 94

Sutter 2004, 46, 49; and Simon 2004, 264. See critiques by Sanders 2000; Swaine 2003; Shirk 2003; Sigal 2005; and Berkofsky 2005. Roy 2003b offers a more sanguine view. 96 Some debates remain over the relative weight of these two core objectives: Harrison 2005 endorses Ambassador Stephen Bosworth’s characterization of “no nukes, no war, no collapse.” Kang 2003 believes that stability is as important as nuclear weapons. Roy 2004b argues that a concern for DPRK’s regime stability trumps even nuclear capabilities. Chung 2003 points out that Chinese attitudes toward Korean reunification remain unclear. See Wu 2005 for specifics of the Chinese demands on the DPRK from the perspective of a middle-level diplomat, which Selig Harrison 2005 has found credible. 97 In 2002, Beijing and Pyongyang had a serious diplomatic falling out when China arrested a Chinese-born businessman—one Mr. Yang, a self-made man of the cultivated flower business—hand-picked by Kim Jong-il to administer a new economic zone near the border. He was nominally charged with tax evasion. 95

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brinkmanship and threats of sanctions. Faced with increasing involvement by Russia and Japan, China moved forward to secure a niche role in the multilateral negotiation process.98 Beijing has deepened its engagement despite its awareness that the Japan–ROK–US trilateral alliance provides the main impetus for pushing negotiations ahead (despite cracks in this united front), and that multilateralism may not prevent armed conflict – in fact, it may increase the risks if the US and the DPRK engaged in a game of “chicken.” However, the Chinese hope that confidence-building measures can reduce the chance of miscalculation and encourage restraint.99 The multilateral framework provides an added benefit of potentially straining US alliances. For example, when the DPRK defected from the Agreed Framework in 2002, the ROK expressed unhappiness with the Four-Party Talks and sought to improve bilateral relations with Russia and China and reduce its reliance on Washington. Deciding between “remaining ‘anchored’ within the US alliance framework or cutting ‘adrift’ in the direction of a continental accommodation with China,” over time the ROK arguably will favor the latter.100 In 2003, Chinese strategies began to pay off. It cut off its oil supply for three days to the DPRK (ostensibly because of technical problems), thus seeming to punish Kim Jong-il for reneging on his commitments. China further earned American appreciation by privately working to bring the United States and the DPRK back to the negotiating table, which represented a facing-saving measure for both parties.101 By 2004, China was brimming with confidence, as evidenced by calls by Chinese academics and high-level officials to expand the agenda of the Six-Party Talks to include the “Korean nuclear issue, economic integration, antiterrorism, non-traditional security threats, environmental protection, energy security, infectious disease prevention and 98 For analyses of Russia’s muddled view of its global and regional status, see Hanson 2004, 185. Swaine 2003 argues that Russia was interested in the Korean Peninsula for railroad routes and sought to project a good image in the G-8 forum. 99 In this sense, China’s motivation in multilateralism differs from that of the US, which consists mainly of sharing the cost of pressuring North Korea with others. Shirk 2003. 100 Cha 2004, 141. 101 Shirk 2003. For details of the Six-Party Talks process from the eyes of a seasoned diplomat, see Pritchard 2005.

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crackdown on cross-border crimes.”102 “Even after the nuclear problem is resolved, the six-party dialogue meeting and its workgroup should still continue functioning to explore ways to build up mutual political trust between the United States and North Korea, prompt the two countries to normalize relations and finally establish diplomatic ties and clear up the Cold War-style standoff on the Korean Peninsula,” a participating official proposed.103 Finally, China achieved perhaps its greatest innovation in collective security in the form of the Shanghai Cooperation Organization (SCO). In the aftermath of 9/11, Russia and China both bandwagoned with the United States, yet also took up the anti-terrorist commitment within SCO’s anti-hegemonic agenda.104 China supported both the SCO’s Charter, signed in June 2002, which gave the organization for-mal legal status, and a proposal to attain recognition by the United Nations.105 Iran, India, and Pakistan (at China’s insistence) were admitted as observers to the SCO in 2005.106 The SCO shows potential as an effective “second pillar” in Chinese foreign policy with the incorporation of energy cooperation into the agenda, and with a recent unified demand that US troops withdraw from Pakistan.107 According to one observer, the SCO “has become a de facto podium for its member states, especially Russia and China, to express their political views to an international audience.”108 It is important not to overestimate the potential of the SCO based on a simple projection of its current activities. Generally speaking, Northeast Asian security forums have been weak and lacking in widespread regional support.109 However, the substantive linkage of energy and security cooperation may offer a solid foundation for 102

As quoted in “Framing NE Asia Security: Six-party talks on Korean nuclear issue lay a foundation for multilateral security cooperation” by Ni Yanshuo, Beijing Review. Available from . 103 Ibid. 104 Swaine 2004, 85; Hanson 2004, 179-80; and Sergei Blagov, “Shanghai Group Aims to Keep US in Check,” Asia Times, 19 June 2004. 105 Ralph A. Cossa, “Asian multilateralism gets a lift,” Taipei Times, 2 Aug 2002. 106 David Wall, “Bound by a common cause,” The Japan Times, 1 August 2005. 107 Ibid.; and Herberg 2004, 367. 108 Yom 2002. 109 Chung 2003; and Shirk 2003.

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Sino-Russian partnership and allow for the SCO’s expansion to incorporate new partners such as other resource-rich Central Asian countries and Japan.110 If so, the SCO could help resolve highly contentious issues such as Chinese and Japanese competition over Siberian oil and resource-driven territorial disputes in the East China Sea. Russia would benefit from promoting Japanese, Korean, and Chinese imports of Russian oil and gas.111 The United States has kept its market relatively open while expressing cautious optimism about China’s efforts in implementing WTO terms.112 Initially ambivalent about China’s rise and the distribution of economic benefits of APT, individual ASEAN countries have increasingly echoed the narrative of “China as a powerful engine of regional growth” over successive meetings and trade shows anticipating the FTA with China.113 Compared to the late 1990s, ASEAN seems more inward looking and more detached from its ties with the United States, Canada, and Latin America.114 Recognizing the diversity of members’ economic conditions, both ASEAN and APEC have introduced mechanisms to allow countries to liberalize at different rates. In April 2002, ASEAN announced the implementation of the “10 minus X” formula, which borrowed from the notion of the “pathfinder approach” publicized in APEC’s Shanghai Ministerial the year before. Basically, it reassured countries faced with China’s competitiveness, allowing them to go slower in liberalization, while others forged ahead to capture their complementarities with the booming Chinese economy. While still keeping up the appearance of collective 110

For case studies of NEA energy cooperation, see Rozman 2005; and Christoffersen 2005, 2000, 1998. 111 Chung 2003. For a detailed analysis of existing gas cooperation arrangements, see Chen 2004. 112 See progress reports from the US–China Business Council. Available from . 113 Roy 2002. For a recent authoritative statement, see “Asia and China: Growing Together?” Keynote Speech by Haruhiko Kuroda, President of the Asian Development Bank, given at the Center for Global Development/Institute for International Economics, 23 June 2005, Washington, DC. Also, “Rise of China an opportunity rather than threat: Deputy PM of Thailand,” People’s Daily, 19 October 2005. 114 For an analysis of the economic dynamics of ASEAN, see Palanca 2005. Also see survey results of Chinese outward FDI from ARF-CCPIT, 2005, which showed Chinese firms to hold little interest in investing Canada.

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action according to “Asian style” norms, these operational principles have altered the “quasi-parameters” of APEC and ASEAN. If pursued to their logical conclusion, the separate ways of pathfinders and laggards could reduce ASEAN Plus Three or the ASEAN–China framework to little more than a series of bilateral agreements.115 In November 2002, China and ASEAN signed a Framework Agreement on Comprehensive Economic Cooperation, which aims to establish a FTA in ten years.116 Do these bilateral agreements look the same as those signed in the 1990s? The trade and wider economic partnership agreements of ASEAN countries vary in coverage, specificity, and length.117 More significantly, compared to the WTO liberalization agreements, these agreements seem to fulfill several roles at once, from customized and niche country-to-country negotiations in which parties can pick the issues and choose the form to provisions for long-term consultative and dispute settlement mechanisms to incorporation of non-trade issues.118 These customized bilateral agreements aim to build encompassing relationships, representing a different approach than the economic bilateralism of the United States or the EU, and even differing from agreements between Asian countries in the past. By raising issues above and beyond the WTO scope (partly to fulfill gaps in the multilateral regime, such as in competition policy, investment, and mutual recognition), these Asian bilateral ties may seriously complicate future tasks of “nesting,” even if they do not necessarily prevent forward momentum in multilateralism. Furthermore, China does not suffer from domestic coalition mobilization issues that make sectoral agreements problematic for United States.119 One may also wonder if these Asian bilateral agreements would be susceptible to weakness of implementation stemming from the voluntarist Asian norms, or if

115

Severino 2005, 16. See Antkiewicz and Whalley 2004 for a review of Chinese’s new regional trade agreements. 117 Banda and Whalley 2005, 6. Also see Antkiewicz and Whalley 2004. 118 Banda and Whalley 2005, 7. 119 See Aggarwal and Ravenhill 2001. 116

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in fact they are created precisely to overcome those collective inclinations.120 In the midst of the bilateral boom, China has continued to support APEC and the WTO, showing its readiness to lead liberalization on all fronts. Given that China started with very few bilateral agreements in 2000 – only Russia and Papua New Guinea within APEC had fewer RTAs, existing or under negotiation – it is sensible for China to distribute its eggs in several baskets.121 The 2001 APEC ministerial in Shanghai led to the adoption of the Shanghai Accord, which generated some momentum toward the Bogor goals.122 In addition to outlining the “pathfinder approach” mentioned above, the Shanghai Accord issued APEC’s first counterterrorism statement, launched a symbolic regional fund for financial crises, and took the Osaka agenda one step further in placing greater importance on trade and business facilitation.123 Over the next few years, China reduced its tariff rates by about half, from around 36% to 10.5% in 2005, lowered non-tariff barriers, and signed the Information Product Protocol. China has also endorsed a shift in APEC’s focus to “business mobility, anti-corruption, intellectual property rights and secure trade,” which either reflects general satisfaction with achievements in the traditional tariff reduction and market access concessions, or a sense of wait-and-see in face of stagnating WTO negotiations. Also consistent with China’s new framing device and its agenda in the SCO

120

Simon 2004, 263, 283. Outside of Asia, China has shown similar enthusiasm for exploring various levels of regional institutions with little tactical regard for consistency, assuming that market forces and ideological agreements will keep things in order. On PRC’s grand strategy in Latin and Central America, see “Prepared Statement of Dr. June Teufel Dreyer before the Commissioner, US–China Economic and Security Review Commission,” Wednesday, 6 April 2005. Available from . 121 For a table of China’s FTA/RTA agreements, see . 122 In 1994, APEC Leaders at Bogor, Indonesia, set the goals of reaching free trade and investment by 2010 for developed economies, and 2020 for developing economies. 123 For a Chinese assessment, see “Shanghai APEC: A Focus of World Attention” by Hu Si, Beijing Review. Available from .

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and bilateral agreements, APEC has broadened its definition of nontraditional security under a new rubric of “human security.”124 Even with the increasingly complex agenda, China and ASEAN members reiterated the consensus-based, non-binding nature of Individual Action Plans and Collective Action Plans made under APEC.125 Taking regionalism one step further, China called for an East Asian Summit to consider forming an “East Asian Community” which would be a rough equivalent of the EU, NAFTA, and NATO all rolled into one in scope and nature (but surely not strength). Washington has interpreted this initiative as a Chinese attempt to comprehensively marginalize the United States in Asia.126 In the round of the WTO Ministerial held in Hong Kong in December 2005, the PRC expressed support for Doha, even in the face of diminished expectations since the collapse of talks at the 2003 Cancun Ministerial over the impasse over agriculture between the US, the EU, and Brazil. Concurring with Hong Kong officials’ do-or-die statements on the outcome of this ministerial, the Chinese Minister of Commerce Bo Xilai expressed firm commitment to multilateralism at the Informal Ministerial Meeting in Dalian in July 2005, and praised APEC’s collective support of the “Swiss Formula” in tariff calculations.127 3.6 Winding Roads Ahead: Scenarios for China’s Grand Strategy It is too early to determine whether China’s strategic shift since the Asian Financial Crisis has created a regional dynamic favorable to a new, anti-US institutional equilibrium. APEC and ARF feature many 124

See Joint Statement issued at the 17th APEC Ministerial Meeting at Busan. Available from . 125 See “Joint Statement of the Seventeenth APEC Ministerial Meeting, Busian, Republic of Korea, 15-16 November 2005.” Available from . 126 Berkofsky 2005. 127 “China Makes Proposals on Doha Trade Talks,” Xinhua News Agency, 9 May 2005; “China Committed to Promoting Multilateral Trade System,” China Daily, 12 July 2005.

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agendas and meetings but have made few influential decisions and avoided the creation of stronger enforcement mechanisms.128 However, a stronger network of bilateral ties might tip the balance against the “Asian way.” New regional mechanisms such as the Chiang Mai Initiative and the Asian Bond Market would decisively rely on China’s management of its foreign reserve and currency controls.129 Similarly, if the SCO succeeds in pressuring Washington to withdraw troops from Pakistan, and if energy needs bring Japan and the ROK into dialogue with the PRC and Russia, perhaps the focal point of negotiation and dispute settlement will shift eastward in the Northeast. Finally, all parties on the Korean Peninsula have come to expect China to play a niche role of brokering and using its significant leverage over the DPRK. If so, one can readily imagine a new geopolitical landscape favorable to the expansion of Chinese influence. Over the next several years, external shocks could exert a powerful impact on China’s grand strategy. First, a macroeconomic or price shock, either from a downturn of the American economy and the ensuring protectionist pressures or from the continuing escalation of global natural resource prices, would necessitate a shift in the Chinese approach. If China fails to adjust and its domestic growth is affected, as nearly happened in the summer of 2005 when soaring prices in an overheating economy provoked heavy-handed control measures from Beijing, it may lose patience in responding to American calls for revaluation of the yuan and other trade-related measures. If other Asian countries are similarly affected, their economic complementarity with China may erode, resulting in intensified regional competition. In particular, economic and resource competition between China and Japan or India may undermine the expansion of ASEAN.130 Second, a crisis involving Taiwan or the Korean Peninsula could polarize American and Chinese positions. Even in the case of “soft landing” or non-militarized collapse of the Kim regime in North Korea, 128

Tellis 2004, 11. “Asia and China: Growing Together?” Keynote Speech by Haruhiko Kuroda, President of the Asian Development Bank, 23 June 2005, Washington, DC. Also see “China, Japan, S. Korea, ASEAN Makes Moves for Asian Monetary Fund” by AFP. Available from . Accessed 6 May 2005. 130 Simon 2004, 244. 129

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China would have to pay the indirect transition costs of reunification, such as accepting trade and investment reductions from South Korea while also pumping money into the North Korean economy. Lastly, China’s strategic options could depend on twists in the USled War on Terrorism. For example, should China be asked to choose a side between Pakistan and India – such as if Pakistan falls short of satisfying the US objectives in Afghanistan – then it may be forced to turn away from an old friend to appease the United States and India, with negative implications for the Shanghai Cooperation Organization. The latter two scenarios would render it more difficult for smaller powers in the region to hedge against uncertainties in Sino-American competition. In the medium term, countervailing US responses, particularly to Chinese attempts to strengthen its ties to other East Asian countries, may test China’s new strategy.131 Washington has strongly supported Japan’s bid for a permanent seat on the UN Security Council. In December 2005, President Bush visited Mongolia, praising its ex-communist regime for implementing democracy. He delivered a similar statement for Taiwan. Secretary of State Condoleezza Rice warned Singapore against supporting an inward-looking regional agenda at an East Asian Summit.132 The deterioration of SinoAmerican relations in 2005 may redouble China’s framing and signaling game strategy with its neighbors, but at the same time it would increase the risks of other countries to respond to China.133 If so, China’s bandwagoning strategy may unravel. More generally, Washington has three potential responses to China’s bid for leadership in Asia: maintain its preponderance; enter into a “sphere of influence” pact with China; or relinquish its regional hegemonic position to China. The first option is the most likely, while 131

Former US Deputy Secretary of State Robert Zoellick called for China to bridge a “gulf of perception” in becoming a truly responsible world power, which he defined as being cooperative with US actions and supportive of US values of democracy, property rights, and labor protection. “Whither China: From Membership to Responsibility?” Remarks of Robert B. Zoellick before the National Committee on US–China Relations, 21 September 2005. 132 Berkofsky 2005. 133 Christensen 2005; and David Shambaugh and Wu Xinbo, “Sino-American bridges need to be repaired,” Financial Times, 29 August 2005.

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the last is the least likely.134 However, one should carefully consider the prospects for the second option, given the emerging conditions and dynamics discussed in this chapter. The inadequacies of mechanisms such as APT, the East Asia Summit, and the WTO’s Doha Round will not prompt a return of the Asia-Pacific to its pre-Asian Financial Crisis state of US-centric impetus for liberalization tempered by “Asian style” norms. Instead, China’s rise will pose a complex and uncertain reality too taxing for any single, integrative logic of nesting or security-economic linkages. China’s attempts to implement a grand strategy will further offset any such logic offered by the global hegemon. The United States may de facto “lose” Southeast Asia if ASEAN members remain divided and susceptible to bilateral buyouts by Beijing, or consolidate and join China to oppose US security ties with Japan, South Korea, Taiwan and the Philippines. As a basis for Sino-Russian partnership, the SCO has the potential to expand Chinese influence on energy and security issues in South and Northeast Asia. In any case, Japan and the ROK seem to face limited set of choices. Nevertheless, no amount of effort by Beijing to depict itself as a benign power will dispel American and East Asian doubts about China’s intentions. Over time, several conditions may constrain China’s implementation of a grand strategy. First, for the foreseeable future China will lack the power to compel its weaker partners’ compliance with Chinese objectives. Second, China’s present inclination to mix-and-match issues in bilateral negotiations to generate a sense of encompassing relationships may fail to produce specific agreements on individual issues. Third, Beijing is aware of the gap between the ‘fundamentals’ of its domestic market and those of a mature capitalist market, which will require the government to engage in export promotion and/or protectionism of home industries.135

134

I wish to thank Yuen-Foong Khong for contributing this insight, and apologize for my simplification. 135 For case studies of recent US and Chinese bilateral agreements that show differences in their approaches, see Garnaut 2005; Hufbauer and Wong 2005; and Soesastro 2003. For a case study of Chinese industrial policy in response to international pressures, see Lin 2006 on the national oil companies.

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A potentially disruptive “nesting” problem lies in the institutional choices China has made to address the above conditions.136 Institutional inconsistency could emerge in three ways. First, China’s customized, encompassing relational agreements and the US Trade Representative’s exacting template for “competitive liberalization” represent two contrasting models of trade and investment negotiation, which would pose barriers to integration at higher-level APEC or WTO frameworks. Second, bilateral FTAs necessarily raise barriers against third parties, compelling some countries to consider signing more agreements to correct for trade diversion.137 However, this rationale for proliferating bilateral FTAs does not necessarily lead to a broader open trade association or a regional free trade bloc.138 Furthermore, bilateralism represents an “obsolescent bargain” – as more bilateral FTAs are signed, each additional agreement represents lesser value for the trade partners.139 Third, domestic beneficiaries of bilateral FTAs may lose incentives for future multilateral, multiproduct trade liberalization.140 In short, if bilateral preferential trade agreements continue to serve as a means through which Washington and Beijing vie for regional influence, we may expect continuing flagging interest in both APEC and the WTO, and increasing tensions from nesting problems.141 This bilateralism is ultimately counterproductive for both

136

China’s flexible approach to bilateral and multilateral negotiations is superficially reminiscent of the United States’ “strategy without vision” in the 1990s toward APEC, in which Washington’s enthusiasm for regional forums created not only problems of consistency with higher order institutions but also tempting targets to further certain short-term U.S. interests. See Aggarwal and Lin 2002. 137 See Garnaut 2005 for Australia’s desire for an FTA with China to counterbalance the US–Australia FTA. 138 Evenett and Meier 2006; and Hufbauer and Wong 2005. 139 Evenett and Meier 2006. 140 Aggarwal 2006; and Evenett and Meier 2006. 141 Bergsten 2002 generally argues in favor of bilateral agreements as providing a positive impetus for multilateral negotiations. However, recently Bergsten 2005 acknowledges the potential for a devastating trade war between China- and UScentered preferential trade blocs. Yet he believes that regional powers will push for an FTA of the Asia Pacific (FTAAP) to avoid “drawing a line down the middle of the Pacific.”

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China and the United States – the world’s two largest economies – because they benefit the most from free trade and multilateral economic institutions. References Aggarwal, Vinod K. 1998. Institutional Designs for a Complex World: Bargaining, Linkages, and Nesting. Ithaca, New York: Cornell University Press. ———. 2006. The Political Economy of a Free Trade Area of the Asia-Pacific: A U.S. Perspective. Business Asia 14 (2):10-16. Aggarwal, Vinod K. and Kun-Chin Lin. 2002. Strategy without Vision: The U.S. and Asia-Pacific Economic Cooperation In Asia-Pacific Economic Cooperation (APEC): The First Decade, edited by Jurgen Roland, Eva Manske, and Werner Draguhn, 87-118. London, UK: RoutledgeCurzon. Aggarwal, Vinod K. and John Ravenhill. 2001. Undermining the WTO: The Case Against ‘Open Sectoralism.’ Asia Pacific Issues 50. Antkiewicz, Agata and John Whalley. 2004. China’s New Regional Trade Agreements. Working Paper 10992. Cambridge, Mass.: National Bureau of Economic Research. Baviera, Aileen S. P. 2004. International Terrorism, U.S. Foreign Policy and Great Power Relations. In Before and After September 11, 2001: An Asian Perspective, 9-20. Quezon City, Philippines: Ateneo Center for Asian Studies. Banda, O. G. Dayaratna and John Whalley. 2005. Beyond Goods and Services: Competitive Policy, Investment, Mutual Recognition, Movement of Persons, and Broader Cooperative Provisions of Recent FTAs Involving ASEAN Countries. Working Paper 11232. Stanford, Calif.: NBER Working Paper Series. Benford, Robert and David Snow. 2000. Framing Processes and Social Movements: an Overview and Assessment. Annual Review of Sociology 26:611-4. Bergsten, Fred. 2005. A New Strategy for APEC. Speech at the 16th General Meeting of the Pacific Economic Cooperation Council (PECC) Seoul, South Korea, September 6, 2005. Available from . Berkofsky, Axel. 2005. China’s Asian Ambitions. Far Eastern Economic Review July/August. Cha, Victor. 2004. Korea: A Peninsula in Crisis and Flux. In Strategic Asia 2004-5: Confronting Terrorism in the Pursuit of Power, edited by Ashley J. Tellis and Michael Willis, 139-162. Seattle, Wash.: National Bureau of Asian Research. Chen, Xavier. 2004. Gas Cooperation in Northeast Asia: Issues and Institutional Barriers. A presentation for BP China, March Seoul, Korea. Available from . Chung, Ok-Nim. 2000. Solving the Security Puzzle in Northeast Asia: A Multilateral Security Regime. CNAPS Working Paper. Washington DC: Brookings Institution.

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Rhetoric or Vision? Chinese Responses to U.S. Unilateralism 103 Greif, Avner and David D. Laitin. 2004. A Theory of Endogenous Institutional Change. American Political Science Review 98 (4):613-632. Hanson, Stephen E. 2004. Russia: Strategic Partner or Evil Empire. In Strategic Asia 2004-5: Confronting Terrorism in the Pursuit of Power, edited by Ashley J. Tellis and Michael Willis, 163-196. Seattle, Wash.: National Bureau of Asian Research. Harrison, Selig S. 2005. China, North Korea and the United States. Written testimony prepared for a hearing of the U.S.-China Economic and Security Review Commission on China’s Role in the North Korea Nuclear Crisis, Dirksen Senate Office Building, Washington, D.C. Available from <www.uscc.gov/ hearings/2005hearings/written_testimonies/05_03_10wrtr/harrison_selig_ wrts.htm>. Herberg, Mikkal E. 2004. Energy: Asia’s Energy Insecurity—Cooperation or Conflict? In Strategic Asia 2004-5: Confronting Terrorism in the Pursuit of Power, edited by Ashley J. Tellis and Michael Willis, 339-377. Seattle, Wash.: National Bureau of Asian Research. Hufbauer, Gary Clyde and Yee Wong. 2005. Prospects for Regional Free Trade in Asia. Working Paper 05-12. Washington, DC: Institute for International Economics. Available from: . ———. 2003. Is China a Status Quo Power? International Security 27 (4):5-56. Johnston, Alastair Iain and Paul Evans. 1999. China’s Engagement in International Security Institutions. In Engaging China: The Management of an Emerging Power, edited by Alastair Iain Johnston and Robert S. Ross, 235272. London, UK: Routledge. Kang, David C. 2003. Getting Asia Wrong: The Need for New Analytical Frameworks. International Security 27 (4):57-85. Kim, Samuel S. 2001. 1991. Peking’s Foreign Policy in the Shadows of Tiananmen. Issues and Studies 27 (1):39-69. ———. 1994. China and the Third World. In China and the World: China’s Foreign Relations in the Post-Cold War Era 3rd ed., edited by Samuel Kim. Boulder, Colo.: Westview Press. ———. The Korean Peninsula and Northeast Asia Security: U.S. Policy Options. In Korean Peninsula and Northeast Asia – U.S. Strategies for Regional Peace. Report of the 42nd Strategy for Peace Conference, edited by Michael Kraig and James Henderson. Muscatine, Iowa: The Stanley Foundation. Available from . Lin, Kun-Chin. 2003. Corporatizing China: Reinventing State Control for the Market. Ph.D. diss., University of California, Berkeley. ———. 2006. Disembedding Socialist Firms as a Statist Project: Restructuring the Chinese Oil Industry 1997-2002. Enterprise & Society: The International Journal of Business History 7 (1):59-97.

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Loungani, Prakash. 2000. Comrades or Competitors? Trade Links between China and Other East Asian Economies. IMF Finance and Development 40 (2):34-36 Mann, James. 1999. About Face: A History of America’s Curious Relationship with China, From Nixon to Clinton. New York: Alfred A. Knopf. McAdam, Doug, John McCarthy and Mayer Zald, eds. 1996. Comparative Perspectives on Social Movements: Political Opportunities, Mobilizing Structures, and Cultural Framings. Cambridge, UK: Cambridge University Press. Medeiros, Evan S. and M. Taylor Fravel. 2003. China’s New Diplomacy. Foreign Affairs 82 (6) Mila, James. 1996. The Legacy of Tiananmen; China in Disarray. Ann Arbor, Mich.: University of Michigan Press. Mochizuki, Mike A. 2004. Japan: Between Alliance and Autonomy. In Strategic Asia 2004-5: Confronting Terrorism in the Pursuit of Power, edited by Ashley J. Tellis and Michael Willis. Seattle, Wash.: National Bureau of Asian Research. Montaperto, Ronald N. and Hans Binnendijk. 1997. PLA Views on Asia Pacific Security in the 21st Century. Washington D.C.: National Defense University Institute for National Strategic Studies. Morrison, Charles E. 2002. APEC in Sino-American Relations: A Vehicle for Systemic Integration. In Asia-Pacific Economic Cooperation (APEC): The First Decade, edited by Jurgen Roland, Eva Manske, and Werner Draguhn, London, UK: RoutledgeCurzon. National Intelligence Council. 1999. Northeast Asia Static but Stable. Conference Report issued by the National Intelligence Council, July. Available from . Osada, Hiroshi. 1997/8. Deepening Economic Interdependence in the APEC Region – Boom and Vulnerability through Trade Linkages. In The Deepening Economic Interdependence in the APEC Region, edited by Keiji Omura. Chiba, Japan: APEC Study Center Working Paper Series 1997/1998 of the Institute of Developing Economies. Available from . Palanca, Ellen H. 2005. Toward an East Asian Economic Community. In Asian Cooperation: Problems and Challenges in the New Century. Quezon City, Philippines: Ateneo Center for Asian Studies. Pearson, Margaret M. 1999. The Major Multilateral Economic Institutions Engage China. In Engaging China: The Management of an Emerging Power, edited by Alastair Iain Johnston and Robert S. Ross, 207-234. London, UK: Routledge. Prasad, Eswar, ed. 2004. China’s Growth and Integration into the World Economy: Prospects and Challenges. IMF Occasional Paper 232. Washington, DC: International Monetary Fund.

Rhetoric or Vision? Chinese Responses to U.S. Unilateralism 105 Pritchard, Charles L. 2005. The Korean Peninsula and the Role of Multilateral Talks. Washington, DC: Brookings Institute. Available from . Reardon, Lawrence C. 2002. The Reluctant Dragon: Crisis Cycles in Chinese Foreign Economic Policy. Seattle, Wash.: University of Washington Press. Ross, Robert. 1995. Negotiating Cooperation: The United States and China, 196989. Stanford, Calif.: Stanford University Press. Roy, Dennis. 2002. China and the Southeast Asia: ASEAN Makes the Best of the Inevitable. Asia-Pacific Center for Security Studies 1 (4). Available from . ———. 2003a. China’s Pitch for a Multipolar World: The New Security Concept. Asia-Pacific Center for Security Studies 2 (1). Available from . ———. 2003b. A Late Honeymoon: China’s Response to U.S. Security Policies. A Special Assessment for Asia-Pacific Center for Security Studies, March 2003. Available from . ———. 2004a. China-Japan Relations: Cooperation amidst Antagonism. A Special Assessment for Asia-Pacific Center for Security Studies, October. Available from . ———. 2004b. China and the Korean Peninsula: China’s Pyongyang Problem and Seoul Hope. Asia-Pacific Center for Security Studies 3 (1). Available from . Rozman, Gilbert. 2005. Sino-Japanese Competition over the Russian Far East: Is the Oil Pipeline Only a Starting Point? In Siberia and the Russian Far East in the 21st Century: Partners in the “Community of Asia,” Vol. 1, Crossroads in Northeast Asia, edited by Akihiro Iwashita, 1-20. Sapporo, Japan: SRC. Rudolph, M. C. J. 2002. The Diversity of Convergence: Global Finance, Capital Control, and the Politics of Securitization in China. Paper presented at the Annual Conference of the Association of Asian Studies, April, Washington, D.C. Sanders, Sol W. 2000. Muddling Through Asia. American Outlook (Winter). Severino, Rudolfo C. 2005. Asia in the Twenty-First Century. In Asian Cooperation: Problems and Challenges in the New Century. Quezon City, Philippines: Ateneo Center for Asian Studies. Shambaugh, David. 2004/5. China Engages Asia: Reshaping the Regional Order. International Security 29 (3): 64-99. Shih, Victor C. 2004. Dealing with Non-Performing Loans: Power Politics and Financial Policies in China. The China Quarterly 180: 922-944. Shirk, Susan. 2003. The United States Is Marginalizing Itself in Northeast Asia. Seventh session of Honors Collegium 155, Dodd Hall, UCLA, May 15, 2003. Available from . Sigal, Leon V. 2005. Bush Policy Backfiring in Asia. Policy Forum Online 05-64A . Available from . Simon, Sheldon W. 2004. Southeast Asia: Back to the Future? In Strategic Asia 2004-5: Confronting Terrorism in the Pursuit of Power, edited by Ashley J. Tellis and Michael Willis. Seattle, Wash.: National Bureau of Asian Research.

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4 Under Pressure: Japan’s Institutional Response to Regional Uncertainty

Saori N. Katada University of Southern California, Los Angeles, CA, USA Mireya Solis American University, Washington, DC, USA

4.1 Introduction1 The “triple shocks” – the end of the Cold War, the Asian Financial Crisis (AFC), and 9/11 – encouraged the Japanese government to formalize for the first time its regional trade, monetary and financial affairs. The Japanese government’s approach to regional institutional building has been influenced by the domestic struggle to garner private sector support, the regional challenge of accommodating China’s interests, and the potential American reaction to the development of exclusively Asian regional institutions. We argue that these factors’ differential impact in trade and finance has given rise to contrasting trajectories in Japan’s approach to regional institution building in these two issue areas. In this chapter, we first analyze the genesis of the shift in Japanese policies and strategies toward regional institutions by focusing on the shocks and disequilibria experienced by Japan and the region in the 1990s. In the third and fourth sections, we analyze Japan’s role 1

We thank Jason Enia for his excellent research assistance. We also appreciate comments from the participants of the conference on “Northeast Asia’s New Institutional Architecture and Community Building in a Post 9/11 World,” especially our discussant Steven Vogel. Jonathan Chow, Edward Fogarty, and Kristi Govella provided valuable feedback and editorial assistance during the revision process.

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in the evolution of both trade and financial architecture in the region and beyond. Finally, we compare Japan’s efforts in these two areas, and address the reasons behind the dissimilarities observed. 4.2 Economic Shocks and the Persistence of Security Constraints Traditionally, informality characterized Japanese leadership in regional entities, partly due to continued distrust on the part of its Asian neighbors over the events of World War II and due to the opposition of the US to organizations which might exclude it. Japan, therefore, was supportive of the Asia-Pacific Economic Cooperation (APEC) forum’s “open” and “voluntaristic” approach to trade facilitation and liberalization,2 and was comfortable with the ASEAN Regional Form (ARF) for security affairs since it included the United States and other extraregional partners.3 Japan’s urge to formalize the regional economic architecture was influenced by two of the three shocks considered in this volume – the end of the Cold War and the AFC – while the improvement of US–Japanese relations post-9/11 has given Japan more leeway to pursue its regional economic initiatives. The first instance, the end of the Cold War made the Japanese government increasingly unsure of the US commitment to East Asian security. In addition, the rise of China, an indirect outcome of the end of the Cold War, began to put pressure on the Japanese government to take an assertive leadership role in the region. The second shock, the AFC, revealed the vulnerability of monetary and financial arrangements in East Asia and affirmed Japan’s inability to act as the leading crisis manager. Nevertheless, the crisis opened new “political space” for Japan to pursue more assertive trade integration strategies without triggering much distrust from its Asian neighbors, at least initially. After 9/11, Japan’s immediate support for the Bush Administration’s War on Terrorism 2

Ashizawa 2004. Since discussing the concept of region per se is beyond the scope of this paper, we simply adopt the definition of region in Pempel 2005, 4: a “contiguous territorial area having sufficiently clear internal cohesion and definitive external boundaries.” By this definition, the United States fails to qualify as a regional partner to Japan.

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muted negative American reaction to Japanese pursuit of a regional institutional structure that might exclude the United States. 4.2.1 The End of the Cold War and the Rise of China Reevaluating the US–Japan Security Relationship

The San Francisco System established in the 1950s long benefited Japan. Viewed by the United States as the bulwark of “the West” in Asia in its confrontation against the Communist bloc, Japan became the most important US ally in the region. Despite the “alliance dilemma” caused by such a tight bond,4 this security arrangement allowed the Japanese government to pursue a low-profile, low-risk, and low-cost defense policy and to concentrate on the country’s economic recovery and growth.5 During the Cold War years, the Japanese government was shielded from overt conflict with East Asian countries thanks to the US presence in the region, which reciprocally assured East Asian governments of Japan’s peaceful behavior. The end of the Cold War affected this stable balance. Although the Clinton Administration reaffirmed in 1994 the US commitment to East Asian security by maintaining its troops in the region,6 the dramatic reduction of the security threat, especially from the Soviet Union, still triggered in Japan a “fear of abandonment.”7 Moreover, two nearly contemporaneous with the end events of the Cold War put Japan at odds with its post-WWII low-profile political and security posture: the 1989 Tiananmen Square incident and the 1990–91 first Gulf Crisis. The former forced Tokyo to follow the G7 consensus on business and foreign aid suspension against China, despite Japan’s wishes to avoid alienating the Chinese government. The latter served as a somber learning experience for the Japanese government, as the country’s $13 billion financial contribution to the war efforts against Iraq was not even kindly acknowledged, and instead, led to criticism 4

Snyder 1997; and Drifte 1998. On the “Yoshida Doctrine” see Pyle 1992, 21. 6 Nye 1995. 7 The fear of abandonment is one of the two security dilemmas; the other is the fear of entrapment. 5

112 Saori N. Katada and Mireya Solis

of Japan’s “checkbook diplomacy.”8 A bill was passed in 1992 to allow the Japanese Self-Defense Force (SDF) to be dispatched under stringent conditions in support of UN peacekeeping operations.” Reformers” like Ichiro Ozawa insisted on Japan becoming a “normal country” (futsu no kuni) with an adequate military capacity to contribute independently to international peacekeeping efforts and wean itself from dependency on the American security umbrella.9 Even with this post-Cold War security environment and some signs of fissure between the two governments,10 the US–Japanese bilateral security arrangement remained intact. In the 1997 New Defense Guidelines, the Japanese government agreed to provide logistical support to American troops in conflicts in surrounding areas.11 Regionally, the Japanese government welcomed the Clinton Administration’s policy to foster a security framework to reduce regional tensions and enhance confidence building. The Japanese leadership fully endorsed the ARF as a unique entity to provide the region’s leaders with increased opportunities to engage in dialogue regarding security matters.12 North Korea, China, and Japan’s Security Dilemma

Two primary security threats have characterized Japan’s post-Cold War regional security environment. The first arose in 1998, when North Korea test-launched a missile over Japan that landed in the Pacific Ocean, prompting fears of nuclear attack.13 The heightened security threat led the Japanese government to engage in joint research on theater missile defense with the United States in August 1999. The Six-Party Talks contained this renewed crisis during the early 2000s, allowing Japan to engage multilaterally in regional security dialogue. 8

Green 2001. Ozawa 1994. 10 For example, the 1995 incident of three marines raping a 12-year old girl in Okinawa led to a high-profile national and bilateral debate on the validity (and the fairness) of US military presence in Japan (especially concentrated in Okinawa). 11 Due to heated and prolonged debates, it took almost two years to pass three pieces of legislation that would enable Japan to provide broader support to the US military forces. 12 Ashizawa 2004. 13 On July 5, 2006, the North Korean military launched six more missiles into the Japan Sea, putting the Japanese government on high alert. 9

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 113

Although Japan has often been paralyzed by its domestic public’s hostility to North Korea (mostly due to the issue of Japanese abductees kidnapped by North Korean spies in the 1970s), the Six-Party Talks helped bridge the institutional gap in the region.14 The second potential danger comes from the rise of China. While not an immediate military threat, China nevertheless constitutes a very important long-term “power transition” challenge that will define East Asia’s security environment, its institutional architecture, and Japan’s role therein. Two events aptly characterize the shifting power balance between Japan and China. One is the growing bilateral trade imbalance in China’s favor since 1995. The other is China’s defiance of the Comprehensive Test Ban Treaty (CTBT) in the summer of 1995, despite the explicit request of Japanese Prime Minister Tomiichi Murayama to refrain from testing nuclear weapons; this resulted in Japan suspending the grant portion of its foreign aid to China.15 Since then, Sino-Japanese relations have been quite bumpy. Unresolved historical issues such as controversy over Japanese textbooks, the Prime Minister’s visits to the Yasukuni shrine, and dissatisfaction with Japan’s apologies for wartime aggression prompted massive antiJapanese protests in China in the spring of 2005. Moreover, although the Japanese government consistently supported China’s accession to the WTO, the two countries entered into a major trade war shortly before China’s admission in 2001. As discussed later in the chapter, Sino-Japanese tensions will have important consequences in the unfolding Northeast Asian institutional structure. Observers in the United States have only focused on the potential barrier this rivalry presents; however, it should also be acknowledged that such competition provides an equally important motivation for Japan to take an active leadership role in Asia and “lock in” regional institutions while the Japanese economy and government still possess the regional clout to do so.

14

See the introduction to this volume by Aggarwal and Koo. Katada 2001. The aid suspension was lifted in March 1997 after China signed the UN CTBT in September 1996. 15

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4.2.2 The Asian Financial Crisis At a time when Japan was facing changes in its global and regional security environment as well as its own domestic financial woes,16 the AFC struck East Asia. The currency and financial crises took hold of Thailand in July 1997 and then spread throughout East Asia.17 The crisis revealed the economic and institutional vulnerability of East Asian economies and forced the Japanese government to refocus its institutional priorities. Prior to the AFC, the Ministry of Finance (MOF) had been mostly interested in increasing Japan’s influence in international financial institutions such as the World Bank and the IMF.18 The pre-AFC regional institutions were, if they existed, informal and loosely-structured, lacking much in the way of binding commitments. Most importantly, at the time of the crisis there was no regional alternative to the IMF that could adequately address macroeconomic problems. Therefore, Japan and other East Asian countries lacked adequate contingency plans, most notably the absence of a lender of last resort facility for a liquidity crisis such as the AFC.19 East Asian economies were also structurally dependent on the US economy and the US dollar at the time. Despite Japan’s large trade presence in the world, less than 5% of world trade is invoiced in the Japanese yen, compared to almost 50% in US dollars.20 In this setting, Asian governments’ desire for a regional financial solution intensified for two major reasons. First, they worried about the reliability of US and the International Financial Institutions’ (IFIs’) commitment to contain this type of financial crisis. The US 16 The failure of two large financial institutions (Hokkaido Takushoku Bank and Yamaichi Securities) in the fall of 1997 shocked many who had long believed that major financial institutions enjoyed the government’s implicit guarantees against bankruptcy. The influence of Japan’s domestic financial crisis on its actions in the regional one is discussed in Amyx 2001. 17 Numerous books and articles analyzing the crisis and its reactions have been published. See Pempel 1999; Haggard 2000; Noble and Ravenhill 2000; and McLeod and Garnaut 1998. 18 Ogata 1989; and Rapkin and Strand 1997. 19 Wesley 1999 analyzed three major regional institutions—APEC, ASEAN and the Asian Development Bank (ADB)—and concluded that none of the actions taken by those institutions effectively mitigated the crisis. 20 Hartman 1998, 36. On capital dependence, see Hamilton-Hart 2006.

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 115

failure to contribute to the Thai rescue package, assembled under IMF leadership in August 1997, was particularly shocking due to the sharp contrast with its pledge of $20 billion to a rescue package for Mexico two years earlier.21 Moreover, East Asian governments’ fear of insufficient resources to deal with such crises was exacerbated by the fact that many of them, unlike many of their Latin American counterparts, did not have large quotas in the IMF. Since the amount of IMF loans that a country can access is based on its quota, low quotas meant limited IMF funds during a balance of payments crisis.22 The Japanese government would be hard-pressed to provide the bulk of financial assistance for the regional crisis, and was un pre

Fig. 4.1 Japan’s imports from East Asia, 1985–2000 21

“Far Eastern Economic Review: Pacific Divide,” The BurmaNet News, 6 November 1997; and Congressional Press Releases 8 August 1995. 22 IMF loans are generally deemed to unlock private flows, but the amount of these packages does actually matter. This is demonstrated by the fact that since the Mexican peso crisis of 1994–95, the standard 300% maximum for the IMF loans has been stretched to 688% to meet immediate liquidity needs. The IMF made even more pronounced exceptions during the Asian crisis, extending financial assistance of $3.9 billion to Thailand (505% of its IMF quota), $10 billion to Indonesia (490%), and $21 billion to South Korea (1,939%).

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pared to offer alternative rescue measures such as opening up its markets to exports from distressed East Asian economies (Figure 4.1) or pressuring its banks to keep lending to the region. The Japanese government also became interested in a regional financial solution due to its sharp disagreement with the US and the IMF over the causes of the AFC. Japan and other Asian countries insisted that the AFC was a liquidity (or capital account) crisis, whereas the United States saw it as a current account crisis caused by poor economic fundamentals. East Asia keenly felt the lack of an autonomous regional mechanism to underwrite its views.

4.2.3 9/11 and Japan’s Support for the War on Terrorism The terrorist attacks on the World Trade Center and the Pentagon in September 2001 dramatically changed the international security landscape as US foreign policy attached utmost priority to the War on Terrorism. From its 2001 attack on Afghanistan to the subsequent war in Iraq, the Bush Administration emphasized military means to combat terrorist organizations and the governments that support them. For this endeavor, the United States sought the support of its allies in forming a “coalition of the willing,” and the Japanese government under the Koizumi and Abe administrations was unequivocally supportive of the Bush Administration. In sharp contrast to Japan’s hesitant response to the 1990 Persian Gulf War, in November 2001 Koizumi managed to swiftly push through the path-breaking Anti-Terrorism Special Measures Law, enabling him to dispatch Japan’s SDF for logistical support of US combat forces in Afghanistan.23 Furthermore, despite strong Japanese public disapproval of the War in Iraq, the Koizumi cabinet maintained its

23

Midford 2003 argues that US pressure, Koizumi’s extraordinary popularity, and the permissive attitude of its East Asian neighbors towards such deployments helped Japan expand the range of action of Japanese military personnel overseas. See also Friman, Katzenstein, Leheny and Okawara 2006, 89.

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 117

support of the United States by sending SDF forces to participate in reconstruction projects in southern Iraq.24 The climate of US–Japan relations in the years after September 11 has been described by officials on both sides of the Pacific as one of the best ever. As the Bush Administration has focused almost exclusively on security and the anti-terrorism campaign, it has downplayed potential economic friction with its allies. So, while the War on Terror has cemented the US–Japan security partnership and has more closely aligned Japanese foreign policy on security matters with the American agenda, the Japanese government has also gained bargaining leverage in other issue areas such as bilateral trade, demonstrated by muted US reaction to the ban of US beef exports.25 The same dynamic – emphasis on anti-terror cooperation and muted economic friction – is observable on the question of Asian regionalism. For instance, Washington tried to reshape the most ambitious project of Asian-Pacific economic integration (APEC) into a vehicle for closer security cooperation in the war against terrorism. Consequently, APEC summits in Malaysia (2003) and Chile (2004) discussed the issue of war on terrorism more actively than trade facilitation or liberalization.26 On the other hand, the United States tempered its negative reaction to the construction of exclusively regional institutions in East Asia in an attempt to buttress international support for its War on Terror.27

24 Japanese troops remained in Iraq until mid-July 2006. “Japan troops withdraw from Iraq,” BBC, 18 July 2006. Available from . 25 US negotiators were not able to push Japan to lift its 5-year ban on US beef imports strongly, for fear of losing Japanese support on its war in Iraq. 26 The future of cooperation on antiterrorism via APEC is unclear, however. Among the countries of Southeast Asia with a large Muslim population, the pressure from the United States to get tough on terrorist organizations has generated resentment. They face the challenge of balancing regional support for the Bush administration and regional aversion to any compromise of state sovereignty imposed by unyielding tactics of the United States. Even for Japan, expanding the war on terror in South East Asia poses substantial risks, given the lack of domestic counterterrorism measures, the possible deterioration of relations with neighboring countries, and negative public opinion if Japanese nationals become targets of terrorist groups. See Leheny 2001. 27 Lincoln 2004.

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The triple shocks and the challenges of the 1990s encouraged Japan to reorient its foreign policy on security and economic affairs. A key component of this shift has been the explicit campaign to build regional institutions in trade and finance. We turn next to the analysis of Japan’s new regionalism. 4.3 Japan and the New Regional Trade Architecture Japan embarked on a major reorientation of its trade policy with the signature of its first bilateral FTA with Singapore in the fall of 2002. This agreement marked a complete turnaround from Japan’s previous criticism of preferential trade agreements as harmful to the spirit, if not the letter, of the GATT/WTO multilateral system.28 4.3.1 Charting a New Course for Trade Policy Japan, which only began to entertain the possibility of signing FTAs in 1998, has rapidly expanded its preferential trading network. By the summer of 2007, Japan had three bilateral FTAs in force with Singapore, Mexico and Malaysia and had signed trade agreements with Philippines, Thailand and Chile. It had also reached a basic agreement with Indonesia, and was engaged in FTA negotiations with ASEAN, Vietnam, Switzerland, Australia, India, the nations from the Gulf Cooperation Council (see Table 4.1 for a detailed chronology).29 With this rapid succession of FTA initiatives, Japan has moved away from its “multilateral first, regional informalism second” approach to trade and toward a multi-track commercial strategy. Remarkably, therefore, Japan is prepared to accept binding liberalization commitments not only at the multilateral level but also with select economic partners in East Asia and elsewhere. Japan’s conversion to a preferential trade strategy came as the adverse effects of a number of international trends paved the way for policy experimentation. First, the proliferation of FTAs since the1990s 28 Hatakeyama 2002, 24. On the negotiation of FTAs in the Asia-Pacific, see Aggarwal and Urata 2006; and Dent 2006. 29 FTA talks with Korea have been deadlocked since November 2004.

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created a sense of isolation and “policy backwardness.” Japanese business executives and industrial policy bureaucrats noticed with growing alarm that Japan was one of the few states, along with Korea and China, relying exclusively on the WTO and APEC to advocate its trade Table 4.1 Chronology of Japan’s policy towards a regional/transregional trade architecture30 Date

Initiative

Current status

1989

APEC (informal and open regionalism) New Age EPA with Singapore East Asia Vision Group recommends East Asian FTA EPA with Mexico

Stagnation of liberalization process; Japan aloof In force since November 2002

2001 (Jan) 2001 2002 (Nov) 2002 (Nov)

No official action to implement In force since April 2005 Proposal rejected by Japan

2003 (Dec)

China proposes trilateral Japan, China, Korea FTA EPA with South Korea

2004 (Jan)

EPA with Malaysia

In force since July 2006

2004 (Feb)

EPA with Philippines

2004 (Feb)

EPA with Thailand

Agreement signed on September 2006 Agreement signed on April 2007

2005 (April)

EPA with ASEAN

Negotiations under way

2005 (June)

EPA with Indonesia

Talks at a standstill

2005 (Nov)

EPA with Chile

Basic agreement reached on November, 2006 Agreement signed on March 2007

2006 (Aug)

EPA with 16 nations*

No official action to implement

2006 (Sept)

Negotiations under way

2007 (Jan)

EPA with Gulf Cooperation Council EPA with Vietnam

2007 (Jan)

EPA with India

Negotiations under way

2007 (April)

EPA with Australia

Negotiations under way

2007 (May)

EPA with Switzerland

Negotiations under way

Negotiations under way

*16 nations include India, Australia, China, Korea, Japan, New Zealand and ASEAN-10

30

METI 2005; and Solís and Urata 2007.

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interests.31 Catching up with the wave of regionalism and expanding Japan’s trade options played an important role in the decision to embark on FTA talks. Moreover, Japanese exporters and multinational enterprises began to report concrete losses in foreign markets without the benefits of preferential FTA treatment. NAFTA in particular prompted complaints about market share losses and discriminatory treatment pertaining to investment and government procurement in the Mexican market.32 Leveling the playing field so that Japanese international businesses could compete on equal terms with their foreign rivals provided a strong rationale for shifting gears on the trade front. Regional events were also important in changing Japan’s attitudes toward the construction of FTA networks. The AFC exerted a significant, albeit indirect, influence on the search for new regional trade institutions in two ways: first, it shattered the existing consensus that market-led integration would provide for continuous regional economic expansion, and second, it opened new political space for more active displays of Japanese leadership in the region.33 Yet the impact of the AFC on trade matters was more tenuous than on finance, where there was a very direct connection between the crisis and proposals for new financial mechanisms to combat future financial instability. For instance, in none of MITI’s initial pronouncements in favor of FTA diplomacy was the AFC mentioned as a main catalyst for the trade policy change.34 Rather, MITI emphasized the need to develop multiple trade fora and to pursue new WTO plus FTA commitments while continuing to promote the stagnant WTO agenda.35

31

Ogita 2003; and Hatakeyama 2002. All those countries have since aggressively pursued FTA strategies. Indeed, a striking characteristic of these early FTA initiatives is the heavy dose of cross-regionalism. For a discussion of this phenomenon, see Solís and Katada 2007a. 32 Solís 2003; and Solís and Katada 2007b. 33 Munakata 2006, 12–103 also notes that while the AFC was not the major cause for the turn to trade regionalism, it increased the interest of crisis-stricken countries in FTAs to attract FDI and carry out structural reforms. In this context, Japan’s integration initiatives were received more positively. 34 1999 and 2000 White Papers 35 Ogita 2003, 223–227; and Yanagihara 2004.

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The search for new regional trade institutions was also facilitated by Japan’s growing disaffection with APEC, its most ambitious project for regional cooperation at the time. As John Ravenhill explains, the rift between the United States and Japan over the Early Voluntary Sectoral Liberalization (ESVL) initiative in 1997–98 reflected a clash over the essential nature of APEC’s liberalization process: consensual and voluntaristic (Japan’s preference) versus legalistic and mandatory (the United States’ preference).36 Moreover, Japan was alienated from the EVSL process because it felt that its preferences had been ignored: the agenda called for liberalization of sectors sensitive for Japan (e.g., forestry and fisheries) without incorporating any sectors of interest for Japanese industry (e.g., automobiles).37 It is precisely because FTAs allow Japan to pair with nations willing to exempt these sensitive sectors that Japan has been attracted to preferential agreements.38 In other words, Japan is able to act as a “prime architect” in the construction of FTA forums.39 4.3.2 Japan’s Supply of Regional Trade Goods Japan’s new leadership in the construction of an FTA network means that it is, for the first time, engaged in the supply of club goods. By definition, free trade agreements award trade and investment preferences exclusively to signatories without extending them to the broader WTO membership. Japan’s FTAs have generally featured at least five important traits: emphasis on bilateral agreements, selection of developing nations as partners, coverage of modest volumes of trade and investment, protection of sensitive sectors, and enlarged scope to include economic cooperation topics.

36

Ravenhill 2001. Krauss 2003. 38 Ravenhill 2003, 299 refers to this phenomenon as “liberalization without political pain.” 39 For a more theoretical account of the lure of bilateral trade forums for agenda control purposes see Pekkanen, Solís, and Katada 2007. 37

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Bilaterals First, Minilaterals Second

Table 4.1 demonstrates that Tokyo has attached priority to bilateral FTAs, while being much more cautious regarding broader regional preferential trade agreements. This choice is particularly evident in Southeast Asia, where Japan negotiated individually with the four largest members of ASEAN before launching negotiations for a comprehensive Japan–ASEAN FTA. METI had originally toyed with the idea of negotiating with ASEAN as a whole first to avoid the deleterious effects of “spaghetti bowl regionalism” (i.e. crisscrossing rules of origin). In the end, however, it favored bilateral FTAs to address specific concerns on market access with each individual country.40 Since the bilaterals were negotiated first, METI regarded subsequent FTA negotiations with ASEAN as a whole valuable in providing not only access to the smaller economies in the group but, perhaps more importantly, as an opportunity to devise a framework for regional rules of origin by working up from smaller agreements.41 North/South FTAs

As illustrated in Table 4.2, there is a sharp divide in income levels between Japan and most of its FTA partners. Reflecting a broader trend of the “new regionalism,” Japan is establishing preferential trading relations predominantly with developing countries.42 Asymmetries in market power are essential to understanding why Japan is unlikely to pursue an agenda of deep regional integration. While North/South FTAs could benefit developing countries as they lock in economic liberalization, they also open up the possibility for larger parties to extract greater concessions from weaker members. Ravenhill, for instance, deems the Japan–Singapore FTA an unequal agreement because Singapore made many liberalization concessions while Japan effectively sheltered sensitive sectors (more on this below).43 40 Author interviews with several METI officials and Japanese academics, summer 2005. 41 From the beginning, MOFA favored bilateral FTAs as a way to strengthen diplomatic relations with each Southeast Asian nation. Author interviews with MOFA officials, summer 2005. 42 Ethier 1998. 43 Ravenhill 2003, 307.

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 123 Preferential Trading with Small Economic Partners

Another remarkable feature of Japanese FTA diplomacy is the selection of small trading partners. As shown in Table 4.2, all the countries with which Japan has negotiated or is currently negotiating a preferential trade agreement capture a very small portion of Japanese imports, exports, and foreign direct investment. On the trade front, Korea is the largest economic partner in this list of FTA counterparts, accounting for 6.7% of Japanese exports and 6.1% of its imports; however, as noted before, the Japan–Korea bilateral trade negotiations are not moving forward. Table 4.2 Japan and its FTA partners44

Japan Singapore Mexico Korea Malaysia Philippines Thailand Indonesia Chile Vietnam India Australia Switzerland

GDP per capita Share of (PPP US$, 2003) Japanese exports (%) 27,967 – 24,481 3.6 9,168 1.0 17,971 6.7 9,512 2.6 4,321 2.0 7,595 3.1 3,361 1.5 10,274 0.1 2,490 0.5 2,892 0.5 29,632 2.0 30,552 0.4

Share of Japanese imports (%) – 2.3 0.5 6.1 3.7 2.5 3.5 2.3 0.9 0.8 0.6 1.1 1.6

Share of Japanese FDI (%) – 1.8 0.7 1.6 0.6 1.1 2.1 1.4 0.1 0.2 0.4 2.5 0.2

The predilection for small FTA counterparts reveals the caution with which Japan has embarked on this new trade policy area. So far, the government has consciously decided to avoid the substantial adjustment costs associated with steep liberalization with large economic partners. However, this cautionary approach could backfire since it could undermine what has hitherto been the strongest justification 44

Note: Exports, imports and FDI shares represent averages for 1999 to 2004. GDP data from UN Human Development Report 2005. Available from . Trade data from JETRO 2005. FDI data from MOF.

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for the new FTA diplomacy: its impact on stimulating Japanese economic reforms and competitiveness.45 If Japan only approaches smaller trade partners and skirts concessions in its most sensitive sectors, the vaunted benefits of revamping outdated economic structures will quite simply not materialize.46 Shelter for Sensitive Sectors

Lax implementation of the WTO’s Article 24 provision, which requires regional agreements to liberalize “substantially all trade,” has left ample wiggle room for the protection of politically powerful sectors in FTA negotiations. Japan has quickly learned the ropes of the FTA negotiation game and has so far refused to dismantle niches of protection for agriculture, forestry, and fisheries. For instance, excluding rice is considered a precondition for initiating FTA talks with Japan. Japanese agricultural concessions in its first enacted FTAs are either negligible (e.g., Singapore) or modest at best (e.g., Mexico). Despite the miniscule importance of agricultural commodities in bilateral trade flows with Singapore, Japan refused to make additional concessions on agriculture, merely binding the zero percent tariffs that were in effect de facto.47 Agriculture almost derailed negotiations with Mexico, and in the end tariff-rate quotas (TRQs) were implemented for the most sensitive products (e.g., pork, beef, chicken, oranges, and orange juice).48 A similar dynamic can be seen in the

45

Urata 2005; Keidanren 2000; and Japan’s Cabinet Office 2004. Although the business umbrella organization Keidanren has endorsed FTA negotiations with the United States and Europe, so far no official action has taken place. On Keidanren’s position, see “Joint Statement. US–Japan Economic Partnership Agreement,” January 19, 2007; and “Call for the Start of a Joint Study Group for a Japan–EU Economic Partnership Agreement,” June 12, 2007. Available from http://www.keidanren.or.jp/english/policy>. Accessed on 12 July 2007. 47 Lincoln 2004. 48 Solís 2003; and Solís and Katada 2007b. TRQs are used to protect sensitive sectors because only a fixed amount of exports is offered some level of tariff concession. In this sense, TRQs run counter to the notion of tariff-free, quota-free liberalization. 46

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 125

exclusion of plywood (one of Malaysia’s largest exports to Japan)49 and in the deadlock in negotiations with Korea caused in part by Japanese resistance to open the agriculture and fisheries sectors.50 The recently launched talks with Australia could represent a turning point for liberalization of the Japanese agricultural market. However, the Japanese government only agreed to initiate negotiations after Australia acknowledged that Japan’s sensitivities on agricultural products would be factored into the negotiations. Inclusion of Economic Cooperation

The Japanese government has enthusiastically embraced the term Economic Partnership Agreement (EPA), initially suggested by Singapore, to distinguish its brand of preferential trade agreements from conventional FTAs. In this way, the Japanese government is advancing the idea that it is both signing high standard FTAs (with multiple WTOplus commitments) and embracing the idea of economic cooperation – broadly conceived – as guiding the formalization of bilateral/ minilateral economic relations. Table 4.3 compares two of Japan’s EPAs in force with NAFTA in order to identify the novel elements of the FTA “goods” Japan is supplying its partners. The first category of traditional issues underscores that there are indeed a number of issues covered by all these FTAs, including roles of origin, safeguards, and liberalization of goods, agriculture, and services. The more recent FTAs, however, embrace a much more comprehensive agenda incorporating, for instance, the so-called “Singapore issues” which have yet to be adopted at the WTO.51 On these issues, Japan’s EPAs and NAFTA are remarkably similar: adopting “hard”

49

Officially, plywood was placed in the category of “renegotiation,” which only means that at a future date liberalization of this sector can be considered, but there are no guarantees that concessions will be made. 50 Ahearn 2005, 7. 51 “Singapore issues” refers to the topics of investment protection, competition policy, transparency in government procurement, and trade facilitation, so named because they were initially addressed at the 1996 WTO Ministerial Conference in Singapore. Disagreements between developed and developing economies prevented resolution on these issues within the WTO, however, and limited progress has only been achieved in the area of trade facilitation.

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obligations for investment, government procurement, intellectual property, and temporary entry for business people, whereas “soft” commitments are the norm for competition policy and customs procedures.52 After that, the differences between Japan’s EPAs and NAFTA begin to surface. For instance, only NAFTA offers a review panel on antidumping disputes and side agreements on environmental and labor standards. Another interesting distinction is that Japan has not been interested in pushing for mandatory obligations on financial services. There are important differences in the issues covered in the EPA with Singapore and the one with Mexico, clearly reflecting the different priorities involved when negotiating with a developed versus developing nation. For example, only with Singapore did Japan accept clauses on mutual recognition and paperless trading; in the case of Mexico, “improving the business environment” for Japanese companies was a very important priority. A key point is that with the exception of mutual recognition with Singapore, all of Japan’s new issues on FTAs are soft commitments that do not generate mandatory and actionable obligations. Pockets of Japan’s earlier preference for voluntarism are discernible here. On the positive side, Japan’s emphasis on economic cooperation as an integral part of the preferential liberalization of markets means that the government is aware of the need to help its developing country counterparts foster supporting industries and upgrade their trade capabilities.53 On the negative side, however, many believe that this emphasis on economic cooperation is simply a way for the Japanese government to find political shelter from domestic opposition to market opening by substituting liberalization concessions with economic cooperation promises.54

52 By “hard” obligations we mean those that are actionable through a dispute settlement mechanism; by “soft” commitments we mean non-mandatory, non-actionable items. 53 Aoki 2004, 11. 54 Ahearn 2005, 1.

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 127 Table 4.3 What is distinctive about an EPA? Japan–Singapore Japan–Mexico NAFTA Traditional issues Goods

○

○

○

Agriculture

○

○

○

Services

○

○

○

Rules of origin

○

○

○

Safeguards

○

○

○

Investment

○

○

○

Government procurement

○

○

○

Competition policy

▲

▲

▲

Intellectual property

○

○

○

Common new issues

Unfair trading practices

N/A

N/A

○

Temporary entry business people

○

○

○

Customs procedures

▲

▲

▲

Environment

N/A

N/A

■

Labor standards

N/A

N/A

■

▲

▲

○

Paperless trading

▲

N/A

N/A

Mutual recognition

○

N/A

N/A

Science and technology

▲

▲

N/A

Human resource development

▲

▲

N/A

Small and medium enterprises

▲

▲

N/A

Tourism

▲

▲

N/A

N/A

▲

N/A

Finance Japan's new issues

Improvement of the business climate

○ denotes a mandatory commitment. ▲ denotes a non-mandatory provision in that it entails only cooperation and/or is specifically excluded from the dispute settlement mechanism. ■ denotes areas where there is nominally a binding obligation, but de facto a very weak dispute settlement procedure (for example NAFTA's side agreements on environment and labor)

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4.3.3 Japan’s Role in the Regional Trade Architecture The Japanese government has shown unprecedented activism in regional trade negotiations. Nevertheless, Japan’s role as an architect of East Asian institutions is conditioned by several fundamental factors. The first and most fundamental factor is Japan’s domestic politics. FTAs have brought to the surface, as perhaps never before, the clashing interests of industry and agriculture in the formulation of trade policy.55 Business interests (most notably Keidanren) mobilized first to demand the negotiation of FTAs, energized to do so when they began to incur tangible losses from competing in foreign markets without preferential access. NAFTA played a pivotal role in this regard; negotiating with Mexico became the first rallying cry for the business community to embark on FTA talks.56 After receiving an informal proposal to negotiate from the Mexican government, MITI began its first serious re-examination of its stance vis-à-vis FTAs in the fall of 1998.57 MITI’s internal report gave the green light to preferential trade agreements but attached priority to talks with Korea. This report reflected the strength of Asia-oriented MITI bureaucrats who saw FTA policy as an opportunity not only to reverse trade diversion and promote domestic economic reforms, but also to establish closer political ties with neighboring states.58 The agricultural sector, long sheltered from international competition, did not welcome the proposed preferential trade accords. Moreover, the farm lobby remains a sizeable force in Japanese politics, despite its dwindling population, the 1994 electoral reform moderately reducing overrepresentation of rural districts, and the emergence of a Prime Minister committed to structural reform. At a time when big business and industrial bureaucrats were championing FTAs, the agricultural lobby responded with a frontal attack by arguing that agricultural liberalization should be discussed only at the WTO. This not only meant that Japan could not meet the requirements of the WTO

55

Mulgan 2005. Keidanren 2000; Solís 2003; and Yanagihara 2004. 57 Hatakeyama 2002. 58 Ogita 2003, 221, 242. 56

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 129

on FTAs, but that many countries would not be interested in sitting down at the negotiation table with Japan.59 With the aim of avoiding an FTA policy deadlock from an all-out, zero-sum struggle between industry and agriculture, the Japanese government attempted a compromise by negotiating first with small economic partners and providing exceptions to sensitive primary commodities while still striving for Article 24 compliance. At times, this has required high-level political intervention from Prime Minister Koizumi to solve inter-bureaucratic disputes and make additional agricultural concessions to salvage FTA negotiations.60 However, it is not yet clear whether top-down decisions on agricultural trade policy will result from a centralization of decision-making power in the Prime Minister and his Cabinet.61 Politicians with agricultural ties continue to wield significant influence, the Prime Minister depends on the bureaucracy to implement his policies, and no one in the opposition is championing substantial liberalization in agriculture. For these reasons, the current dynamic of protracted FTA negotiations and piecemeal agricultural concessions is likely to continue while significant disagreements at home are ironed out. The second major constraint on Japanese FTA policy is the configuration of economic, security, and historical factors in Northeast Asia. As Table 4.1 makes clear, Japan’s FTA network has spread southward and also extends cross-regionally to countries such as Mexico, Switzerland, and Chile. Yet, efforts to build trade institutions within Northeast Asia have made only limited progress. FTA talks with Korea came to an impasse and Japan rejected the 2002 Chinese proposal of a tripartite FTA in Northeast Asia. Japanese– Korean FTA negotiations have touched sensitive nerves for Japan’s agriculture and fishery sectors and for Korea’s small and mediumsized enterprises. The Japanese government has deemed bilateral FTA negotiations with China premature until it demonstrates its ability to

59

Solís 2003. Solís and Katada 2007b. 61 Mulgan 2005, 288–296. 60

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implement WTO reforms.62 Moreover, Koizumi’s visits to the Yasukuni Shrine produced a marked deterioration of relations with both countries, making it more difficult for FTA initiatives to flourish.63 Finally, FTA policies in Northeast Asia have been marked more by a spirit of competition than cooperation, intended more to develop rival hub-and-spoke networks than to form a subregional trade bloc. China’s rapid economic rise and assertive FTA policy have worried Japanese policymakers who feel the need to quicken the pace of Japan’s own FTA negotiations with Asian countries. A case in point is Japan’s sudden announcement to seek negotiations with ASEAN after the shocking news of a China–ASEAN FTA initiative.64 For Japanese policymakers, the FTA race between Japan and China is not only about securing preferential market access and avoiding trade and investment diversion, but also about competing to define the types of FTAs that will become the basis for a new institutional trade architecture in East Asia.65 4.4 Japan and the New Regional Financial Architecture In addition to its role in promoting FTAs, Japan has been active in the debate over new financial institutions in Asia. 4.4.1 Japan’s Impetus for a Regional Monetary and Financial Architecture The AFC was the fundamental impetus behind the shift in the Japanese government’s views and policies toward a regional financial architecture. Tokyo was, however, strikingly ambivalent about its leadership role in providing regional financial goods and determining the direction of regional financial cooperation. On the one hand, despite its 62

Pempel and Urata 2005, 90. For instance, even though many in the Japanese business community believe an FTA with China could bring important benefits in terms of investment protection and policy transparency, they are not actively petitioning for FTA talks because of the present climate of hostility in bilateral relations. See Solís 2006. 64 Pempel and Urata 2005, 78. 65 Author interviews, summer 2005. 63

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131

domestic economic troubles, Japan actually showed unprecedented leadership when it announced its commitment to establish the Asian Monetary Fund (AMF) following the efforts of Asian governments to contain the Thai crisis and provided a total of $80 billion in financial assistance through the rescue packages of 1997 and the 1998 New Miyazawa Initiative. But its record on regional solutions fell short as Japan acquiesced to IMF involvement in the stabilization of the crisis.66 The AFC motivated Japan to partake in the construction of a regional monetary and financial architecture.67 As noted earlier, neither the IFIs nor the United States were fully reliable, and the absence of regional alternatives during the AFC proved devastating. Under these conditions, the Japanese government affirmed common regional interests and loosely shared views regarding regional economic institutions among Asian governments. The governments that experienced difficult economic adjustment under the IMF and suffered criticism of “crony capitalism” were especially motivated not to repeat this type of crisis ever again.68 The emergence of ASEAN+3, which linked ASEAN to Japan, China, and Korea, indicated that Asian leaders were increasingly interested in having solid regional control over both the speed and the nature of trade and financial liberalization. Finally, the Japanese government realized that Japan needed a reliable regional institutional structure that would enable it to convince its domestic economic actors to contribute to regional public goods, such as financial crisis management and new funding for countries experiencing massive foreign exchange outflows.69

66

The three governments, Thailand, Indonesia, and South Korea went first and directly to the Japanese government for its bilateral support at the onset of their respective currency crises to avoid IMF involvement, but all of them were turned away. See Katada 2001. 67 Hughes 2000 views the AFC as a blessing in disguise because it provoked Japan to take leadership in establishing regional financial arrangements. 68 The responses of Asian leaders were partly political in nature. It was politically much easier to blame the IMF for the economic pain than to address the issue of mismanagement and responsibility of the government in fostering these crises. Higgott 1998 calls this the “politics of resentment.” 69 Interview with a former Bank of Tokyo executive, Tokyo, Japan, June 2004.

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Japan’s Supply of Regional Financial Goods

The Japanese government has attempted to transform the regional monetary and financial architecture so that Japan can assume regional leadership and avoid future crises. Table 4.4 indicates that it has provided regional public goods in at least three ways: contributing to the establishment of a mechanism for regional emergency liquidity; launching steps towards a regional monetary mechanism or union; and fostering a regional bond market. Emergency Funding and Liquidity Mechanism

Despite its stillbirth, the AMF was an unprecedented initiative by the Japanese government, proposing the creation of a $100 billion fund to respond to the regional liquidity crisis, with half of the money to be supplied by Japan. The exclusion of the United States was arguably deliberate to prevent the hijacking of this Asian scheme, or to avoid dilution of common interests.70 After the AMF was rejected by the United States and others, the Manila Framework took up the idea of added liquidity and quick disbursement of funds under the auspices of the IMF. East Asia’s aspirations for a regional emergency funding mechanism, however, died hard. As early as November 1997, East Asian governments sought to deal with regional financial issues through ASEAN+3, eventually producing a regional emergency liquidity mechanism called the Chiang Mai Initiative (CMI), a network of currency swap agreements completed in 2002.71

70

Lee 2006. Hamiton-Hart 2006, 110 however, argues that those regional financial arrangements were not intentionally structured to keep the United States out. 71 The CMI consists of two components. One is the expanded ASEAN Swap Agreement (ASA), a regional swap currency facility from which each member can draw from up to a set-amount. The other is the newly established network of Bilateral Swap Arrangement (BSA) and repurchase arrangements among all the members of ASEAN+3. See Henning 2002, 13–14; and Park and Wang 2005, 93–94.

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Table 4.4 Chronology of Japan’s policy towards a regional financial architecture72 Date 1997 (Sept)

Category Initiative CMI Japan proposes AMF

1997 (Nov)

CMI

1998 (Oct)

AMF rejected and Manila Framework set up New Miyazawa Initiative announced

1999 (April)

AMU

Report on internationalization of yen published in Japan

2000 (May)

CMI

ASEAN+3 Finance ministers agree to CMI

2001 (Jan)

AMU

Kobe Project proposed at ASEM

2001 (May)

CMI

2002 (Jan)

ABM

2002 (Dec)

ABM

ASEAN+3 Finance ministers agreed to enhance monitoring under CMI Thailand proposes Asian Bond Scheme at East Asia Summit Japan proposes ABMI

2003 (June)

ABM

EMEAP establishes ABF

2003 (Aug)

ABM

ASEAN+3 agrees to promote ABMI

2004 (June)

ABM

2004 (June)

AMU

Yen dominated Korean collateralized bond obligations issued under ABMI ASEM produces a report in support of AMU

2005 (May)

CMI

ASEAN+3 agrees to enhance CMI including ERPD

2005 (May)

ABM

ABF2 launches local currency bonds and $2 billion fund

2005 (Aug)

ABM

Thai baht bonds guaranteed by Japan issued in Bangkok

2005 (Nov)

CMI

CMI swap network total expanded to $58.5 billion

2006 (May)

AMU

2007 (May)

CMI

ASEAN+3 agreed to study the possibility of Asian Currency Unit (ACU) ASEAN+3 agrees to multilateralize CMI process

CMI: Chiang Mai Initiative, AMF: Asian Monetary Fund, AMU: Asian Monetary Union, ASEAN: Association of Southeast Asian Nations, ASEM: Asia–Europe Meeting, ABM: Asian Bond Market, EMEAP: EMEAP: Executives' Meeting on East Asian and Pacific Central Banks, ABMI: Asian Bond Market Initiative, ABF: Asian Bond Fund, ERPD: Economic Review and Policy Dialogue

72

Source: MOF “Regional Financial Cooperation among ASEAN+3.”

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The scheme is established, first and foremost, to help prevent a currency crisis such as the one that triggered the AFC. Asian finance ministers agreed on doubling the size of the $35 billion CMI facilities and on working toward multilateralization of these bilateral swap networks during the 2005 Asian Development Bank (ADB) annual meeting.73 At the 2007 ADB annual meeting, the ASEAN+3 finance ministers agreed on the multilateralization scheme, although details including “surveillance, reserve eligibility, size of commitment, borrowing quota and activation mechanism” are to be worked out in the future.74 The second and long-term objective of the CMI was to enhance regional cooperation both in terms of currency stabilization and in establishing regional financial monitoring, information sharing, and surveillance. In Japan, the bureaucracy, particularly the MOF and the Bank of Japan, is behind the drive to strengthen the CMI. They hope to avoid Japan’s manifest ambivalence during the AFC, and to better position the country to manage financial crises in East Asia. Exchange Rate and Currency Arrangements

The Japanese government’s views on exchange rate and currency issues have also changed dramatically since the AFC. Prior to the crisis, most East Asian countries pegged their currencies to the US dollar in some fashion. Despite Japan’s rising economic power, its large financial and investment presence in the region, and an increasing volume of intra-regional trade in East Asia in the late 1980s and early 1990s, the Japanese government did not show much interest in promoting a yen bloc in the region.75 This lack of interest stemmed

73

When the idea of multilateralization was first announced, the Far Eastern Economic Review hailed it as “Thinking the Unthinkable,” 8 April 2004. 74 Available from . Accessed on 12 July 2007. The MOF official in charge of regional cooperation, however, clearly noted that this multilateralization will not mean the rebirth of the AMF. No standing institution (like the IMF) is currently envisioned. 75 The rise of Japan and possibility of the yen bloc was, of course, a major concern for other economic powers, especially the United States. But neither journalistic accounts (Economist, 15 July 1989) nor academic analyses (Frankel 1999) found strong evidence of yen bloc formation during this period.

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 135

mostly from the Japanese economy’s heavy reliance on the US market, but Japan has also historically been reluctant to run current account deficits or to lose macroeconomic policy autonomy.76 As the region relied heavily on US dollars, Asian economies became vulnerable to fluctuations in dollar-yen exchange rates. Many Asian economies’ trade performance worsened and current account imbalances grew as the Japanese yen depreciated against the dollar after 1995.77 The most proximate trigger of the AFC came from this very currency peg. The Thai central bank could not, in the spring to summer of 1997, defend against the massive wave of attacks by currency traders betting against the baht. Subsequently, as the AFC spread across East Asia, many governments were forced to enter into a world of floating currencies. Although there was intellectual support during this period for the “two-corner solution” to exchange rate policies,78 due to their relatively small size and external dependence on investment and trade, East Asian governments were eager to stabilize their exchange rates in other ways.79 After the AFC, the Japanese government strove to enhance the yen’s internationalization to decrease East Asia’s over-dependence on the US dollar.80 To facilitate use of the yen, the MOF has made several regulatory changes.81 Widespread use of the yen, indeed, would constitute an important part of Asia’s move toward instituting a regional buffer against volatile global financial markets. 82 As shown 76

In 1996, at the time of Japan’s “Big Bang” announcement by then-Prime Minister Ryutaro Hashimoto, internationalization of the yen was proposed as one way to heighten the global importance of the country’s financial market. However, urgency for the movement was added by the AFC. 77 Goldstein 1998, 14–15; and Nobel and Ravenhill 2000, 6. 78 The only two stable exchange rate regimes are a single currency such as the euro or free floating. 79 Kuroda and Kawai 2003, 21. Frankel 1999 supports a managed exchange rate regime. 80 Council on Foreign Exchange and Other Transactions 1999, 1–2. 81 For example, non-residents and foreign corporations that earned interest income from Japanese government bonds are now exempt from withholding taxes. The Japanese government also decided to diversify the maturity of government bonds to make them more attractive. Settlement systems have also been improved to facilitate cross-border transactions. 82 See Grimes 2001; and Helleiner 2000.

14

51

48

Western Europe

Southeast Asia**

13

2

North America

Western Europe

Southeast Asia**

98

87

95

97

52

49

86

59.5

Other

1983

9.2

28.9

7.8

9.7

37.5

51.2

17.3

35.5

Yen

90.8

71.1

92.2

90.3

62.5

48.8

82.7

64.5

Other

1986

80.5

72.3

89.8

85.9

56.5

57.8

83.6

65.3

Other

1989

19.5

27.7

10.2

14.1

43.5

42.2

16.4

34.7

Yen

23.8

31.7

13.8

17

52.3

40.3

16.6

40.1

Yen

76.2

68.3

86.2

83

47.7

59.7

83.4

59.9

Other

1992

26.2

44.8

21.5

22.7

44.3

34.9

17

36

Yen

73.8

55.2

78.5

77.3

55.7

65.1

83

64

Other

1995

36

26.7

44.3

16.9

21.8

48.4

34.9

15.7

73.3

55.7

83.1

78.2

51.6

65.1

84.3

64

Other

1998* Yen

36.1

24.8

49.7

20.8

23.5

50

33.5

13.2

Source: Ministry of Finance, Annual Report, Various Issues.

Vietnam, South Korea, Taiwan, India, Pakistan, Sri Lanka, Maldives, Bangladesh, Afghanistan, Nepal, and Bhutan.

** Southeast Asia includes Indonesia, Malaysia, Singapore, Thailand, Philippines, Brunei, Myanmar, Laos, Cambodia,

75.2

50.3

79.2

76.5

50

66.5

86.8

63.9

Other

2001* Yen

* All information is based on the report in September except 1998, whose numbers come from March of the year, and 2001, whose numbers come from January

3

5

All Regions

Imports

40.5

All Regions

North America

Exports

Yen

Table 5: Currency Denomination of Japan’s Foreign Trade by Region (Percentage)

136 Saori N. Katada and Mireya Solis

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 137

in Table 4.5, however, the use of the yen in regional trade basically stayed flat throughout the 1990s and into the 21st century. On the other hand, the prospect of an Asian currency is attracting some attention. A joint July 2002 study with the European Union (the so-called “Kobe Research Group”) on the possibility of an Asian Monetary Union (AMU) recommended a three-phase approach: monetary integration by 2010; preparation for a single currency by 2030; and launching of the single currency by 2033.83 The ADB and ASEAN+3 finance ministers continue to discuss the establishment of Asian Currency Unit. Asian Bond Market More recently, East Asian countries have launched the Asian Bond Market Initiative (ABMI) and Asian Bond Fund (ABF). The AFC most keenly pointed to the “double mismatch problem” that emerges both from the length of maturity of financial instruments and from the choice of currency. At the time of the AFC, East Asian firms and banks borrowed short-term in dollars and invested in long-term assets denominated in local currencies. Their actions followed partly from the challenge of the exchange rate regime discussed above, but were also due to the lack of a long-term capital market in Asia’s local currencies. This realization gave way to the idea for the Asian Bond Market (ABM).84

83

IIMA 2002. Thailand initiated discussion of an Asian bond market in 2002, with Prime Minister Thaksin proposing that members of ASEAN+3 contribute one percent of their respective country’s foreign exchange reserves to launch a regional fund to purchase Asian bonds. The EMEAP (Executives’ Meeting of East Asia and Pacific Central Banks) set up the ABF in June 2003. The central banks of eleven AsiaPacific countries (including Australia and New Zealand) pledged $1 billion for the purchase of semi-sovereign and sovereign bonds from less advanced countries in the region (i.e., excluding Japan, Australia or New Zealand). At this stage, the bonds that this fund would purchase were all US dollar-denominated. In June 2005, however, as the second phase of the Asian Bond Fund (ABF2) was launched, the fund began to invest in bonds denominated in Asian currencies with a $2 billion fund. The third phase of ABF, currently being discussed, aims at providing credit enhancement to sovereign and private Asian bonds. Business Times Singapore, 16 November 2005. 84

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As early as the 1998 New Miyazawa Initiative, the MOF was interested in supporting local bond market development to tap into local savings and avoid heavy reliance on foreign capital. In December 2002, Japan officially proposed the idea of the ABMI at an ASEAN+3 meeting in Thailand. Its aims were twofold: to facilitate access to the market through a wider variety of issuers, and to enhance market infrastructure to foster bond markets in Asia.85 Under this initiative, the Japan Bank for International Cooperation (JBIC) guaranteed issuances of local-currency denominated bonds.86 Furthermore, six working groups under the ABMI umbrella are working to establish market infrastructure including a regional bond-rating system.87 The Japanese government has, in this way, taken the initiative in the ABM, but the jury is still out on its success in nurturing the local currency (or Asian Currency) bonds. 4.4.2 Japan’s Role in a Regional Financial Architecture The new architecture in monetary and financial affairs reflects quite immediately the region’s AFC experiences, when the need for regional policy autonomy, bargaining power, and a possible measure for insulation intensified. The different levels of progress made in these three areas underscores three fundamental challenges to Japan’s role in regional financial institution building. First, the domestic politics of finance have defined the parameters of Japan’s contribution to a regional financial architecture. On the one hand, as seen in the case of the CMI, there was no immediate need for the Japanese government to rely on its private financial sector to 85

Online , accessed on September 2006. 86 Several local-currency bonds have been issued since the establishment of ABMI including South Korea, Thailand, China, the Philippines, Malaysia and Indonesia. 87 The six working groups are: New securitized debt instruments (WG1); Credit guarantee and investment mechanisms (WG2); Foreign exchange transactions and settlement issues (WG3); Issuance of bonds denominated in local currencies by Multilateral Development Banks (MDBs), foreign government agencies, and Asian multinational corporations (WG4); Rating systems and information dissemination on Asian bond markets (WG5); and Technical assistance coordination (WG6).

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implement its policies, which made it relatively easy for the MOF and the BOJ to shape the emergency funding mechanism among the finance ministers and central bankers, and to proceed to discussions of regional monitoring and surveillance. On the other hand, internationalizing the yen remains quite difficult for the Japanese government: regardless of how much it promotes the issue for the sake of regional financial stability, private financial and business actors are yet to be persuaded to use the yen more often for their business transactions. Finally, the future success of ABMI also depends on how much the country’s private financial sectors can buy into the framework. It has been argued that the Japanese government is keenly interested in a regional bond market, for the country is increasingly interested in enticing nonresident holders of Japan Government Bonds (JGB).88 Yet Asian governments with advanced capital markets (like Japan and Singapore) need to produce sufficiently solid infrastructure and regional public and private bond issuers so that the regional private investors, such as Japanese security firms, will be motivated to invest actively in the region. The second factor affecting Japan’s role in the regional financial architecture is the question of membership. Both the fluidity of the definition of “Asia” as a region and the overlapping financial institutional arrangements therein complicate Japan’s provision of regional public goods. In particular, the inclusion and exclusion of the United States, and to a lesser extent of Australia and New Zealand, is important. Because the demand for regional financial institutions emerged out of the AFC experience, which produced dissatisfaction with the APEC process and the monopoly of the IMF and “Washington Consensus,” it made sense, at least at the initial stage of financial institution building, to exclude these countries. As the focus shifted from crisis management to monitoring and surveillance and from exchange rate and currency management to the bond market, Japan began to look more fondly on inclusion of other wealthy countries. For example, the ABF includes the central banks of Australia and New Zealand to boost its funding base. Furthermore, as the goal of regional financial architecture shifted from defending and insulating regional finance 88

Anthony Rowley, “New US$1.5 billion Asian bond fund to be launched: It will invest in bonds denominated in Asian currencies,” Business Times Singapore, 17 November 2003.

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to enhancing the attractiveness of the Asian financial environment, exclusion of the United States, Australia, and New Zealand began to make less sense. On political grounds, Japan has always needed a strong ally to counterweigh China.89 The third factor is the long-term power transition trajectory in the region. As discussed earlier, the power-rivalry between Japan and China began to intensify in the mid-1990s and has had an impact on the type of regional institutional design.90 Japan, in relative decline, has strong incentives to produce “institutional lock in” while it has the power to define regional institutions. These institutions are even more essential for a declining power when they house high institutional inertia, as observed in the use of currencies. China, the rising power, prefers to avoid being locked in to permanent or semi-permanent institutions now and to wait until it can dictate more advantageous institutional terms later. So with the possible exception of cases of urgent institutional need observed in the CMI, China has objected to many of Japan’s proposals. Hence, Japan’s role as regional public good supplier has to be endorsed by the emerging power for the regional institution to gain traction. The precarious nature of the dynamics between two opposing regional hegemons is quite obvious. 4.5 Conclusion In the past few years, Japan has displayed unprecedented activism in the construction of a new regional institutional architecture in the areas of trade and finance. Japan’s urge to formalize the regional economic architecture was influenced by the triple shocks. The end of the Cold War created uncertainty about the US commitment to East Asian security in the context of the rise of China, prompting Japan to take a more assertive role in the region. The AFC exposed the vulnerability of existing monetary and financial arrangements in Asia; while it affirmed Japan’s inability to act as the leading crisis manager, it opened 89 Hamashita 1997 argues that Japan has historically used the West to counterbalance China. 90 Grieco 1997 argues the dramatic “relative disparity shift” taking place in East Asia prevents the region from formalizing the regional institutions despite their high economic interdependence.

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up political space for Japan to pursue more assertive trade integration without triggering distrust from its Asian neighbors. Finally, Japan’s support for the Bush administration’s War on Terror led to the improvement of US–Japanese relations and gave Japan more leeway to pursue regional economic projects. In a short period, Japan has engaged in the supply of regional club goods. Japan’s institutional initiatives aimed to respond to adverse international and regional trends (US regionalism, the AFC, the rise of China), open new economic opportunities for private actors, and enhance the government’s influence in regional affairs. On trade matters, Japan is actively constructing a network of FTAs with Southeast Asian developing nations. Japan has labeled its own brand of preferential trade agreements “EPAs” in order to emphasize a broader concern with economic development and trade facilitation. Critics, however, have argued that Japan has supplanted painful market opening concessions with vague promises of economic cooperation. With respect to financial markets, Japan has been active in the construction of regional schemes for emergency funding, currency mechanisms, and bond markets. The progress made on these financial initiatives has been uneven, however, as East Asia is nowhere near a “yen bloc.” Domestic politics have fundamentally shaped the type of economic club goods Japan has been prepared to offer to the region. Agricultural protectionism has been the most important stumbling block regarding FTAs, although labor’s opposition to meaningful concessions on migration has also complicated negotiations with countries such as the Philippines and Thailand. Similarly, in the case of finance, private actors’ indifference to the Japanese government’s policy goals has constrained initiatives toward the construction of regional institutions. A case in point is the rapid withdrawal of capital by Japanese banks in the wake of the AFC, which greatly discredited the government’s campaign to exert decisive leadership to help the region recover from the massive outflow of foreign capital. Although a number of themes are common to both trade and finance – path-breaking institutional responses to adverse international trends, tempered by the realities of domestic politics – there are significant differences between trade and financial matters. In a nutshell, financial

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issues have produced a more inclusive set of nascent regional institutions, whereas trade institution building has generated a more fragmented network of bilateral FTAs linking Japan on preferential terms not only to Southeast Asian nations but also to countries outside the region, albeit bypassing Northeast Asia thus far. The question, therefore, emerges as to what accounts for these important differences. Three factors in particular seem to explain the different outcomes in institution building for trade and finance: the main impetus behind the policy change; the existence (or lack thereof) of a mutual understanding and interests between China and Japan; and the reaction of the extra-regional hegemon. As mentioned earlier, the AFC exerted a decisive influence in the decision of the Japanese government to construct a regional institutional alternative to the IMF and bring financial stability back to the region. On the other hand, although the AFC facilitated Japan’s new trade initiatives by ameliorating the traditional distrust of its neighbors toward Tokyo’s displays of leadership and justifying more formal trade arrangements, Japan’s launch of an FTA policy was more directly a response to diversion from preferential trading blocs elsewhere in the world. For these reasons, Japan’s FTA policy has had from its inception a cross-regional element, and has proceeded bilaterally in order to address specific concerns with market access. Moreover, the reality of two competing would-be hegemons in East Asia has also influenced the shape of the new institutional architecture. As noted above, Japan’s region-wide institution building proposals must be endorsed by China in order to get traction. Although far from easy, this has already taken place in finance with their joint participation in the CMI. However, no such understanding has ensued in the case of trade. On the contrary, Japan and China have briskly proceeded to create their own FTA networks in the region, increasing the challenge of building a region wide free trade area. Finally, US policies toward East Asian financial and trade regionalism have diverged, producing more vocal opposition to the former than to the latter for two reasons. First by doing so, the United States had already “defected” from the multilateral system by negotiating NAFTA; it was poorly positioned to criticize East Asian trade regionalism. In finance, however, Japan’s AMF proposal was considered

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 143

a direct challenge to the multilateral IMF, and the United States decisively opposed any such notion. Second, the United States has not been worried about the creation of an inward-looking discriminatory Northeast Asia free trade area, given the limited progress that regionwide trade initiatives have made so far. Northeast Asia’s institutional architecture has not yet reached an equilibrium point. On the contrary, it is still under construction. Interestingly, although finance and trade represented two opposite alternative models to institution-building (region wide Asian institutions versus bilateral intra- and cross-regional FTAs), they seem to be moving toward greater convergence. As the main supplier of funds, Japan is now more eager to allow participation from outsiders in financial institutions. But on the trade front, the United States was not invited to the discussion of a possible East Asian FTA during the first East Asian Summit held in Kuala Lumpur on December 2005.91 Although it is far from clear that the East Asian Summit process will yield any concrete results, especially given the Japanese and Chinese disagreements over membership,92 it marks the crossing of another threshold in the path towards regional institution-building. References Aggarwal, Vinod K. and Shujiro Urata, eds. 2006. Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications. New York: Routledge. Ahearn, Raymond J. 2005. Japan’s Free Trade Agreement Program. CRS Report for Congress. Available from . Amyx, Jennifer. 2001. Political Impediments to Far-reaching Banking Reforms in Japan: Implications for Asia. In The Asian Financial Crisis and the Architecture 91 According to some, the U.S push to negotiate a Free Trade Area of the AsiaPacific during the November 2006 APEC meeting in Hanoi was an attempt to both revive the Doha Round and to prevent the creation of an inward looking East Asian economic bloc. See Sugawara 2007 for a discussion of US motives. However, the obstacles to this initiative are very high since it would entail abandoning the core APEC principles of voluntarism and non-discrimination, and the American Congress refused in the summer of 2007 to extend fast track authority to the Executive. 92 While China supported membership for the ASEAN+3 nations only, Japan advocated the inclusion of India, Australia, and New Zealand.

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of Global Finance, edited by Gregory Noble and John Ravenhill. Cambridge, UK: Cambridge University Press. Aoki, Maki. 2004. New Issues in FTAs: The Case of Economic Partnership Agreements between Japan. Paper presented at the APEC Study Centers Consortium Meeting. Available from . Ashizawa, Kuniko. 2004. Japan, the United States, and Multilateral InstitutionBuilding in the Asia-Pacific. In Beyond Bilateralism: U.S.-Japan Relations in the New Asia-Pacific, edited by Ellis Krauss and T.J. Pempel. Stanford, Calif.: Stanford University Press. Council on Foreign Exchange and Other Transactions. 1999. Internationalization of the Yen for the 21st Century: Japan’s Response to Changes in Global Economic and Financial Environments. 20 April. Available from . Dent, Christopher. 2006. New Free Trade Agreements in the Asia-Pacific. Basingstoke, UK: Palgrave Macmillan. Drifte, Reinhard. 1998. Japan’s Foreign Policy: From Economic Superpower to What Power? London, UK: Palgrave McMillan. Ethier, Wilfred J. 1998. The New Regionalism. The Economic Journal 108 (July): 1149-1161. Frankel, Jeffrey. 1999. No Single Currency Regime is Right for All Countries or at All Times. Essays in International Finance No. 215 (August). International Finance Section, Princeton University. Friman, H. Richard, Peter J. Katzenstein, David Leheny, and Nobuo Okawara. 2006. Immovable Object? Japan’s Security Policy in East Asia. In Beyond Japan: The Dynamics of East Asian Regionalism, edited by Peter J. Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell University Press. Goldstein, Morris. 1998. The Asian Financial Crisis: Causes, Cures, and Systemic Implications. Policy Analyses in International Economics #55, Washington D.C.: Institute for International Economics. Green, Michael. 2001. Japan’s Reluctant Realism: Foreign Policy Challenges in an Era of Uncertain Power. London, UK: Palgrave McMillan. Grieco, Joseph. 1997. Systemic Sources of Variation in Regional Institutionalization in Western Europe, East Asia, and the Americas. In The Political Economy of Regionalism, edited by Edward D. Mansfield and Helen V. Miner. New York: Columbia University Press. Grimes, William W. 2001. Internationalization of the Yen and the New Politics of Monetary Insulation. In Governing Money: Ambiguous Economics, Ubiquitous Politics, edited by Jonathan Kirshner. Ithaca, New York: Cornell University Press. Hamashita, Takeshi. 1997. The Intra-Regional System in East Asia in Modern Times. In Network Power: Japan and Asia, edited by Peter Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell University Press. Hamilton-Hart, Natasha. 2006. Creating a Regional Arena: Financial Sector Reconstruction, Globalization, and Region-Making. In Beyond Japan: The Dynamics of

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 145 East Asian Regionalism, edited by Peter J. Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell University Press. Hatakeyama, Noboru. 2002. Short History of Japan’s Movement to FTAs (Part 1). Journal of Japanese Trade & Industry (November/December): 24-25. Haggard, Stephan. 2000. The Political Economy of the Asian Financial Crisis. Washington D.C.: Institute for International Economics. Hartman, Philipp. 1998. Currency Competition and Foreign Exchange Market. Cambridge, UK: Cambridge University Press. Helleiner, Eric. 2000. Still an Extraordinary Power, but for how much Longer? The United States in World Finance. In Strange Power: Shaping the Parameters of International Relations and International Political Economy, edited by Thomas C. Lawton, James N. Rosenau, and Amy C. Verdun. Aldershot, UK: Ashgate. Henning, C. Randall, 2002. East Asian Financial Cooperation. Policy Analyses in International Economic series #68. Washington D.C.: Institute for International Economics. Higgott, Richard. 1998. The Asian Economic Crisis: A Study in the Politics of Resentment. New Political Economy 3 (3): 333-356. Hughes, Christopher W. 2000. Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet Victory? Review of International Political Economy 7 (2):219-253. Institute for International Monetary Affairs (IIMA). 2004. Report Summary of Studies on Toward [sic] a Regional Financial Architecture for East Asia. Available from . Japan’s Cabinet Office. 2004. Keizai zaisei unei to kôzô kaikaku ni kansuru kihon hôshin [Basic policy on structural reform and economic and fiscal management]. Available from . Katada, Saori N. 2001. Banking on Stability: Japan and Cross-Pacific Dynamics of International Financial Crisis Management. Ann Arbor, Mich.: University of Michigan Press. Keidanren. 2000. Urgent Call for Active Promotion of Free Trade Agreements Toward a New Dimension in Trade Policy. Available from . Krauss, Ellis. 2003. The United States and Japan in APEC’s EVSL Negotiation: Regional Multilateralism and Trade. In Beyond Bilateralism: U.S.-Japan Relations in the New Asia-Pacific, edited by Ellis Krauss and T.J. Pempel. Stanford, Calif.: Stanford University Press. Kuroda, Haruhiko, and Masahiro Kawai. 2003. Strengthening Regional Financial Cooperation in East Asia. PRI Discussion Paper Series (no. 03A-10), Tokyo: Policy Research Institute, Ministry of Finance, Japan. Lee, Young Wook. 2006. Japan and the Asian Monetary Fund: An Identity-Intention Approach. International Studies Quarterly. 50 (2):339-366.

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Leheny, David. 2001/2002. Tokyo confronts terror. Policy Review 110, (DecemberJanuary): 37-48. Lincoln, Edward. 2004. East Asian Economic Regionalism. Washington, DC: Brookings Institution. McLeod, Ross and Ross Garnaut. 1998. East Asia in Crisis: From Being a Miracle to Needing One. London, UK: Routledge. Midford, Paul. 2003. Japan’s Response to Terror. Dispatching the SDF to the Arabian Sea. Asian Survey 43 (2):329-351. Mulgan, Aurelia George. 2005. Where Tradition Meets Change: Japan's Agricultural Politics in Transition. The Journal of Japanese Studies 31 (2):261-298. Munakata, Naoko. 2006. Transforming East Asia. The Evolution of Regional Economic Integration. Washington, DC: Brookings Institution Press. Noble, Gregory, and John Ravenhill. 2000. Causes and Consequences of the Asian Financial Crisis. In The Asian Financial Crisis and the Architecture of Global Finance, edited by Noble and Ravenhill. Cambridge, UK: Cambridge University Press. Nye, Joseph, Jr. 1995. The Case for Deep Engagement. Foreign Affairs 74 (4):90-102. Ogata, Sadako. 1989. Shifting Power Relations in Multilateral Development Bank. The Journal of International Studies 22:12. Ogita, Tatsushi. 2003. Japan as a Late-Coming FTA Holder: Trade Policy Change for Asian Orientation? In Whither Free Trade Agreements? Proliferation, Evaluation, and Multilateralization, edited by Jiro Okamoto. Tokyo: Institute of Developing Economies. Ozawa, Ichiro. 1994. Blueprint for a New Japan: The Rethinking of a Nation. Tokyo: Kodansha International. Park, Yung Chul and Yunjong Wang, 2005. The Chiang Mai Initiative and Beyond. The World Economy 28 (1):91-101. Pekkanen, Saadia, Mireya Solís, and Saori Katada. 2007. Trading Gains for Control: Forum Choices in international trade and Japanese economic diplomacy. International Studies Quarterly 51 (4):945-970. Pempel, T. J., ed. 2005. Remapping East Asia: The Construction of A Region. Ithaca, New York: Cornell University Press. Pempel, T. J., ed. 1999. The Politics of the Asian Economic Crisis. Ithaca, New York: Cornell University Press. Pempel, T.J. and Shujiro Urata. 2006. Japan: A New Move toward Bilateral Trade Agreements. In Bilateral Trade Agreements in the Asia-Pacific: Origins, Evolution, and Implications edited by Vinod K. Aggarwal and Shujiro Urata. London, UK: Routledge. Pyle, Kenneth. 1992. The Japanese Question: Power and Purpose in a New Era. Washington D.C.: AEI Press. Rapkin, D. P. and J.R. Strand. 1997. The United States and Japan in the Bretton Woods Institutions: Sharing or Contesting Leadership? International Journal 52: 265-296. Ravenhill, John. 2001. APEC and the Construction of Pacific Rim Regionalism. Cambridge, UK: Cambridge University Press.

Under Pressure: Japan’s Institutional Response to Regional Uncertainty 147 ———. 2003. The New Bilateralism in the Asia Pacific. Third World Quarterly 24 (2):299-317. Snyder, Glenn. 1997. Alliance Politics. Ithaca, New York: Cornell University Press. Solís, Mireya. 2003. Japan’s New Regionalism: The Politics of Free Trade Talks with Mexico. Journal of East Asian Studies 3: 377-404. ———. 2006. How Japan’s Economic Class Views China and the Future of Asian Regionalism. Japan Institute of International Affairs Policy Report (July). Available from . Solís, Mireya and Saori N. Katada (2007a). Understanding East Asian CrossRegionalism: An Analytical Framework. Pacific Affairs 80 (2). ———. (2007b). The Japan-Mexico FTA: A Cross-regional Step in the Path Toward Asian Regionalism. Pacific Affairs 80 (2). Solís, Mireya and Shujiro Urata. 2007. Japan’s New Foreign Economic Policy: A Shift towards a Strategic and Activist Model? Asian Economic Policy Review 2 (2):227-245. Sugawara, Junichi. 2007. The FTAAP and Economic Integration in East Asia: Japan’s Approach to Regionalism and US engagement in East Asia. Mizuho Research Paper, no. 12. Available from . Urata, Shujiro. 2005. Free Trade Agreements: A Catalyst for Japan’s Economic Revitalization. In Reviving Japan’s Economy: Problems and Prescriptions, edited by Takatoshi Ito, Hugh Patrick and David E. Weinstein. Cambridge, Mass.: MIT Press. Wesley, Michael. 1999. The Asian Crisis and the Adequacy of Regional Institutions. Contemporary Southeast Asia 21 (1):54-73. Yanagihara, Toru. 2004. Nihon no ‘FTA senryaku’ to ‘kantei shodô gaikô’ [Japan’s FTA strategy and Prime Minister-led Diplomacy]. Kaigai jijô (April): 92-108.

5 North Korea’s Strategy for Regime Survival and East Asian Regionalism

Sang-young Rhyu Yonsei University, Seoul, South Korea

5.1 Introduction1 Recently, East Asia has been at the center of academic debate regarding the political economy of regionalism, often focused on explaining East Asia’s weakly institutionalized mechanisms of regional cooperation. Despite the attention given to it as a country in the region, the Democratic People’s Republic of Korea (hereafter North Korea or DPRK) has never figured prominently in this debate – unsurprisingly, given its prominence in the nuclear issue and the Six-Party Talks consisting of the United States, China, Russia, Japan, and Two Koreas. However, considering that regionalism can exist in a variety of levels, types and paths, and that the nuclear issue and the Six-Party Talks can be directly related to regionalism, we should not ignore the effect of North Korea’s historical transformations and shifts of preferences and capability on East Asian regionalism. Due to Pyongyang’s capacity to sow political and economic uncertainty and instability, the resolution of key issues surrounding North Korea is a necessary condition for regional cooperation in both the security and economic arenas. So, how should North Korea be discussed in the debate on East Asian regionalism? Can the North Korean economy be considered independent with regard to regionalism? If North Korea is to become a 1

For their comments and editorial assistance, I would like to thank Jonathan Chow, Edward Fogarty, and Kristi Govella.

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potential participant in East Asian regionalism, which paths can it take? Faced with decisions between either external or internal factors, and security or trade goods, which might have a bigger influence on the DPRK, and under which framework will they be combined? Can the development of East Asian regionalism be a medicine or a poison to Kim Jong-il’s regime survival? What type of regionalism does North Korea prefer? This chapter explores these questions. Section 5.2 provides a brief overview of North Korea’s place in the equilibrium of the Cold War. In the context of bipolar confrontation, North Korea enjoyed relative stability and security, remaining unaffected by external pressure and hostile to East Asian regionalism. Section 5.3 describes the subsequent transformation of North Korean prospects in the wake of the Cold War, while Sect. 5.4 addresses the aftermath of the Asian financial crisis, both focusing on the factors that led North Korea to seek engagement. Section 5.5 pays special attention to the last of the three major shocks, the post 9-11 crisis. It addresses the economic integration initiatives among North Korea, South Korea and China, with a particular focus on the Gaeseong Industrial Complex as a pioneering regional project. It also considers the North Korean nuclear issue as a threat to regional integration, examining how security issues play into functional or economic regionalism. Section 5.6 looks at the dynamic interactions between security goods and trade goods on the Korean Peninsula and in East Asia, exploring whether the current stalemate can be broken to the benefit of East Asian regionalism. The study concludes with an overview and assessment of North Korea’s likely path toward inclusion within East Asian regionalism. 5.2 North Korea’s Development in the Cold War Equilibrium The containment policy of the United States after 1947, the division of the Korean Peninsula in 1948, the outbreak of the Korean War in 1950, and the cease-fire in 1953 were major historic events shaping the Cold War framework surrounding the Korean Peninsula. North Korea continued to develop politically and economically based on a triangular socialist alliance with the Soviet Union and China against

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the capitalist alliance of the United States, Japan, and South Korea. Based on Kim Il-sung’s Juche ideology and the ‘Socialism of Our Style’ institutionalized in the Socialist Constitution of 1972, North Korea established perhaps the hardest authoritarian regime in human history. It also achieved rapid economic growth by emphasizing heavy industries to reinforce military power. Military and economic support from the Soviet Union and China played the critical role both in solidifying North Korea’s system and maintaining a regional anti-capitalist bulwark against the United States. The Soviet Union played a decisive role in the formation of the Kim Il-sung regime. China established a blood alliance with the North by participating in the Korean War in 1950, and established a formal military alliance in 1961 under which each party was obliged to intervene if the other was attacked. These three countries were united formally and informally through bilateral institutions and networks in politics, trade, military, ideology and culture. Throughout the Cold War era, Pyongyang’s amicable ties with each continued even as relations between Moscow and Beijing soured. However, this ‘concentrated bilateralism’ with the Soviet Union and China left North Korea with little experience with regionalism or global multilateralism, nor any motivation to pursue them; ‘regionalism’ for North Korea came only in the form of confronting US, Japanese, and South Korean hostility.2 5.3 Early Attempts at Integration after the End of the Cold War The collapse of the Soviet bloc in 1989–1991 brought major – indeed an existential – crisis for the North Korean regime. Above all, its traditional bilateral relations with Beijing and Moscow changed fundamentally. The change in China–North Korea relations manifested itself in Pyongyang’s need to cope with the establishment of diplomatic ties between China and South Korea in 1992.3 China maintained its 2 3

Rozman 2004, 24. Chambers 2005, 56. China’s recognition of South Korea came in the wake of China’s disapproval of North Korea’s terror activities in Burma in 1983, the optimism following Seoul’s hosting the Olympic Games in 1988, and South Korea’s support of Beijing’s bid to host the Asian Games in 1990.

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political relations with North Korea and continued to provide economic assistance, but needed economic cooperation with South Korea for development reasons. Meanwhile, Moscow’s relations with Seoul improved in 1991 after the South Korean government provided a $300 million dollar loan to disintegrating communist regime. Eventually, the two countries established formal diplomatic ties as the result of the Roh Tae-woo government’s ongoing “northern strategy.” North Korea’s trade environment changed considerably due to the end of the Cold War. Moscow could no longer afford to provide military and economic assistance to Pyongyang, dissolving North Korea’s most important trade and aid relationship. As shown in Table 5.1, the collapse of the Soviet Union had very direct effect on the trade of North Korea. Until just before its collapse in 1990, the Soviet Union was the top trade partner of North Korea.4 After the Soviet collapse, China took the top spot and Japan emerged as the second leading trade partner of North Korea. Japan surpassed China to become the top trade partner of North Korea in 1995. However, China subsequently reclaimed its former status and has remained the DPRK’s top trade partner since then, with the gap between Chinese and Japanese trade with North Korea widening with each passing year. Table 5.1 North Korea’s leading trade partners, 1990–1996 (millions of US$) Exports

Imports

Japan China S.Korea Russia Japan China S.Korea Russia

1990 300 125 12 1,047 176 358 1 1,668

1991 284 86 106 171 224 525 6 194

1992 257 156 163 65 223 541 11 227

1993 252 297 178 39 220 602 8 188

1994 323 199 176 40 171 425 18 100

1995 340 64 223 16 255 486 64 68

1996 291 69 182 29 227 497 70 36

These structural changes prompted an equally pivotal change in North Korean politics. No longer able to rely on Moscow or Beijing to ensure the survival of its regime, North Korea chose to pursue a strategy of normalizing relations with the United States and also acquiring nuclear weapons, policies which proved to be incompatible with each other. By becoming a member of the United Nations and 4

Rhyu 2004.

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participating in key UN agencies and in improving relations with the South, the Kim Il-sung regime sought to secure economic aid from the international community, with the hope of eventually producing an atmosphere for normalization of diplomatic ties with the United States and Japan. Inter-Korean relations made rapid progress in the early 1990s. At the sixth inter-Korean high-level meeting in Pyongyang in February 1992, North and South Korea reached the Agreement on Reconciliation, Nonaggression, Cooperation and Exchange, and the Joint Declaration on the Denuclearization of the Korean Peninsula. At the time, interested parties were optimistic that these agreements could help the two Koreas alleviate mutual suspicions and take a first step toward reunification of the Korean Peninsula.5 In 1992, Pyongyang and Seoul reached the South–North Basic Agreement, laying the foundation for mutual recognition through the United Nations and reaffirming the goal of a nuclear-free Korean Peninsula. This early post-Cold War improvement in inter-Korean relations came in the context of a more general North Korean strategy of participating in global institutions and regional networks to encourage economic growth and enhance its status at home and abroad. Twelve years after entering the United Nations Development Program (UNDP), North Korea joined the UN General Assembly in 1991, at the same time as South Korea. After admittance into the General Assembly, North Korea opened the door for the involvement of other agencies, including the United Nations Educational, Scientific and Cultural Organization (UNESCO), the United Nations Industrial Development Organization (UNIDO) and, after 1995, the World Food Program and the Food and Agriculture Organization.6 However, following the Soviet collapse, Kim Il-Sung watched nervously as North Korea grew increasingly isolated. Unable to balance South Korea’s diplomatic success with a breakthrough with the United States, he continued with his military buildup. Faced with weaker ties to Moscow and Beijing, US global hegemony, and economic backwardness, North Korea elected to develop nuclear weapons to ensure deterrence and regime security – despite the clear prospect of 5

For a description of these agreements, see the website of South Korea’s Ministry of Unification. Available from . 6 In 1993, the UNDP and the UNIDO launched together a Management Development Plan. See Beck and Reader 2005. 41–42.

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international isolation and in apparent contradiction of previous diplomatic efforts.7 North Korea had previously ratified the Nuclear Nonproliferation Treaty (NPT), in December 1985, agreeing to the obligations under Article II of the NPT as a non-nuclear weapon state: not to receive any nuclear weapons or related technology, not to seek assistance in the manufacture of nuclear weapons, and most importantly, not to manufacture any nuclear weapons. Under Article III, Pyongyang was also obligated to conclude a safeguards measure agreement with the International Atomic Energy Agency (IAEA). Breaking with this stance, North Korea announced its withdrawal from NPT on March 12, 1993, prompting the first nuclear crisis on the Korean Peninsula. After substantive talks with the Clinton administration on June 11, 1993, North Korea decided to return to the NPT.8 Consequently, it allowed safeguard inspections to resume. Further monitoring was included in the Agreed Framework, signed by North Korea and the United States on October 21, 1994, which aimed to suspend plutoniumbased nuclear weapons development in return for heavy oil and the eventual construction of light-water nuclear reactors (LWRs).9 The institutional mechanism for this agreement was called the Korean Peninsula Energy Development Organization, or KEDO. Long before the 2003 target date for each side to fulfill its obligations, cooperation under KEDO broke down. Suspicious that North Korea was failing to comply, the United States stopped delivery of heavy oil and the construction of LWR was suspended. By 2006, KEDO was officially dismantled, dashing Pyongyang’s hopes of gaining a position of strength through the simultaneous pursuit of nuclear weapons and US recognition. Kim Il-sung subsequently decided that weapons of mass destruction (WMD) offered the greatest security for his regime. However, his sudden death brought internal crisis to match North Korea’s mounting political and economic difficulties and shifted decision-making to his son and successor, Kim Jong-il, who responded to economic hardship with ideology and political control and continued to develop WMD as a part 7 8

Rozman 2004, 68. Pyongyang simultaneously made overtures to Seoul, suggesting a summit talk meeting with then-president Kim Young-sam of South Korea in 1994. 9 Yoo 2004, 48-50.

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of North Korea’s emerging military-first ideology (Sungun Jeongchi). Kim Jong-il followed his father’s instructions for five years to solidify his power foundation. In addition, as a political strategy to solve economic difficulties and escape from isolation in the international arena, he declared a “March of Hardship” in the mid-1990s when the country was faced with continuous drought and famine. He cut off relations with foreign countries and strengthened his control of the country during this period. 5.4 Aftermath of the 1997 Asian Financial Crisis Although North Korea was not directly affected by the Asian financial crisis due to its economic isolation, it was not immune to indirect effects. Above all, trade with South Korea – which had increased steadily since the late 1980s, and was now a major source of income – fell (see Figure 5.1). Though this drop was temporary, it was a heavy blow to the North Korean economy.

10

Fig. 5.1 Fluctuation in North–South Korea trade volume by year11

Meanwhile, the Asian financial crisis demonstrated how the fluctuations of US-backed globalization processes and regional responses could impinge on North Korea. The dictates of international economic 10 11

Ibid. Ministry of Unification 2005: 87.

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integration exerted substantial influence on North Korea’s most important trading partner, China. Despite weathering the financial storm in 1997–98, China was affected by global and regional financial pressures of globalization, and increasingly followed a policy toward North Korea based on a practical economics rather than shared ideology or political goals. In particular, China’s entry into the WTO in 2001 made it difficult to maintain the traditional pattern of economic relations under the changed international circumstances. During this period, the Washington-based international financial institutions began to engage North Korea and sought to draw it into the global economy. The International Monetary Fund (IMF) dispatched a fact-finding mission to Pyongyang in 1997, and in February 1998 delegates of the World Bank followed suit. Together with the Asian Development Bank (ADB), the IMF and the World Bank have tended to emphasize potential non-lending roles in North Korea, focused on economic evaluation, policy and business practice advice, and technical assistance.12 Though North Korea’s engagement with these institutions remains weak, they provide a potential path toward integration with both the global economy and regional partners. North Korea cannot ignore these international organizations; its leadership has recognized that development aid from international organizations or international consortiums may be necessary to achieve economic growth. Starting in July 2002, North Korea has haltingly adopted meaningful economic reforms with significant capitalist elements. Still, these reforms have been limited, and have yet to produce significant gains. They reflect North Korea’s continuing dilemma of restructuring its economy without weakening the existing political system. During this period, North Korea also took halting steps toward greater regional security cooperation. In 2000, it joined a regional security grouping, the ASEAN Regional Forum (ARF). The ARF remains the only multilateral framework for political and security dialogue at the governmental level in East Asia, bringing together foreign ministers from Southeast Asian nations with other key regional players such as China, Japan, South Korea, and the United States to discuss regional security issues. 12

Peter and Nicholas 2005, 43; and Babson 2005, 22.

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Two factors pushed North Korea to become a member of the ARF. First, Kim Jong-il saw improved relations with the international community as a possible avenue to acquire greater foreign economic assistance. Second, other ARF members were eager to draw North Korea into the forum.13 Given the importance of Korean Peninsula security issues on the ARF agenda, North Korea’s membership was necessary to make the forum into a locus in which real progress could be made. Although Pyongyang’s passive participation in the ARF has exposed the limitations of the institution, North Korea’s participation at least raised hopes that an inclusive multilateral dialogue would bear fruit. 5.5 Post-9/11 North Korean Regionalism: The Gaeseong Special Economic Zone and the Six-Party Talks Like the Asian financial crisis, the terrorist acts on September 11, 2001 did not directly affect North Korea but produced significant indirect effects – in this case, a deterioration in North Korea–US relations in the face of a newly muscular US security strategy and anti-terror policies. After the incident, the Bush administration declared a global war against terrorism, greatly increasing the military budget and shrugging off diplomatic constraints on unilateralism. The eradication of terrorism by means of force rather than dialogue became its overriding goal. Economic cooperation and functional issues faded before the urgency of global anti-terrorist security. Already under a variety of sanctions as a state sponsor of terrorism, North Korea quickly found itself in the crosshairs of the new American policy. In January 2002 President George W. Bush denounced North Korea as a member, with Iran and Iraq, of an “axis of evil”, singling out Kim Jong-il as a potential perpetrator of nuclear terrorism. The United States strengthened sanctions and containment against North Korea, targeting its development and ownership of WMD and proliferation to other countries. 13 Surin Pitsuwan, then Thailand’s foreign minister, played an important role at the 7th ARF meeting in 2000. He contacted Mr. Hun Sen, the Prime Minister of Cambodia, and through him asked the Cambodian monarch, King Shianouk (who once took refuge in Pyongyang during Cambodia’s crisis in the 1980s) if the King would use his connections to persuade North Korea to join.

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The September 11 attack initiated a shift in regional approaches to North Korean WMD. The Bush administration denounced the Agreed Framework and the Clinton administration’s North Korea policy more generally as a failure, and closed off existing channels of dialogue. In October 2002, the administration verified evidence that North Korea held a new uranium enrichment program. Based on the assumption that Pyongyang was a willing and ready nuclear proliferator to state and nonstate actors alike, the US declared unequivocally that there would be no dialogue until the North gave up all nuclear weapons.14 The Bush administration’s unilateralism reversed the Clinton administration’s benign neglect of East Asian regionalism. The Clinton administration policy had operated on the premise that East Asia’s regionalism could help China and North Korea both engage in the international community and reform themselves; in sharp contrast, the Bush administration believed that East Asian regionalism would make China and North Korea even more dangerous. For Bush, security trumped economics: it would be better to face a security threat early than to allow economic gains to generate a greater threat in the future.15 Under the circumstances, the Bush administration looked warily on signals of regional comity such as Japanese Prime Minister Junichiro Koizumi’s visit to Pyongyang in September 2002 and the increasingly reconciliatory atmosphere between China and Japan. The Bush administration’s post-9/11 policies seemed increasingly intolerant of regionalism (except in the EU, where it was a fait accompli) and geared instead toward ‘security globalization.’ The administration insisted not only on its own leadership in Northeast Asian security issues, but also on linking economics to security. In September 2002, the new U.S National Security Strategy (also known as the Bush Doctrine) presented a rationale for preemptive war and prevention of China’s rise as a military rival.16 Since that time, Washington has looked increasingly askance on South Korea’s sunshine policy and sought to promote a common strategy of pressuring North Korea. Despite this, however, North Korean efforts to open its economy and perhaps increase its engagement of East Asia’s regionalism can be found through its attempts to pursue the Gaeseong Special 14 15 16

Rozman 2004, 291. Ibid, 294. Ibid, 296.

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Economic Zone (SEZ), which may reflect a shift away from its military strategy toward economic rationality, as discussed below. It has also sought to improve relations with major international economic and financial institutions.17 In 2001, North Korea applied for membership in the Asian Development Bank, and recently indicated its intention to apply for observer status in the World Trade Organization.18 Also, its governor of the Central Bank attended the annual meeting of the Bank of International Settlement in Switzerland in 2005.19 However, these forays were deeply complicated by the ongoing nuclear standoff, also discussed below. 5.5.1 Economic Integration Initiatives: The Case of the Gaeseong SEZ In order to become a “powerful and big country” (Gangsung Daeguk), North Korea needs to improve both worker productivity and more general living conditions. Although the military-first policy and the dual economy are the key pillars of Kim’s regime, broad-scale economic reform and growth seem increasingly essential to regime survival. To this end, North Korea seems to be flirting with a China-style open-economy policy, taking economic considerations into account in addition to its traditional focus on political and military principles. There are debates about North Korea’s commitment to such a policy and its ability to imitate China successfully. However, given that North Korea is most closely connected economically with China, its economic development model (and potential response to East Asian regionalism) is most clearly influenced by China. Of particular interest to Kim Jong-il have been China’s special economic zones (SEZs), which he visits whenever he goes to China.

17

Lancaster 2004; and Moon and Lee 2004. One North Korea expert posited that North Korea had already entered the stage of “market socialism” using markets to supplement the command economy and the next logical stage was a “socialist market economy” using state intervention in key sectors to facilitate and compensate for a market economy. See Suh 2005. 18 Park Song-wu, “North Korea Hopes to Observe WTO,” Korea Times, 15 July 2005. 19 “North Korea Studies International Bank System at BIS Meet,” Reuters.

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North Korea has pursued a Special Economic Zone system since 2002, seeking to simultaneously maintain its political control and revive the economy. The Gaeseong Industrial Complex is a representative SEZ intended to simultaneously link North Korea to the East Asia market and promote inter-Korean economic cooperation.20 It is also something of an experiment, testing whether North–South economic cooperation can contribute to the enhancement of political and military peace on the Korean Peninsula.21 Any of several variables could determine the outcome of this experiment: uncertain political and security effects of economic cooperation; uncertain North Korean commitment to supporting the Gaeseong Complex; and uncertain policy responses of the United States, China, and other concerned parties.22 The Gaeseong Industrial Complex is better positioned politically and economically than other such zones, including the Rajin-Seonbong economy and trade zone and the Shinuiju Special Economic Zone. (See Table 5.2 below for comparison.) The Rajin-Seonbong zone has been official since November of 1991, but its growth has been hampered by poor infrastructure, an undeveloped market in the adjacent area, and its isolated location.23 Meanwhile, the Chungjin Industrial Complex where the Rajin-Seonbong economic zone is located is not a favorable environment for light industries. However, it is very good for heavy chemical industries, which made it very difficult to attract

20 21

Babson 1999; 2004; and 2005. The Ministry of Unification’s 2005 White Paper on Korean Unification exhibits Seoul’s optimism that the Gaeseong Complex can generate a form of ‘economic deterrence’, arguing that the promotion of inter-Korean economic cooperation will contribute to easing military tension, bringing stability and peace to the Korean Peninsula, and resolving the North Korean nuclear issue. The Gaeseong Industrial Complex will also be beneficial to North Korea in its efforts to achieve change and stable growth, encouraging North Korea to adopt further economic reforms. Furthermore, when the financial center of Seoul and the logistics function of Incheon, which are geographically close, are linked with Pyongyang and Nampo, the Gaeseong Industrial Complex is expected to serve as an outpost for economic cooperation in Northeast Asia. Ministry of Unification 2005, 117–118. 22 Lim and Lim 2006, 47–61. 23 As noted by Noland 2000, 137, the Rajin-Seonbong zone’s locale is also disadvantageous in that it must compete with the large Russian port of Vladivostok.

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foreign investment for the short-to-mid term.24 Meanwhile, although the Rajin-Seonbong SEZ was acceptable to the North Korean military due to the zone’s nonstrategic location, neighboring countries saw few incentives to make investments there, ultimately leading to its demise. Taking a lesson from this failure, North Korea became more active in its open-door policy in the Shinuiju Special Economic Zone. In September 2002, a Chinese–Dutch entrepreneur, Yang Bin, was appointed as the Chief Executive of the zone with the strong support of Kim Jong-Il, who felt the need to modernize North Korean agriculture.25 Shinuiju has a friendlier business environment than the RajinSeonbong Economic Zone, with larger markets in adjacent areas. Yet although it was created to mimic the Chinese open-market model, it eventually collapsed, largely due to Chinese opposition. Table 5.2 Comparison of North Korean special economic zones SEZ

Geopolitical features RajinLocated in the Seonbong East Sea (Dec.1991) adjacent to Russia, in competition with Vladivostok

North Korean stance Military support due to location in a non-key military area

Shinuiju (Sep.2002)

Active support.

Adjacent to Chinese development area, in competition with China. Gaeseong Adjacent to (Nov.2002) Seoul and Inchon, possible South–North Joint production base

24 25

Symbolic military stronghold, but accepted as a last alternative for economic recovery

Neighboring countries’ stance Passive or uninterested due to lack of economic feasibility and the politically closed area Strong opposition from China, neutral response from other countries

Foreign investors’ stance Passive due to poor infrastructure, undeveloped market in adjacent area, and isolated location

Positive response from neighboring countries, strong opposition from the United States

Led by Hyundai ASAN and Korean Land Corporation due to attractive environment, cheap labor and established infrastructure

Neutral due to large Chinese market near the complex

Lee, Lee and Jung 2003, 208. Chinese authorities arrested Yang on suspicion of tax evasion barely one month later. North Korea requested that China free him, but Yang was sentenced to eighteen years in prison. See Hwang 2004, 653–696.

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From an objective viewpoint, the Gaeseong Complex has a better probability of success than the other two regions due to market environment and geopolitical location. It is located in a very advantageous area in terms of logistics and consumption markets as it is in the center of Seoul, Inchon, and Pyongyang. With respect to infrastructure, it has easy access to electricity and railways of South Korea.26 Two South Korean firms, Hyundai ASAN and Korean Land Corporation, have jointly built infrastructure in the area after being selected as project partners. A number of medium and small-sized South Korean companies are also making progress on the project. Given that Gaeseong was a key military and strategic stronghold during the Korean War, North Korea’s decision to choose that location suggests a shift in focus to emphasizing economic rationality rather than political and military principles.27 While it is too early to be overly optimistic about the success of the Gaeseong Complex, at a minimum, it has contributed to peace on the Korean Peninsula by requiring North Korea to withdraw military facilities in the areas adjacent to the Gaeseong Complex. There is no accurate information regarding how and where these facilities were withdrawn, but the story of the Gaeseong Complex suggests some shift in North Korea’s military-first policy – and thus perhaps a stance less geared toward military provocation. North Korea established a more sophisticated legal system to achieve success within the Gaeseong Industrial Complex. The laws of the Mt. Geumgang Tourism Zone and the Gaeseong Industrial Zone, which the North established in November 2002, encouraged Hyundai ASAN’s tourism business in the Mt. Geumgang area and provided legal grounds for the Gaeseong project, which is jointly led by Hyundai ASAN and the Korea Land Corporation. These laws are arguably modeled after the economic reform measures in China and Hong Kong.28 Although a number of obstacles remain in financial and IT infrastructure, North Korea seems quite determined – even desperate – to see the Gaeseong project succeed. For instance, Chosun Shinbo, a pro-North Korean Japanese newspaper, released an article about 26 Hyundai Asan Corp., “Developmental Plan for Gaeseong Industrial District, 2003.” Available from . 27 Noland 2002, 179; and “After Beijing Breakthrough, What Next?” The Korea Times, 23 September 2005. 28 Kim 2004.

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the Gaeseong Special Economic Zone titled “Economic Hub of Northeastern Asia” on July 3, 2003, expressing its hopes that the Gaeseong Complex will contribute to the joint development of the Korean economy.29 Meanwhile, the North Korean regime implemented drastic economic reform measures to overcome its economic hardships. The “economic management and improvement measure,” which North Korea adopted in July 2002 was an innovative action designed to strengthen the elements of market economy in North Korea. Included in the initiative were measures to allow more room for prices to be decided by the market and to cut subsidies as a means to ease the government’s fiscal burden. These changes provided a signal to potential foreign investors in the Gaeseong Complex that Pyongyang was serious about pursuing economic reform. Production at the Gaeseong Industrial Complex officially began in December 2004. As of January 2007, a total of twenty-four Korean and joint corporations are operating. The accumulated output is worth over $100 million, employing more than 11,000 workers in the area. The total number of visitors, including Koreans and foreigners, has exceeded 100,000.30 5.5.2 Security Disintegration Hurdles: Nuclear Threat to Regional Integration On October 16, 2002, North Korea acknowledged its nuclear development program, sparking the second North Korean nuclear crisis. Though the ensuing Six-Party Talks produced a joint communiqué on September 19, 2005 – roughly seven months after North Korea officially announced that it possessed nuclear weapons – tensions on the Korean Peninsula intensified the following year when North Korea test-launched seven missiles, including a Taepodong-2 on July 5, 2006, and carried out its first nuclear test on October 9, 2006. The fifth round of Six-Party Talks, beginning in February 2007 and featuring direct dialogue between the United States and North Korea, have 29 30

Cho 2003, 147. Kaesong Industrial District Management Committee Homepage. Available from .

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raised hopes that the parties could find a long-term resolution to the nuclear crisis. However, there is no real prospect of North Korean participation in East Asian regionalism without a resolution of the North Korean nuclear issue. On January 10, 2003, North Korea once again declared “an automatic and immediate effectuation of its withdrawal from the NPT,” on which ‘it unilaterally announced a moratorium as long as it deemed necessary” according to the June 11, 1993 DPRK–US Joint Statement. North Korea justified its withdrawal from the Treaty by arguing that its sovereignty and interests were being threatened by hostile US policy. Specifically, it stated that first, “the United States instigated the IAEA to adopt another resolution against the DPRK” in which “the resolution termed the DPRK a ‘criminal’”; second, “the IAEA still remains a servant and spokesman for the US and the NPT is being used as a tool for implementing the US hostile policy toward the DPRK aimed to disarm it and destroy its system by force”; third, “the United States listed the DPRK as an ‘axis of evil’ adopting it as a national policy to oppose its system, and singled it out as a target of pre-emptive nuclear attack, openly declaring a nuclear war;” and fourth, systematically violating the DPRK–US Agreed Framework, the United States initiated another “nuclear suspicion” and stopped the supply of heavy oil, reducing the AF to a dead document.”31 North Korea and the United States have approached the Six-Party Talks from a contrasting set of principles. North Korea has emphasized US adoption of a policy of peaceful coexistence and cessation of nuclear threats in exchange for North Korean abandonment of its nuclear program, normalization of US–DPRK relations, compensation of economic loss from denuclearization, and reciprocity in cooperation.32 In contrast, Washington approached the talks from the Bush administration’s evolving perspective of national security threats. One objective was to prevent WMD terrorism, as articulated in the September 2002 National Security Strategy Report and the February

Yoo 2004, 40–46. Statement by Spokesperson, the Ministry of Foreign Affairs, North Korea, 18 February and 12 April 2003; and Korean Central News Agency, 29 August 2003. 31 32

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2003 National Strategy for Combating Terrorism.33 Another was to halt North Korean missile development, since the Taepodong series of missiles would ultimately be able to reach the US mainland (see Table 5.3). The Bush administration wanted the North to dismantle its nuclear weapons program in a complete, verifiable and irreversible (CVID) way, rather than simply freezing it.34 The CVID principle states that North Korea should abandon its entire nuclear program – plutonium and enriched uranium – including existing nuclear weapons to the extent that they cannot be recomposed.35 Meanwhile, President Bush suggested a cooperative Proliferation Security Initiative at the end of May of 2003, simultaneously pressuring North Korea by pushing an Illicit Activities Initiative to prevent counterfeit money and drug traffic. Table 5.3 North Korean ballistic missiles

SCUD B

Maximum Payload Range (KM) (KM) 320 1,000

SCUD C

570

NODONG

1,480

TAEPODONG-1 2,300 TAEPODONG-2 6,200+ TAEPODONG-2 15,000 (three-stage) 33

Comment Reverse-engineered/Soviet Scud B.

770

Conventional explosives, chemical, and cluster warheads. 1,200 Test-fired in May 1993; flew 500 kilometers. Fewer than 50 launchers deployed. Designed to carry a nuclear warhead. 1,000–1,500 Test-launched on August 31, 1998. Not yet deployed. 700–1,000 Not yet tested. unknown

More than a decade away. May be capable of striking North America

For each report, see the White House website. Available from . 34 James A. Kelly, Assistant Secretary of State for East Asia and Pacific Affairs, “Ensuring a Korean Peninsula Free of Nuclear Weapons,” remarks to the Research Conference, North Korea: Toward a New International Engagement Framework, 13 February 2004. Available from . 35 Ha and Jeon 2006; “Lessons from Libya and North Korea’s Strategic Choice,” Yonsei GSIS, 21 July 2004. Available from .

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At the second session of fourth Six-Party Talks in Beijing on September 19, 2005, the United States and North Korea managed to overcome some of their differences. They announced a joint statement on the abandonment of North Korea’s nuclear program and the denuclearization of the Korean Peninsula. North Korea’s commitment to abandon all nuclear weapons and existing nuclear programs and return to the NPT and IAEA safeguards was a powerful first step toward securing a nuclear-free Korea and preventing a nuclear ‘domino effect’ in Northeast Asia. US affirmation of certain principles – mutual respect of sovereignty, peaceful coexistence, and eventual diplomatic normalization – was an encouraging sign of diplomatic moderation. The mediation and involvement of China and the other parties helped shepherd this agreement. The five other countries reaffirmed their willingness to help rebuild the failed North Korean economy by engaging in bilateral and multilateral economic cooperation in the fields of energy, trade and investment, and continuing to negotiate a permanent peace treaty on the Korean Peninsula.36 However, even before the ink on the agreement had dried, Pyongyang issued a statement that it would not return to the NPT or sign and comply with safeguards agreement unless light-water nuclear reactors were provided. The United States, for its part, began to pursue punishment of North Korea’s alleged official counterfeit activities and to renew criticism of North Korea’s human rights violations. As a result, the opportunity to use the joint statement as the political foundation of more general regional cooperation was lost amid persistent mistrust. Absent a firm commitment from all sides to overcome this mistrust, individual moves toward nuclearization seem at least as likely as regional cooperation. 5.6 Security and Trade: Reluctant Coexistence Under a Fragile Equilibrium The policy debate among the United States and its allies regarding North Korea has tended to revolve around two perspectives: those emphasizing negative incentives (sanctions) or positive incentives 36 “After Beijing Breakthrough, What Next?” The Korea Times, 23 September 2005.

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(economic cooperation).37 During the Cold War era, the focus was on negative incentives: the dictates of systemic competition between the US and Soviet blocs required containment of North Korea. After the Cold War, however, many stressed engagement based on an understanding of the internal sources of inter-Korean conflict – and thus the potential peace benefits of internal reforms and international economic integration.38 Underlying this policy debate was an academic debate between neorealists emphasizing systemic competition and idealists and functionalists emphasizing incentives to cooperate.39 Ultimately, both the policy and academic debates have been driven by the same question: “What is the relationship between security competition and economic integration, regional or otherwise?” The neorealist argument emphasizes how security competition imposes constraints on the possibilities of cooperation. From this perspective, normalization of North Korea’s diplomatic relations with neighboring countries is a necessary condition for economic and other cooperation – regardless of any reforms within North Korea. Without political and military stability, neither North-South economic cooperation nor Northeast Asian regionalism involving North Korea can take root. A variant of this approach would note how the North’s economic and financial weakness can also inhibit regional cooperation, regardless of the status of diplomatic normalization. Idealist and functionalist theories of cooperation start from the expectation that countries can achieve peace through economic cooperation and development. This sort of thinking is reflected in Clause IV of the June 15, 2000 South–North Joint Declaration, which aimed to “… consolidate mutual trust by promoting balanced development of the national economy.” The Kim Dae-jung administration’s Sunshine Policy and the Clinton administration’s engagement and enlargement policy were based on similar premises, focusing on how to economically engage the North to reduce its incentives or inclination to present military threats.40 It is also possible to interpret the North’s decision to develop the Gaeseong Complex as a strategic choice to 37 38

Grieco and Ikenberry 2003. Moon and Steinberg 1999. See also “After Beijing Breakthrough, What Next?” The Korea Times, 23 September 2005. 39 See Mansfield and Milner 1997; Haas 1975; Schmitter 2005; and Borzel 2006. 40 Bracken 2004, 147–158.

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achieve economic engagement for the sake of peace as well as development, both on the Peninsula and in the region more generally.41 US policymakers have been split between those influenced by neorealist and idealist/functionalist premises. While there seems to be a consensus that “North Korea is neither irrational nor undeterrable,” there has been disagreement between ‘weak-kneed appeasers’ who propose dialogue with North Korea and ‘irresponsible ideologues’ who are determined to shun Kim Jong-il as a “radioactive lunatic”.42 Hardliners (and neoconservatives) have argued that the 1994 Agreed Framework failed because Pyongyang is determined to arm and will not honor agreements standing in the way of this goal – and thus that the United States and its allies should rally support for strong sanctions against North Korea.43 They also insist that Six-Party Talks legitimize and entrench North Korea’s nuclear program. In response, ‘softliners’ argue that the hardliners’ position creates a self-fulfilling prophecy of confrontation and conflict. Softliners emphasize North Korea’s desire for normalized relations with the United States and its willingness to abandon its nuclear program to secure this goal (and to end US efforts at regime change). They also argue that North Korea’s economic reforms need time and support to take hold, and that international assistance to and/or investment in the North could provide the necessary confidence to achieve political reconciliation and resolution of the nuclear issue.44 They seem to have a point: US reluctance to engage on the nuclear issue appears to have reinforced Pyongyang’s inclination to secure regime survival via nuclear weapons and missiles, as indicated by North Korea’s missile tests. The policies of other key players in the Six-Party Talks may also mitigate against a hardline approach. Russia, South Korea and China 41 Citing the reconnection of the Donghae Line and the Gyongui Line and the linking of roads, Mt. Geumgang Tours and the Gaeseong Industrial Complex, the Ministry of Unification declared, “With the peaceful use of the demilitarized zone, the eased military tension and confidence-building measures, the foundation for peaceful unification will be prepared” under the philosophy of “Greater interaction and cooperation will create peace.” See Ministry of Unification 2005, 106–108. 42 Cha and Kang 2003. 43 Sokolski 2006, 49; and Haggard and Noland 2007. These hardliners make a similar argument regarding Iran. 44 Sigal 2006, 50–57; and Ahn, Eberstadt, and Lee 2004.

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have made it clear that they can live with a nuclear North Korea. They have also made it a matter of policy to prop up the current regime and contest any move toward the imposition of tougher multilateral sanctions. These debates have extended to questions of human rights and democratic reform in North Korea. Though both sides agree on the goal of supporting positive changes on these fronts, they differ on themeans. The hardliners believe that sanctions and other forms of external pressure can force North Korea to open up and improve human rights conditions, while softliners believe that humanitarian aid and inducements for North Korea to open up its economy should be used to promote internal reforms.45 Softliners point to the example of Cuba to argue that sanctions and containment will only push Kim Jong-il’s regime to tighten its grip on society. However, a policy tilted toward engagement must emerge in the context of a long-term inclination toward a more punitive stance. US economic sanctions on North Korea – both unilateral and multilateral – have been in place since the onset of the Korean War in 1950. (See Table 5.4.) However, the effectiveness of sanctions is open to question. Hufbauer and his collaborators found that of 115 cases of economic sanctions between World War I and 1990, 34% to be at least partially successful, but that “efforts to impair a foreign adversary’s military potential, or otherwise to change its policies in a major way, succeed only infrequently.”46 It is far from clear that the Bush Administration’s reinforced US sanctions against North Korea are capable of producing the desired effects, because the Stalinist country is already the most isolated economy in the world.47 For example, it is debatable if the UN sanctions resolution against the North since its nuclear test and the US government-led Proliferation Security Initiative (PSI) have been successful. If sanctions do not work and military action is prohibitively dangerous, then Washington would seem to have few options other than pursuing a course of normalized relations. 45 For this latter view, see Harrison 2002; and Chung-in Moon, “Why Seoul helps the North,” International Herald Tribune, 1–2 October 2005. 46 Hufbauer et al. 1990, 93; and Chang 2006, 36–46. 47 This isolation is largely a result of Western countries’ collective export control regimes—including the Coordinating Committee for Export Control (COCOM) and the Wassenaar Arrangement.

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However, even if relations with Washington are normalized, the prospects for North Korea’s participation in institutionalized cooperation in Northeast Asia are relatively poor due to its utter lack of experience Table 5.4 Chronology of US economic sanctions against North Korea June 28, 1950

Total embargo on exports to North Korea, based on the Export Control Act of 1949 Dec 16, 1950 Presidential Proclamation 2914, forbidding any financial transactions involving, or on behalf of, North Korea Sept 1, 1951 Denial of MFN status to North Korea, based on the Trade Agreement Extension Act of 1951 Aug 26, 1955 International Traffic in Arms Regulation (ITAR) denying exports and imports of defense articles and defense services to North Korea Sept 4, 1961 Foreign Assistance Act passed but not applied to North Korea Oct 22, 1968 Arms Export Control Act passed, allowing arms sales, but not applied to North Korea Nov 29, 1987 North Korea place on the list of countries supporting international terrorism under the Export Administration Act of 1979, with the effect of denying the country loans from international financial organizations, among other restrictions March 6, 1992 First of many company-specific sanctions against North Korea’s Lyon-gaksan Machineries and Equipment Export Corporation and Changgwang Sinyong Corporation for missile proliferation activities Sept 17, 1999 President Clinton announces the first significant easing of economic sanctions against North Korea since the end of the Korean War in 1953 Nov 29, 1999 North Korean Threat Reduction Act passed, tightening export of nuclear material or technology to North Korea requiring presidential approval April 11, 2000 Congressional Oversight of Nuclear Transfers to North Korea Act passed, tightening exports of nuclear material or technology to North Korea requiring Congressional approval June 19, 2000 Sanctions against North Korea eased through amendments to the Foreign Assets Control Regulations, ending the ban on exports to North Korea and allowing travel with a US passport Jan 2, 2001 The first of many sanctions against North Korea’s Changgwang Sinyong Corporation for violation of the Iran Nonproliferation Act of 2000 Oct 18, 2004 President George W. Bush signs into law the North Korean Human Rights Act, requiring human rights issues to be a part of any negotiations with North Korea, among other provisions

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with such cooperation. Indeed, Pyongyang’s isolation seems self-perpetuating, leading to exclusion from current debates on cooperation among the countries of Northeast Asia. North Korea has no treaties or formal institutions with foreign states in the fields of tariffs or finance, including China. South Korea, despite its Sunshine Policy, has scarcely mentioned North Korea as an expected partner; and Japan seems unwilling to engage North Korea in the face of recent missile tests and threats – and in the context of the Bush Administration’s tough policy toward Pyongyang. North Korea’s unilateral attempts to break out of its isolation – notably, with the Gaeseong Industrial Complex – also face major hurdles. The special economic zones have clear limitations, including the guarantee of foreign investors’ autonomy, property rights, freedom in making contracts, building Social Overhead Capital (SOC) and financing issues, and fees on land leases and labor cost negotiations. Indeed, these issues are relevant to political and economic reform of North Korea in general. Meanwhile, both US sanctions and the Wassenaar Arrangement continue to restrict the export of technologically advanced products into North Korea.48 The normalization of diplomatic relations between North Korea and the United States are a necessary, if not sufficient, condition to overcome these hurdles.49 Perhaps partly in frustration with this lack of success, North Korea has tried to enhance its position by signaling its intention (and capacity) to go nuclear. Yet although a brinkmanship strategy has sustained world attention, it has also exposed Pyongyang’s obsession with regime survival and the entrenched nature of the military-first ideology – both retaining far higher priority than economic reform. Kim Jong-il’s government has insisted that security is a necessary precursor to economic reform, and is willing to sacrifice the latter to attain the former. 48

Washington placed strong sanctions on the DPRK in the military supplies industry after it categorized North Korea as a terrorist country for allegedly exported missile technology to Iran and Syria. 49 In South Korea–US FTA negotiations, Washington refused to accept the certificate of origin for products made in the Gaeseong Industrial Complex. The eventual US approval of products made in the complex, as well as those made in South Korea, might provide an institutional opportunity by which North Korea can be integrated to East Asia’s economic regionalism.

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Given these priorities, North Korea has focused on bilateral dialogue with the United States and shown only intermittent interest in the Six-Party Talks. Pyongyang believes that it can get what it wants only from Washington. North Korea pursued nuclear weapons in response to sustained pressure from the United States; it wants to trade its abandonment of these weapons for Washington’s commitment to lift sanctions, normalize relations, and guarantee the security of the North Korean regime. In this sense, Pyongyang is seeking both security and economic goods (i.e. regime survival, peaceful coexistence, and curtailed sanctions), in cooperation with the United States, which itself would gain primarily security goods (i.e. elimination of a potential threat of nuclear war and/or proliferation). Yet policy is not purely monolithic or consensual in North Korea; it has its own conflicts among hardliners and softliners. Softliners have made gains in part due to slow but appreciable changes in North Korean society, resulting from exposure to international nongovernmental organizations (NGOs) and the development of inter-Korean economic cooperation.50 But more important have been the failures of existing policy. Some policymakers have questioned the value of the nuclear program in feeding the population and guaranteeing regime survival. Since the nuclear and missile tests, international sanctions have been wider than anticipated, and allies – namely China – have lost patience with Pyongyang.51 As a result, hardliners have lost some of their dominance, forcing Kim Jong-il to change strategies.52 North Korea acquiesced to the framework of the Six-Party Talks – perhaps fortuitously, given the possible softening of US policy in the wake of Democratic Party gains in 2006 national elections. Following a historic bilateral meeting in Washington, DC, in March 2007, North Korea and the United States worked hard for a breakthrough in their relations within a mixed bilateral-multilateral context. Their representatives have met within a working group aimed at achieving North Korea’s nuclear disarmament in exchange for aid and

50 51 52

Beck and Reader 2005, 70. Chambers 2005, 50; and Rozman 2004, 340. Aggarwal and Urata 2006, 17.

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other potential benefits.53 The two sides were to start talks aimed at resolving bilateral issues and moving toward full diplomatic relations, as well as the possible de-designation of North Korea as a state sponsor of terrorism (thus curtailing sanctions under the Trading with the Enemy Act). Washington signaled readiness to resolve the case against a Macau bank, which resulted in the freezing of $24 million in North Korean accounts linked to counterfeiting activities, and proposed a peace treaty on the Korean Peninsula and advised the North to enter international financial organizations. North Korea, for its part, has reiterated its commitment to the initial implementation of the February 2007 agreement and moved toward allowing resumption of IAEA nuclear inspections. Nevertheless, mutual mistrust remains, as both sides demand firm guarantees on the fulfillment of the other’s promises. Given the remaining pitfalls, including North Korea’s high enriched uranium (HEU) program and existing nuclear weapons, it is too early to be optimistic about the results of the direct dialogue between Pyongyang and Washington. But the existing stalemate appears to have been broken, in large part due to changing circumstances in Washington. The Bush Administration has amended its tough position, partly to seek a major breakthrough to improve its foreign policy legacy, and partly in recognition of the limited results of its former hardline policy. Such a breakthrough would greatly improve the prospects of an inclusive East Asian regionalism. A reduced North Korean security (and nuclear) threat would foster regional security cooperation by removing a point of division among China, Japan, and South Korea. Meanwhile, the normalization of North Korean relations with the United States and Japan, and a relaxation or removal of economic sanctions, would be a first step toward greater North Korean economic integration with its neighbors. Perhaps most importantly, a breakthrough would remove a key rationale for some aspects of the US hegemonic presence that have been particularly stifling under the Bush Administration.54 53 A 13 February 2007 agreement established a total of five working groups. The others focus on North–South Korea relations, North Korea–Japan relations, denuclearization and regional security. 54 Sigal 2006, 55–56 has argued that the Bush Administration’s policy regarding the Koreas and in East Asia has been self-defeating, driving regional countries toward closer ties with China.

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5.7 Conclusion: North Korea and East Asian Regionalism To date, regionalism has not loomed large in North Korea’s security and economic strategies. Security and economic goods that could be gained through regional cooperation have not simply failed to materialize; for Pyongyang, they have been – whether in perception or reality – in direct conflict with one another. Economic cooperation has been limited in the face of a military-first ideology and concerns about regime survival; progress in security cooperation has been limited at least in part due to the absence of mutual trust and interests that has accompanied North Korea’s economic isolation. Therefore, the path chosen to try to integrate these security and trade goods will determine whether North Korea can integrate more generally into East Asia’s regionalism. We can consider possible North Korean integration into an inclusive East Asian regionalism via three distinct (but not mutually exclusive) paths – each beginning with increased economic cooperation. First, based on the Gaeseong Industrial Complex, the North and South Korean economies can enhance interdependence, with inter-Korean economic cooperation as a springboard toward more general North Korean economic integration with East Asia. Second, increased trade with China could permit North Korea to become part of an East Asian economic zone via China. Third, and least probable, North Korea could pursue economic cooperation with Japan, focusing on attracting Japanese investment (following the normalization of relations).55 Inter-Korean economic cooperation seems the most feasible means to draw North Korea into broader regional commercial networks. Already, such cooperation has produced sectorally diverse investment into North Korea: companies moving into the Gaeseong Industrial Complex prior to January 2005 include those from major industries such as clothes, shoes, electronic products, electricity-supplying and control equipment, ordinary machinery, semi-conductors and communication equipment.56 This road places a great deal of responsibility on South Korea (and South Korean firms) to ensure the success of Gaeseong as a means to successfully incorporate North Korea into the East Asian market. 55 56

Rhyu 2004. The Ministry of Unification 2005, 122.

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China, the apparent leader of East Asian regionalism, could incorporate North Korea as a partner in a vertical labor division, allowing North Korea to restore the missing link to Japan via China. However, it is difficult to forecast how economic cooperation between North Korea and China – seen already in the increase of trade volumes – would affect the construction of East Asia’s regionalism. It is not at all clear that closer North Korea–China ties are good for regional cooperation or Peninsular peace; certainly this was not the case during the Cold War, and at least in the short run, a strengthened Pyongyang– Beijing alliance might reinforce Cold War attitudes regarding Korean and regional security. Yet given China’s size and extensive integration in the global economy, over the long run it may be North Korea’s most important partner in escaping its economic isolation. Although both the prospects and effects of greater North Korean participation in regional networks remain uncertain, certain other conditions can help push these in a positive direction. For one, the United States and Japan could adopt more flexible strategies regarding economic sanctions on North Korea, which constrain economic cooperation by definition. South Korea might also engage in more strategic cooperation with China with an aim of integrating North Korea into regional networks via joint projects – including joint ventures between South Korea and China at the Gaeseong Industrial Complex or on North Korean infrastructure. To the extent that economic integration reduces military tensions and promotes cooperation on other issues, these measures would be a step in the right direction. However, the benefits to regional peace from economic integration remain uncertain. China and Taiwan have strong and deep trade and investment ties, but political-security relations across the Taiwan Strait remain tense. It is difficult to say how long the nuclear crisis and inter-Korean economic cooperation can coexist, or how the evolution of key countries’ strategies – especially North Korea and the United States – will affect this situation.57 Nevertheless, these countries appear to have reached a fork in the road, and although neither path ensures regional peace and prosperity, they have the opportunity to choose cooperation over confrontation.

57

Dwor-Frecaut 2005, 149.

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Noland, Marcus. 2000. Avoiding the Apocalypse: The Future of the Two Koreas. Washington, D.C.: Institute for International Economics. ———. 2002. North Korea's External Economic Relations: Globalization in Our Own Style. In North Korea and Northeast Asia, edited by Samuel S. Kim & Tai Hwan Lee. Lanaham, Maryland: Rowan & Littlefield Publishers. Norris, Robert S. and Hans M. Kristensen. 2005. North Korea’s Nuclear Program 2005. Bulletin of Atomic Scientists 61 (3). Available from: . Accessed 8 December 2006. Rhyu, Sang-young. 2004. Japan-North Korea Relations: Economic Reinterpretation of the Vanished Interface. Korean Political Science Review 44 (2). Rozman, Gilbert. 2004. Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization. Cambridge, UK: Cambridge University Press. Schmitter, Philippe C. 2005. Ernst B. Haas and the Legacy of Neofunctionalism. Journal of European Public Policy, 12 (2):255-272. Sigal, Leon V. 2006. Try Engagement for a Change. Global Asia 1 (1):50-57. Sokolski, Henry. 2006. Treat North Korea as a Nuclear Proliferator. Global Asia 1 (1):44-49. Suh, Jae Jean. 2005. North Korea’s Market Economy Society From Below. Studies Series 05-04. Seoul, Korea: Korean Institute of National Unification. Yoo, Chang-ho. 2004. Evaluating the Legal Mechanisms in Dealing with the North Korean Nuclear Threat: The North Korean Question & the ROK-U.S. Alliance. IFANS Review 12 (1).

6 Impassive to Imperial? Russia in Northeast Asia from Yeltsin to Putin

Taehwan Kim Yonsei University, Seoul, South Korea

6.1 Introduction1 The disintegration of the Soviet Union put an end to the Cold War, both as a historical epoch and as a bipolar international structure of power. It also inflicted a bitter blow on Russia, both internally and externally. Once a global superpower, Russia sank into a seemingly bottomless pit of political and economic turmoil in the aftermath of the Soviet collapse. Since then, it has struggled to climb up this steep slope while bearing an agonizing burden of domestic transformation. Far from being complete, this systemic change is still underway. Russia is now experiencing a resurrection that promises to be felt throughout Northeast Asia. Moscow has recently shown growing unilateral assertiveness in its general foreign policy behavior, while also more actively participating in regional affairs and institutions – a sharp break from its inward orientation during the 1990s. This shift poses important questions: What accounts for Russia’s growing assertiveness and vigorous involvement in the region? What are Russia’s regional goals, and how will its policies evolve to pursue them? And what impact will this policy evolution have on an emerging regional institutional architecture?

1

I would like to thank Jonathan Chow, Edward Fogarty and Kristi Govella for their feedback and editorial assistance on this chapter.

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In answering these questions, this chapter casts its analytical focus on the domestic-international nexus and attributes recent changes in Russia’s external behavior to the shift that took place in domestic political governance across the transition from Boris Yeltsin to Vladimir Putin regimes. It uses an historical analogy between Russia’s internal political evolution during the 1990s and the transition from feudalism to absolutism/mercantilism in medieval and early modern Western Europe. The neofeudal governance of the Yeltsin regime caused fragmentation of the Russian state, which in turn led to inconsistency and drift in its external behavior in general and its Northeast Asia policy in particular. It was only after neoabsolutism under Vladimir Putin replaced Yeltsin’s neofeudal governance that Russia began to pursue a neomercantilist strategy in Northeast Asia. The “triple shocks” – the end of the Cold War, the 1997 Asian financial crisis, and the 9/11 terrorist attacks – each played a role in pushing forward this Russian evolution from neofeudal governance and a strategy of disengagement to neoabsolutist governance and a more neomercantilist strategy. The chapter develops as follows. After establishing an analytical framework in Sect. 6.2, Sect. 6.3 explores how neofeudal governance under Yeltsin’s early post-Cold War leadership caused inconsistency and ineffectiveness in Russia’s Northeast Asia policy. Section 6.4 focuses on the impact of the Asian financial crisis and how it helped satisfy the domestic prerequisites for the rise of Russian neoabsolutism. Section 6.5 discusses Putin’s shift toward a neomercantilist strategy in Northeast Asia, propelled by domestic consolidation of neoabsolutist governance. The conclusion assesses possible future directions of Russia’s Northeast Asia policy and their implications for Asian regionalism. 6.2 The International Domestic Nexus: An Analytical Framework There are powerful analytical tools and theories that can guide the search for answers to this chapter’s research questions. Neorealist

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theory,2 which places great emphasis on the structure of the international system, argues that ongoing changes in the distribution of power and resources both at the global and regional levels – and Russia’s position therein – have shaped Moscow’s external behavior in a decisive way. In contrast, state-level, or “second-image,”3 theories seek to explain countries’ external behavior and international outcomes primarily in terms of individual states’ domestic characteristics, such as political regime type, level of economic development, national identity, political culture, and elite ideology. In this theoretical tradition, recent changes in Russia’s external behavior are ascribed to domestic sources. Though these two theoretical perspectives take opposite approaches to explaining a country’s foreign policy strategy – neorealism from the top down, domestic politics theories from the bottom up – we can combine them to account for Russia’s “individual situation” and its consequences for Moscow’s Northeast Asia policy over the Yeltsin and Putin periods.4 The triple shocks – the end of the Cold War, the 1997 Asian financial crisis, and the 9/11 terrorist attacks – exemplify this approach: they affected the institutional equilibrium in Northeast Asia not only directly at the systemic level, but also indirectly by penetrating deeply into individual states like Russia and giving rise to different domestic responses and reactions. These latter changes at the domestic level in turn shaped Russia’s external behavior, with consequences for the regional institutional order. In this internationaldomestic nexus, the analytical focus is on the type of domestic political governance5 and the type of dominant ruling coalition6 in particular.

2

The seminal work in this school of thought is Waltz 1979. 1978. 4 Regarding countries’ “individual situations” and the “triple shocks,” see the introduction to this volume. 5 Political governance is defined here as a complex of rules that regulate the vertical and horizontal relationships between political authorities and civil society, as well as the relationship between different elements of state hierarchies. Although this definition is quite close to the more widely used concept of “political regime,” the notion of political governance is more attuned to informal ruling coalition than to the formal rules and procedures of a political regime. 6 “Ruling coalition” often refers to the association of multiple political parties to form a cabinet/government in the parliamentary system when one party cannot win the electoral majority to form a cabinet on its own. Ruling coalition is defined 3 Gourevitch

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Fig. 6.1 Ruling coalition and external policy

Figure 6.1 illustrates theanalytical scheme, which is based on different bargaining powers of the state and its ruling coalition partners.7 here, however, as an informal political alliance between the incumbent government (or parts of the government such as the top political leadership) on one hand, and a group or groups of societal forces (powerful political constituents) on the other. The two parties forge a political alliance based upon coincidence of interests, under which the government provides favors and benefits for the coalition partner group in return for the latter’s support. Examples are Olson’s “distributional coalition” and the “triple alliance” or “trio” formed by the incumbent military government, domestic bourgeoisie and foreign capital in some Latin American countries in the 1960s and 1970s. See Olson 1982; and Evans 1979. 7 Tangible or intangible resources controlled by the state and its coalition partner constitute the bargaining power of each party. On the part of the state, they could be various formal and informal benefits, favors and privileges granted to the coalition partner, while bargaining power of the latter may include political support and loyalty, voting power, financial resources, and media control. Powerful constituents

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When the relative bargaining power of the two parties clearly diverges, as in cells I and IV of Fig. 6.1, it is relatively easy to predict external policy outcomes. When the state’s bargaining power is stronger than that of its coalition partners, the policy preference of the state is likely to prevail, producing an “absolutist coalition.” The outcome is reversed, however, when the power relationship of the two parties is inverted, resulting in “state capture.” When the two parties’ bargaining power is about the same, however, more factors are needed to predict policy outcomes. When both parties are strong enough that neither can impose its preferences on the other and when their preferences diverge, compromising bargained outcomes are expected, producing a “bargaining coalition.” When both parties are weak and the state’s capacity is low, external policy becomes hard to predict as it is reactive rather than proactive, characteristic of a “drifting coalition.” As the following discussion demonstrates, the external “triple shocks” combined with internal political dynamics to push Russian governance from a drifting coalition under Yeltsin to an absolutist one under Putin. This allowed Putin to pursue a far stronger policy of engagement in East Asia than the hamstrung Yeltsin government. 6.3 Post-Cold War: Neofeudal Governance and External Drift During the Cold War era, the Soviet Union was so preoccupied with Europe both in terms of economics and security that Asia remained peripheral to its global strategy. On the Western front, Moscow carefully wove its satellites into multilateral institutional networks such as the Warsaw Pact Organization and the Council for Mutual Economic Assistance (COMECON or CMEA); it created no equivalent security and economic institutions on the Eastern front. Soviet officials repeatedly proposed multilateral collective security arrangements in the region to counterbalance US influence and to build an anti-Chinese

with high bargaining power could simultaneously constitute a crucial political support base and a critical political constraint. See North 1981.

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coalition.8 They never followed through, however, and instead organized a series of bilateral alliances with Asian communist counties against the web of US-led bilateral alliances. The demise of the Soviet Union and the end of the Cold War put a sudden end to these Soviet-led bilateral ties. The emergence of the United States as the sole superpower and of China as a newly rising regional-cum-global power ushered in a new regional balance of power structure to which a much-weakened Russia had to adjust. 6.3.1 The Rise of Neofeudal Governance in Russia The Soviet collapse triggered a “triple transformation” that shook Russian society at its foundations. On the political side, the one-party dictatorship gave way to a more open and democratic political regime. This process of democratization awakened and activated the politically dormant Russian society and made interest-based conflicts more explicit than ever before. Accordingly, Moscow’s policymaking process became exposed to a wide spectrum of voices, from “conservative” communism to ultra nationalism to Western liberalism. No less profound a transformation was Russia’s move away from a centrally planned system toward a market-oriented economy. While most Russians suffered as a result of this painful process of radical economic reform, a small group of “oligarchs”9 leveraged their political positions or access to benefit handsomely from the early reforms.10 The new Russia was also challenged by the imminent task of state building. With the vast Soviet empire dismantled, Russia now found itself struggling to hold its centrifugal federation together within a shrunken (but still enormous) territory.11 Provincial elites, a majority 8

Horelick 1974. The term “oligarchs” refers to those who control a great portion of the Russian economy and wield enormous political and economic influence in Russian society. They garnered enormous wealth in the chaotic early reform years, particularly via noneconomic methods in the nontransparent privatization process. For an excellent account of oligarchs, see Hoffman 2002. 10 Hellman 1998. 11 Immediately after the Soviet collapse, the Russian Federation consisted of eighty-nine federal subjects, in which over 160 ethnic groups and indigenous peoples resided. Some federal subjects have since merged, and as of the end of 2007 there 9

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of whom were Soviet-era nomenklatura, threatened to secede from the federation, repeatedly asking for material and jurisdictional concessions and favors from the federal government.12 In this tug-of-war between the center and periphery, these provincial elites – particularly those from resource-rich areas – joined the oligarchs as another powerful political force independent from Moscow. This triple transformation inaugurated neofeudal governance in Russia. Exploring medieval European feudalism, Perry Anderson aptly defined it as a unique politico-economic order in which political power was not concentrated at the center but rather diffused down to feudal lords and seigneurs; therefore, sovereignty existed only in a “parcellized” form. The vertical relationship between the feudal king and feudal lords was built on a “feudal pact” in which the former granted land tenure to the latter in return for the latter’s services, especially of a military nature. Fiefdom was an institutional embodiment of such an exchange relationship. In each fiefdom, political and economic power was concentrated in the hands of feudal lord such that politics and economics, power and property, were fused.13 By analogy, in post-Soviet Russia a “dual political coalition” formed on the basis of a neofeudal pact between the center (Moscow) on one hand, and the provincial elites and oligarchs on the other. Under this formula, the federal government conceded autonomy, as well as federal resources, to provincial elites in return for the latter’s political loyalty to the center. As for oligarchs, the federal state gave away Russia’s most precious industrial and financial crown jewels in the murky privatization process, as well as various privileges and benefits, and received in return from them the political support and financial resources badly needed for plugging the chronic hole in the federal budget. Neofeudal fiefdom appeared in Yeltsin’s modern Russia in two parallel yet distinctive institutional forms. In the territorial realm, it were eighty-five federal subjects altogether in the Russian Federation. Meanwhile, as the successor state of the Soviet Union, Russia lost almost half of the entire Soviet population and over twenty percent of its territory. 12 Although Russia’s sub-federal political units are generally called ‘regions,’ this chapter refers to them as ‘provinces’ to avoid confusion with external regions (i.e., Northeast Asia). 13 Anderson 1974.

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took the form of “asymmetric federalism,” in which the relationship between the federal center and provinces was subjected not to an integral constitutional order, but to bilateral agreements between the two parties.14 In each provincial fiefdom, chiefs of the provincial government exerted enormous political and economic power at the expense of the federal authorities. In the economic realm, the oligarchs formed huge business groups that wielded near-absolute economic power.15 In both the territorial and economic realms, Moscow’s governing authority was seriously impaired and constrained. This leads to our third and last reference concept, parcellized sovereignty, whose reincarnation in post-Soviet Russia was a fragmentation of the state. Constrained by the dual political coalition, the Russian state under Yeltsin lacked internal corporate coherence, which in turn prevented effective policy implementation. Fragmentation of the Russian state again unfolded in several dimensions: the political struggle between the president and the parliament; the political and administrative tug-of-war between the federal and provincial governments; and the bureaucratic corruption and infighting within the executive branch among various state organs.16 6.3.2 Foreign Policy Drift Yeltsin’s dual coalition was prone to factional conflict and policy paralysis. While a faction of export-oriented industrial oligarchs lobbied in favor of liberal trade policies, another faction of oligarchs controlling domestic market-oriented sectors demanded protectionist policies. At the same time, those in the military-industrial complex sought greater access to foreign markets as radically contracting domestic demand threatened their survival. For their part, provincial governors’ preferences varied depending on their different political and economic interest configurations. Provinces endowed with abundant natural resources preferred policies to attract foreign capital 14

Filippov and Shvetsova 1999. For details of Russian business groups, see Kim 2005. For a recent empirical study of their status in the Russian national economy, see Guriev and Rachinsky 2005. 16 Kim 2005, 361–65. 15

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needed for developing their resource bases, while those subject to foreign threats – whether economic, security, or demographic – supported more strictly nationalist policies. Moscow, torn between these powerful contending interests, adopted a foreign policy stance that varied by issue and by region, depending on the prevalence of different sectoral and provincial interests. In post-Cold War Northeast Asia, Russia was comparatively sympathetic to the US-led bilateral alliances, which were considered useful in preserving the regional status quo. Moscow was preoccupied with its domestic agenda, and had neither the capability nor the inclination to compete with the dominant US-led alliance system in the region. Instead, Russia sought favorable bilateral relations with the individual countries of the region, which not only served its political stability but brought potential economic benefits from improved relations with those countries. In Moscow’s relations with Seoul and Tokyo, economic calculations prevailed. South Korea and Japan were perceived to be important sources of badly needed foreign capital; Moscow was even willing to sacrifice its traditional alliance with North Korea for the expected economic benefits of normalized relations with these two developed countries. By contrast, Russia’s approach to China was propelled more by strategic calculations. China was considered to be Russia’s optimal partner in countering American dominance in Northeast Asia.17 More generally, Moscow sought to smooth regional ties by addressing longstanding irritants such as territorial disputes and border demarcation. Yeltsin’s policy strategy, however, was seriously impaired by domestic opposition and resistance. A “red-brown coalition”18 in Russia’s conservative parliament strongly opposed territorial concessions to Japan and insisted on reviving Russia’s relationship with North Korea to maintain

In Moscow–Beijing summits during the 1990s, leaders of both sides made their opposition to US “hegemonism” very explicit. 18 A red-brown coalition formed in the Duma among conservative communists and nationalists, and won impressive victories in consecutive elections in 1993 and 1995. The Communist Party, Liberal Democratic Party, and Agrarian Party combined to win over 32% and 50% of total Duma seats in 1993 and 1995 respectively. 17

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status and influence on the Korean peninsula. Their voices resonated among many in Russian society, particularly within the conservative media and among those suffering most from economic reforms. Yet the power of the political opposition in Moscow had clear limits. In 1993, the conservative parliament was forcibly dissolved and a new Constitution, granting extraordinary rights to the president, was adopted. Under the newly forged institutional order, informal opposition and resistance from within the ruling coalition itself had a greater effect on policy than political opposition in the formal political process. Particularly notable in this regard was the resistance and opposition of provincial governors in East Siberia and Russia’s Far East (ESFE), which eventually inflicted a fatal blow on Yeltsin’s Northeast Asia policy. Provincial barons greatly amplified and politically manipulated xenophobic concerns and fears in the Far Eastern regions, at the heart of which was the demographic imbalance between the bordering provinces of China and the Russian Far East.19 With the opening of borders to their eastern neighbors mainly for economic purposes, Russian border regions were instantly flooded with legal and illegal Chinese immigrant workers and merchants, while Russians moved out of these economically declining regions. By the mid-1990s, Russia’s regional leaders began to view China as the main potential challenge to the regional balance of power, arguing that the largely unregulated opening of the border with China could have serious consequences for the Russian border provinces.20 Yevgenii Nazdratenko, Governor of Primorskii Krai, openly refused to recognize the Russian-Chinese border agreements of the early 1990s. Due to a protracted dispute over islands in the Argun and Amur rivers and some other segments, Nazdratenko repeatedly declared that territorial concessions to China would inevitably damage Russian ports and eventually dislodge Russia from the Far East. He even embarked on a campaign to collect signatures supporting a referendum to reverse the transfer of territory to China. His appeals on this subject significantly 19

While the population of the Russian Far East is only 8 million and falling, the three neighboring provinces of China—Jilin, Heilongjiang, and Liaoning—boast a population of almost 100 million. During 1992–1996, the population of Russia’s Far East decreased by 7%. Vitkovskaia et al. 2000. 20 Wishnick 2002.

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complicated Russia’s bilateral relations with China, backing the Russian Ministry of Foreign Affairs into a corner.21 Starting in 1994, the Russian government reintroduced visa and border controls, and imposed new restrictions on the use of foreign contract labor in agricultural sectors. Provincial authorities took their own steps to prevent illegal Chinese immigration: Primorskii Krai passed an edict in April 1994 limiting the number of hotels allowed to house foreign tourists and placing greater controls on tour groups from China.22 Also, the provincial governments of Primorkii and Khabarovkii Krai embarked on periodic police sweeps of markets and tour companies. Just when Moscow was wooing China as a “strategic partner” and thus as a focal point in Northeast Asia policy, provincial leaders helped to undermine the federal government’s policy. Moreover, these provincial policy initiatives seriously hampered the growth of bilateral economic cooperation, much to the distress of policymakers in Moscow and Beijing. Cross-border trade underwent a substantial decline, and multilateral regional cooperation schemes such as the Tumen River project stalled. Despite the 1996 pledge by Yeltsin and Jiang Zemin to boost bilateral trade to $20 billion by 2000, trade volume between the two countries peaked at around $8 billion in 1993 and fluctuated between $5 billion and $6 billion through the end of the decade. Territorial issues were also the greatest impediment to Russia improving its relationship with Japan. Although Yeltsin and his proWestern Foreign Minister Andrei Kozyrev took conciliatory initiatives on the disputed Kurile Islands (or “Northern Territories,” in Japanese parlance), the dispute was never resolved due in great part to strong Russian provincial opposition. The governor of the Sakhalin Oblast, Valentin Fedorov, repeatedly criticized Moscow for proposing to cede two of the Kurile Islands to Japan and encouraged islanders to protest the surrender of territory.23 Yeltsin’s scheduled visits to Japan were suddenly canceled twice, in September 1992 and May 1993, simply because he was not able to garner enough political support for territorial concession to Japan even within the ruling circle. Although 21

Blank 1997. Vitkovskaia et al. 2000, 84. 23 Brown 1992. 22

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Russia scored moderate economic gains from a generally improved relationship with Japan, no further advance was possible because of the unresolved territorial issue. Russia’s rapprochement with South Korea similarly failed to bear the expected fruits, with the political costs of scaling back ties with Pyongyang exceeding the meager economic gains of closer ties to Seoul.24 By ignoring North Korea, Moscow lost any political leverage on the Korean peninsula, as vividly demonstrated in its total exclusion from the four-party talk process to resolve the first North Korean nuclear crisis in 1993–1994. In sum, although Yeltsin fashioned a strategic partnership with China and improved relations with South Korea and Japan to some extent, he was not able to alleviate Russia’s marginalization in the region. Yevgenii Primakov, replacing Kozyrev as Russia’s Foreign Minister in 1996, certainly imbued Russia with new foreign policy ideas.25 He strove to pull Russia away from his predecessor’s pro-Western orientation and more towards a Russia-specific policy, emphasizing Russia’s unique Eurasian identity as well as the (anti-hegemonic) notion of multipolarity in world politics.26 Yet Primakov’s foreign policy leadership was unable to overcome neofeudal constraints and setbacks. He recalled later in his memoirs the intense infighting with Yeltsin’s core inner circle, or “family,” that eventually cost his political career.27 The neofeudal coalition continued to tightly constrain Russia’s foreign policy, and Russia’s Northeast Asia initiatives remained hostage to the weakness of the central government throughout the Yeltsin period.

24 Russia was able to obtain $3 billion in commercial loans from South Korea on very favorable terms. In the 1990s, some Korean companies made inroads into Russia, but most of them, faced with unfavorable legal and infrastructural problems, decided to retreat shortly thereafter. 25 Primakov was appointed as Foreign Minister in 1996 and promoted to Prime Minister in 1998. 26 For details of Primakov’s main foreign policy ideas, see Primakov 2001; and 2002. For an excellent English review of his thoughts, see Daniels 1999. 27 Moscow Times 6 June 2001.

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6.4 Post-Financial Crisis: Breaking up the Neofeudal Coalition Russia was hit hard in 1998 by contagion from the East Asian financial meltdown. In the context of ongoing economic hardship, military disintegration, and secessionist conflict, the value of the Russian ruble plummeted and foreign investors fled. As Moscow declared default on its debt,28 the federal government seemed almost defunct in fiscal and financial terms, and Yeltsin’s political authority was irrevocably damaged. The 1998 meltdown practically put an end to the Yeltsin era, paving the way for the rise of a new form of politico-economic governance in Russia. 6.4.1 Demise of the Neofeudal Coalition The 1998 Russian financial crisis created cracks in the ruling neofeudal coalition. Major oligarchs were badly hit by the crisis, with some of them totally bankrupted. Even those that survived had to bear painful contraction of their business empires.29 Hence the collective bargaining power of oligarchs was seriously weakened, while that of the state dramatically rebounded just two years after the crisis, thanks to the hike in crude oil prices.30 By 2000, the nearly doubled crude oil prices, combined with the ruble devaluation, gave a major boost to Russia’s

During 1995–1997, domestic financial sources, mostly revenues from shortterm government bonds, accounted for 38 to 55% of budget deficit financing while the rest came from foreign sources. Goskomstat 1998. 29 The most powerful oligarchs were hit hardest. For example, Mikhail Khodorkovskii’s Bank Menatep and Vladimir Potanin’s Oneksimbank went bankrupt, while Vladimir Vinogradov’s Inkombank totally disappeared. Smolenskii (SBSAgro bank) was no longer retained in Russia’s oligarch list. Boris Berezovskii (MFK financial company) and Vladimir Gusinskii (Most-Group) survived only to be purged by Putin a couple of years later. 30 Prices of crude oil hit bottom in 1998 (below $15 per barrel), contributing in part to the 1998 financial meltdown, but began to recover after 1999 and almost doubled by 2000 ($30 per barrel). 28

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exports and in turn to the federal coffers. With the federal budget producing a surplus by 2000,31 the Russian state no longer needed to rely on the oligarchs to finance its budget deficit. On the other hand, many of the provinces that had resorted to external borrowing found themselves unable to service their hard currencydenominated debts due to the ruble devaluation. Many provincial leaders took extraordinary steps to protect their regions independently of the Moscow government, but these measures soon proved inadequate. Witnessing the swelling federal coffers, provincial barons determined that a demonstration of loyalty to Moscow represented the best chance for political survival. The dramatic changes in power balance within the neofeudal coalition rendered Moscow ready to launch political offensives against both the oligarchs and the provincial barons. It was Vladimir Putin who aptly seized the opportunity afforded at this critical juncture. Having publicly pledged in his first presidential campaign to “exterminate oligarchs as a class,”32 Putin effectively cut a deal with twenty-one of the country’s most powerful oligarchs at a meeting on July 28, 2000. He promised not to raise questions about the way their companies had been privatized or to challenge their ownership as long as the oligarchs made their business operations more transparent, paid taxes, reduced the amount of money flowing abroad, brought back some of the capital they had already exported, and, most importantly, kept out of politics.33 Putin in this way imposed a new political pact on the oligarchs that would replace the old neofeudal pact. Almost simultaneously, Putin launched a political assault on those oligarchs who were politically critical and recalcitrant. Among the first victims of this “war on oligarchs” were Boris Berezovskii and Vladmir Gusinskii. Putin also embarked on a series of federal reforms, the obvious targets of which were the provincial barons.

31 By 2000, the federal budget surplus reached 2.5% of GDP. Moscow Times, 21 October 2002. 32 Eurasia Daily Monitor, 20 March 2000; and Whitmore 2005. 33 Zudin 2001.

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6.4.2 Foreign Policy: Moving Toward the Center The Asian financial crisis breathed new life into Asian regionalism. As “outside” institutions such as APEC and the IMF failed to produce effective ways of dealing with the crisis, Asian countries began to seek their own formula for cooperation.34 Correspondingly, disappointment with American leadership provided Russia an opportunity to insert itself into East Asia. Boosted by a quick recovery from the financial meltdown, Russia accelerated its move towards a more centrist foreign policy that could be labeled “pragmatic Eurasianism.”35 In Moscow policy circles Primakov’s notions of multipolarity, multilateralism, and strategic partnership resurfaced. But under Putin, these principles were pursued quite differently than under the Yeltsin-Primakov leadership. First, the Russian state was largely free of its former neofeudal shackles, thanks to the weakening of the oligarchs and provincial barons. The Yeltsin government’s conduct of foreign policy revealed the primacy of competing sectional and provincial agendas over a consensus vision of the national interest; under Putin, those sectional interests were subdued, making it appropriate to speak of a genuinely “presidential” foreign policy.36 Domestic conditions had evolved such that the preferences of the political leadership and its main power base could translate more directly into Russia’s external behavior than at any time since the collapse of the Soviet Union. Second, Russia’s foreign policy was no longer conducted from a position of weakness, as was the case throughout the Yeltsin era, but from a position of strength. Quickly recovering from the 1998 financial crisis, the Russian economy began to grow at six to seven percent per annum, with a federal budget surplus as well as copious foreign currency reserves and a Stabilization Fund.37 Meanwhile, the steep 34

C. Fred Bergsten, “Toward a Tripartite World.” Economist, 13 July 2000. For a review of distinctive versions of ‘Eurasianism,’ see Smith 1999; and Rangsimaporn 2006. 36 Lo 2003, 3. 37 Russia now ranks the third in terms of the size of its foreign currency reserve, which amounted to $225 billion by mid-2006 (Moscow Times 5 May 2006). The Stabilization Fund, made up of a portion of oil revenues, had contributed another $5.9 billion by mid-2003. Moscow News, May 2004 Available from . 35

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increase in price, and the intensifying competitive demands, of energy resources in world markets dramatically enhanced Russia’s external position as a major exporter of fossil fuels. Moscow came to use Russia’s energy resources as its main source of foreign policy leverage, just as it had used military resources during the Cold War. Perhaps ironically, US unilateralism became another source of external strength for Moscow. The split between the United States and some Western European countries, particularly France and Germany, over the Iraq War gave Russia a chance to take sides with the latter against the former. Meanwhile, the US-led Missile Defense Initiative, together with the maintenance of US troops in Central Asia, served as points of contention in US relations with China as well as with some Central Asian countries. Furthermore, the subtle discord between Seoul and Washington in dealing with North Korea has provided an opportunity for Moscow to boost its influence on the Korean peninsula. Although Russia’s military power was still diminished, its “soft power” was certainly on the rise.38 Third, post-Yeltsin Russia simply learned from past errors and failures. Pro-Westernism in the Yeltsin era paid off far less than expected, both economically and politically. Given Russia’s huge natural resource endowments, the size of foreign investment it had attracted was meager at best.39 Moscow was not able to put the brakes on NATO’s eastward expansion, nor on its operations in Kosovo. Domestically, disenchantment and disillusionment with the West grew into antipathy toward the United States, not only within the governing circle but also in the society as a whole. As a result, liberals were practically decimated as a viable political force in Russia, as demonstrated in the Duma elections since the late 1990s.40 Against this backdrop, Putin’s policy shift in Northeast Asia quickly became apparent in efforts to enhance Russia’s relationship with China 38

Nye 2005; and Tsygankov 2006. In 1990–2000, foreign direct investment in Russia averaged $2.3 billion a year. This compares to $30 billion in China, $3.7 billion in Poland, and $3.2 billion in Hungary. See UNCTAD 2006. 40 In the 1999 national elections, Russia’s representative liberal parties, Yabloko and the Union of Right Forces, won 5.93% and 8.52% of Duma seats respectively. In the 2003 elections, both failed to reach the threshold of 5% of votes, thereby completely losing their party-list proportional seats. 39

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and mend bilateral ties with traditional allies. A couple of months after his inauguration, President Putin paid a visit to Beijing and signed a joint declaration condemning the US plan to create a missile defense system, and in the following year the two countries further upgraded their bilateral relationship by signing a Treaty for Good Neighborliness, Friendship and Cooperation, the first such agreement between the two Eurasian powers since Mao Tse-tung and Joseph Stalin signed a treaty in 1950. 41 Growing US unilateralism served as an important catalyst for drawing the two countries closer to one another. Putin’s government made similar overtures to other erstwhile allies in East Asia. Learning from the bitter experience of losing influence on the Korean peninsula, Putin’s new Foreign Minister Igor Ivanov visited North Korea and signed a new friendship treaty; Putin himself visited the reclusive state in July 2000, the first visit of its kind since the 1950s. Similarly, Russia worked to restore ties with old Soviet allies such as Vietnam, Laos, Cambodia, and Mongolia. At the same time, riding the cresting wave of East Asian regionalism, Moscow stepped up its efforts to actively participate in regional economic and security organizations such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) forum,42 as well as in official and Track II security dialogue forums like the ASEAN Regional Forum (ARF) and the Council for Security Cooperation in the Asia Pacific (CSCAP) ). In particular, Russia managed to establish its own institutionalized dialogue with ASEAN at the level of foreign ministers to discuss issues of mutual interest on a regular basis. In December 2005, the first ever Russia– ASEAN summit was held in Kuala Lumpur, at which a joint declaration was adopted on a progressive and comprehensive partnership to enhance further cooperation.43 Meanwhile, Russian ministers used

41

The new treaty stipulates five important areas of cooperation: joint actions to offset a perceived US “hegemonism”; demarcation of the two countries’ longdisputed 4,300 kilometer border; arms sales and technology transfers; energy and raw materials supply; and the rise of militant Islam in Central Asia. 42 Russia gained full membership in APEC in November 1998. 43 Together with the Comprehensive Program of Action to Promote Cooperation between the Russian Federation and ASEAN 2005–2015, this agreement on eco-

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APEC to establish a strong rapport with regional leaders. Putin attended every annual APEC summit meeting since 1999, when he was prime minister.44 It is quite ironic that the 1997–1998 financial crises helped establish trends that brought Russia closer to its East Asian neighbors than ever before – closer certainly than in the better times of the Asian economic miracle. In large part, Russia and the countries of East Asia found a common interest in reducing the damaging effects of the crisis and devising internal policy measures to avoid scaring off foreign investors. But domestic political changes within Russia were essential to enabling Moscow to act on this opportunity. Freed from prior oligarchic and provincial constraints and equipped with better state capabilities, Russia positioned itself to proactively seize opportunities popping up in the region. 6.5 Post-9/11: The Neoabsolutist Coalition and Russian Neomercantilism in Northeast Asia The 9/11 terrorist attacks and the ensuing military implementation of the Bush administration’s foreign policy in the framework of the “War on Terrorism” brought about monumental changes not only in the global power structure but also in the balance of power in Northeast Asia. The United States, departing from its exclusive focus on bilateral arrangements in dealing with regional security matters, took a great turn toward multilateral cooperation against terrorism. 6.5.1 Structural Changes in East Asia The terrorist attacks helped produce a new constellation of regional relationships. Japan drew even closer to the United States under the leadership of Junichiro Koizumi, who was himself riding a wave of Japanese nationalism. By contrast, the ROK–US alliance soured precipitously in the context of the second North Korean nuclear crisis in nomic development cooperation laid a solid legal foundation for collaboration between Russia and ASEAN. 44 Shkuropat 2002.

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2002, with new policy differences emerging regarding alleged North Korean money laundering and counterfeiting, the Bush administration’s Proliferation Security Initiative (PSI), and the Roh Moo-hyun government’s engagement policy towards North Korea. Meanwhile, South Korea and China became closer to each other not only for economic reasons,45 but also due to their common interest in condemning rising Japanese nationalism and in dealing with North Korea in a peaceful and diplomatic manner. For its part, North Korea, identified along with Iran and Iraq as part of an “axis of evil” by the Bush administration and alarmed by the US invasion of Iraq, returned to its traditional brinkmanship strategy by provoking the second nuclear crisis, test-firing long-range missiles, and ultimately performing underground nuclear tests in October 2006. From Russia’s viewpoint, the 9/11 attacks and the subsequent US unilateralism in Iraq and elsewhere revealed not only the strength but also the weakness of the United States. Putin seemed to acquiesce to US strength. He tolerated the American military presence in Central Asia, which is considered Russia’s backyard, as well as unilateral American withdrawal from the Anti-Ballistic Missile (ABM) treaty and NATO’s further enlargement to include the former Soviet republics of Lithuania, Latvia, and Estonia. He even rushed to give explicit support for the Bush administration’s War on Terrorism, to the great surprise and dismay of many of his closest aides. We should be cautious, however, in interpreting Moscow’s acquiescence to US foreign policy in the early Putin years. At the time, this acquiescence was generally understood as an indication of his proWestern policy stance, but subsequent events suggest that Putin rhetorically supported the United States in consideration of Russia’s own concerns about the spread of radical Islamic terrorism into Russia’s southern Caucasus region (including Chechnia) and into neighboring Central Asian countries. Though this suggests a certain tendency of fellow sufferers of Islamist terrorism to sympathize with each other, it also implies that Putin’s actions were a tactic calculated to buy him more time to consolidate his domestic political power and to get Russia 45

China surpassed the United States and Japan as South Korea’s largest trade partner, in 2003 with their total trade volume amounting to over $100 billion. China is also Korea’s largest foreign investment destination, accounting for almost 40% of its total foreign investment.

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prepared to articulate and pursue its own interests more clearly and assertively. Moreover, Putin’s Russia could afford to be somewhat sanguine in the face of evidence of the limits of American power. The Iraq War clearly revealed that even the militarily peerless United States could not wage the war alone. Continuing difficulties in Afghanistan were another indication of this weakness, and the rising international and domestic criticism of the Iraq War created further difficulties for Washington in fueling anti-Americanism. Changes in both the global and Northeast Asian power structure following 9/11 thus provided Russia with an opportunity that Putin did not intend to miss. In particular, the shift in the regional balance of power – largely related to the political and economic rise of China and India – portends an emerging regional system in which Russia seeks to establish itself. 6.5.2 Consolidation of Neoabsolutist Governance Putin, linking the 9/11 attacks to the Chechen war and a series of domestic terrorist incidents, effectively utilized the international war on terrorism to consolidate power domestically. In the 2003 State Duma elections, the pro-Putin United Russia party won the largest number of votes and seats, reducing most other parties to minor status.46 Even the formal figure is an underestimate because most of the minor party and “independent” members are in fact clients or supporters of President Putin. The elections thus gave Putin complete control of the legislature. Putin himself was reelected by winning over 70% of votes in the 2004 presidential election. Following the tragic Beslan school massacre in September 2004, Putin also assumed control of appointing the governors of Russia’s provinces and changed the election system for the State Duma in such a way to fill all 450 seats by party-list proportional representation.47 46

The United Russia party won 222 of 450 seats. However, this formal figure actually underestimates Putin’s power, since most of the minority party and “independent” members were in fact his Putin’s clients or supporters. 47 Previously, half of the seats were filled by a party-list system of proportional representation and the other half with individual representatives from singlemember districts.

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His aforementioned political offensives against the oligarchs and provincial barons effectively put an end to neofeudal system and accelerated the rise of a new neoabsolutist political economic governance in Russia akin to early modern European absolutism. Its absolutist features included, first and foremost, a progressive centralization of the state system. With the aim of “building a strong Russian state through a dictatorship of law,” Putin pushed through a series of federal reform measures that culminated in the post-Beslan legislation.48 These legal and institutional measures, backed by Russia’s swelling treasury, enhanced Moscow’s position vis-à-vis the provincial barons. In 2003, for example, Putin sacked the Primorskii Governor Yevgenii Nazdratenko, one of the staunchest opponents of Moscow’s Northeast Asia policy. Another element of Putin’s neoabsolutism was the rise of a new political ruling coalition, whose core consisted of the so-called siloviki, or power group. The siloviki proliferated in the state bureaucracy both at the federal and provincial levels, and reportedly filled up to 25% of top-level posts in civilian ministries and state agencies.49 Through their occupancy of many core policymaking posts, as well as the deputy posts of almost all federal organizations, the siloviki functioned as the sentries of the Russian bureaucratic system and as Putin’s solid power base. With backgrounds in security and law enforcement – such as the old Soviet KGB, the Federal Security Service (FSB), the Ministry of Internal Affairs, the military, and other security organs – the siloviki as a group tended to take a more hard-line stance both in domestic and foreign affairs, emphasizing law and order, security, and the national interest. It is widely believed that Putin’s political offensive against 48 Putin’s federal reform measures included: the introduction of the seven Federal Districts, under the jurisdiction of each of which fell at least twelve or more existing federal subjects; the introduction of a new electoral system for the Federation Council, the upper house of the Russian parliament; the creation of the State Council presided over by the president and composed of heads of the seven Federal Districts and heads of regional governments; and the introduction of a new residential power to dismiss regional chiefs and dissolve regional parliaments. 49 Olga Kryshtanovskaya pioneered research in this field, tracing the growth of horizontal old comrades networks inside the Kremlin. See Kryshtanovskaya 2002 and Baev 2004.

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the oligarchs (including the Yukos affair50) was initiated and organized by hard-core siloviki members, namely, Kremlin powerbrokers Igor Sechin and Viktor Ivanov. Due in great part to the rise of the siloviki, the state and its bureaucracy increasingly dominated big business in Russia. Yet another absolutist element of Putin’s new governance was the state’s active intervention in the economy. Of note here was the state’s advance into the most important sectors of the economy – especially energy – to exercise control through direct ownership. It was widely reported that Yuganskneftegaz, the main production unit of the private oil company Yukos, owned by the renowned oligarch Mikhail Khodorkovskii, ended up in Rosneft’s production row, pushing the national oil company to the top rank in terms of crude oil production. Sibneft, another vertically integrated Russian oil company owned by one of the richest Russian oligarchs, Roman Abramovich, was sold to the national gas monopoly Gazprom. Putin repeatedly argued for increasing the government’s ownership position in Gazprom, and finally in June 2005 succeeded securing over 50% state ownership as the board decided to sell 10.74% of its stock to Rosneft.51 Besides direct ownership transfer, Putin also used his power of appointment to extend control over important energy sector companies. He replaced the recalcitrant Gazprom chief Rem Viakhirev, former Prime Minister Viktor Chernomyrdin’s long-time protégé, with his closest St. Petersburg aide Aleksei Miller, and installed his deputy chief of staff Dmitrii Medvedev as chairman. In August 2004, Putin appointed his chief of staff Igor Sechin as Rosneft chairman and made another deputy, Vladislav Surkov, a board member of the state-owned oil products transportation company Transnefteprodukt. 6.5.3 Neomercantilist Foreign Policy Firmly backed by neoabsolutist governance, Russia’s foreign policy in Northeast Asia began to take on a neomercantilist character. This policy resembled the mercantilism prevailing in Europe in the sixteenth, 50 For details on the Yukos affair, visit the Carnegie Moscow Center’s special section on the topic at . 51 Kommersant, 27 June 2005.

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seventeenth, and eighteenth centuries, under which national governments tightly controlled industry and trade in accordance with the theory that national strength was increased by a preponderance of exports over imports.52 Table 6.1 posits some comparable points of early modern European mercantilism and Putin’s neomercantilism. Table 6.1. West European mercantilism and Putin’s neomercantilism

Early Modern Western Mercantilism • State control of the national economy • Overseas expansionism

• Protectionism

• Domestic coalition with feudal aristocrats • Bourgeoisie weak but on the rise

Putin’s Neomercantilism • State intervention and control of important economic sectors (especially energy) • Assertive foreign policy behavior utilizing energy resources as leverage • Multilateral collective security system • Economic centralization and protectionism • Linkage between external economic integration and domestic regional economy • Old oligarchs and regional barons in retreat • Siloviki on the rise

Putin’s Russia continued to rely on its traditional strengths as the core of its assertive foreign trade strategy: oil, gas, pipelines, the arms trade, and nuclear cooperation. Russia was competitive in these factors globally and could realistically hope to maintain or even expand its 52

Some of the main features of the early modern European mercantilism included: (a) state intervention in the national economy and foreign trade; (b) protection of domestic industries against foreign competition; (c) overseas expansion in the form of colonialism; (d) emphasis on exports over imports based on the zero-sum model of world trade; and (e) bellicosity emphasizing the necessity and profitability of warfare.

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market share. Putin’s renewed emphasis on energy resources in its Northeast Asia strategy, however, best revealed its neomercantilist features.53 Having secured firm control over Russia’s energy sector through the expanded state companies, Rosneft and Gazprom, as well as through the two state-owned pipeline monopolies, Transneft and Transnefteprodukt, Moscow began to pursue plans to diversify energy exports and access new oil and gas markets in the Asia-Pacific region and Northeast Asia in particular.54 As a practical step in implementing this grand scheme, plans for building West-East oil and gas pipelines were set high on Russia’s Northeast Asia agenda. The Angarsk-Daquing pipeline project was originally formulated in 1998 between Yukos and China National Petroleum Corporation (CNPC). Transneft tabled a contending proposal for a much longer pipeline starting from West Siberia all the way to Nakhodka – driven no doubt by resistance to Yukos’ encroachment on its monopoly. Transneft argued that Nakhodka would better protect the security of Russia’s oil trade by accessing a far wider range of buyers on the Pacific than a line that came to a dead end in interior China. Japan later became involved in the competition between the two proposals, beginning with a visit by Prime Minister Junichiro Koizumi to Moscow. Like China, Japan wanted to diversify its supply of energy by securing Russian sources. Northeast Asian pipeline politics from this point on turned into a strategic, zerosum game between China and Japan, with Russia playing the role of balancer and perhaps kingmaker. After vacillating for almost three years, on December 31, 2004, the Russian government announced its official decision to construct the Pacific oil pipeline of over 4,000 kilometers from Taishet to Nakhodka, and Putin confirmed this when he prepared to meet in Tokyo with Koizumi in November 2005.55 But this decision was by

53

Putin, for example, made special reference in his 26 August 2004 Address to the Federal Assembly to energy projects and transport infrastructure in Eastern Russia, including oil and gas pipeline projects. Available from . 54 See Energy Strategy 2020, Russia’s long-term national energy strategy document approved in August 2003. Pravitel’stvo Rossiiskoi Federatsii 2003. 55 Synovitz 2005.

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no means final: the Kremlin remained ready to resume the balancing game whenever the need should arise. Although the idea of Russian integration with the Asian economy had been connected to economic development in Eastern Siberia and the Far East since Gorbachev, it was not until Putin came to power that such a policy received full support from Moscow. State financing of Far Eastern development began to improve noticeably. In 2005, the region received 7.8 billion rubles from the federal budget for development purposes; in 2006, the amount more than doubled. In a working meeting in January 2006 in Yakutia, Russia’s largest republic in the Far East province, Putin made it clear that the development of the province’s natural resources and the regulation of large-scale export to Asia-Pacific would be carried out within the framework of a special national program with an additional 16 billion rubles assigned from the federal coffers.56 Dmitrii Medvedev, a Putin protégé an d chairman of Gazprom, was put in charge of the program. Particular attention was paid to accelerating the development of natural gas in Yakutia and the construction of the Taishet–Skovorodino–Nakhodka oil pipeline. Russia had begun to utilize its abundant natural resources and pipeline routes to reach a takeoff stage in its economic relations with Northeast Asia. Russia’s neoabsolutist governance system was well positioned to follow through on this project. Large-scale development of energy resources in East Siberia and Far East, if properly implemented, would provide a major opportunity for Russia to realize the goal of closer integration in the Asian economy and, as a consequence, the development of the economically backward ESFE. On the security front, Russian neomercantilism was expressed, perhaps paradoxically, through stepped-up efforts to institutionalize multilateral and minilateral security arrangements in Asia. Given Russia’s radically diminished political-military capabilities, it was quite rational for it to rely on the policy of playing “great power on the cheap,” supporting a multilateral system to share the costs of regional or global influence – instead of paying these costs alone, as the Soviet Union did in the Cold War era. Encouraging competing centers of power, rather than unilateral overseas expansion, was a practical way for a much-weakened Russia to adjust to the new international 56

Simonia 2006, 27–28.

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reality. Its moves towards China, India, and other states in Asia could be viewed as a manifestation of such policy. Russia’s utmost security concern lies, first and foremost, in Central Asia and radiates from there to Northeast Asia. As early as in 1992, Russia initiated the Treaty of Tashkent as a basis for multilateral military cooperation among the nations of the Commonwealth of Independent States (CIS),57 but it took ten years to transform this informal security arrangement into the formal and enlarged Collective Security Treaty Organization (CSTO) in 2002–2003.58 After a meeting between Putin and Nikolai Bordyuzha, the secretary-general of the CSTO in May 2006, it was announced that the regional security body would transform into an “international, multifunctional, and universal structure” and form “collective emergency reaction forces,”59 operating not only within its present jurisdiction but also “outside this area.” Whatever its capabilities, the CSTO has patterned itself after NATO as a collective security organization with global reach. More importantly, Moscow collaborated with Beijing to further institutionalize the so-called Shanghai Five.60 This effort bore fruit in 2001 with its transformation into the Shanghai Cooperation Organization (SCO).61 Starting as an organization aimed at confidence-building measures and the demilitarization of borders among member countries, the SCO has since expanded its mandate to include drug-trafficking and terrorism and, more broadly, building a regional security structure to confront common regional threats. At a meeting in September 2003, Chinese Premier Wen Jiabao even proposed the long-term project of establishing an SCO-wide free trade area. The SCO’s agenda is infused with Chinese and Russian suspicion of US designs in Eurasia and a desire to reduce Washington’s influence in Central Asia. This is evident in both the 2001 SCO declaration6 2 57

Only four Central Asian countries (Kazakhstan, Tajikistan, Kyrgyzstan and Uzbekistan) joined this treaty. 58 While Uzbekistan left, Belarus and Armenia newly joined the bloc. 59 Asia Times, 31 May 2006. 60 The Shanghai Five was organized in 1997 as a joint Russian–Chinese initiative to address regional security issues among five neighbors: Russia, China, Kazakhstan, Kyrgyzstan, and Tajikistan. 61 At this point, Uzbekistan joined the Shanghai Five to create the SCO. 62 SCO 2001.

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and the 2005 bilateral Russia–China declaration on “World Order in the 21st Century,” in which the two emphasized the principles of mutual respect of sovereignty, territorial integrity, and mutual nonaggression and noninterference. In line with this, the 2005 SCO summit openly demanded that the United States set a timetable for removing its military bases in Uzbekistan and Kyrgyzstan. It seems clear that both Moscow and Beijing viewed the SCO as a means to check US presence and influence in Central Asia, which grew markedly after 9/11. The SCO granted observer status to India, Pakistan, Iran, and Mongolia, and Moscow sought to expand cooperation with these observer countries.63 The United States cast a suspicious eye on the SCO, which was unsurprising, given that the organization had the potential to develop into a “Eurasian OPEC with nuclear weapons,” or an Eastern version of NATO. The CSTO and the SCO are distinct, but have some overlapping structures. While the former is dominated by Russia, the latter is guided by Russia and China in tandem. Although the CSTO’s sphere of activities is currently confined to the CIS realm, the SCO could operate more broadly in East Asia – particularly due to the Chinese presence and role in the organization. Russia and China followed their first joint military exercise, “Peace Mission 2005,” with another joint military exercise in 2006 on China’s Shandong peninsula within the SCO framework, arousing suspicions and concerns from the West. Moreover, Russia actively sought to extend SCO’s institutional reach. After the Tashkent Initiative adopted at the SCO’s 2004 annual summit raised the issue of creating a partnership network of multilateral associations in Asia-Pacific,64 the ASEAN and SCO secretariats adopted a memorandum of understanding in April 2005. Russia and China also interacted with each other within the framework of the Six-Party Talks, an informal mechanism designed to address the North Korean nuclear issue, along with South Korea, North Korea, Japan, and the US Further discussion of this process can be found in this volume, in the chapters by Rhyu and Frost and Kang.

63 64

Putin 2006. Lavrov 2006.

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6.6 Scenario Analysis Moscow has never before been so active and ambitious in Northeast Asia, even during the entire Soviet period. Its neomercantilist Eastern policy has now been activated in both the economy and security realms. The “triple shocks,” in retrospect, contributed to Russia’s growing engagement on the Asian front. But its neomercantilist regional policy cannot be fully explained by these shocks or by systemic changes in the regional power structure. Even more fundamental was the transition in Russia’s domestic politico-economic governance, centering on the nature of the ruling coalition. Just as Yeltsin’s foreign policy drift was inseparable from neofeudal governance, so did Putin’s neomercantilism emerge from neoabsolutist domestic governance. Consequently, Putin’s neomercantilism in Northeast Asia is not independent of Russia’s domestic political situation. If the Russian state were captured by a more hard-line faction of siloviki – akin to the oligarchs and provincial barons under Yeltsin – we might expect security considerations to eclipse economic interests in Moscow’s foreign policy calculation, ultimately leading to a new round of confrontational great power games in Northeast Asia. Such an outcome would be even more likely if a hard-core siloviki faction aligned itself with more conservative and nationalist elements in Russia. In such a scenario, Asian regionalism might grind to a halt – especially if the United States responded in a bellicose, unilateral way, thereby reinforcing hard-liners in Moscow. Moreover, Russia might seek to mobilize the CSTO–SCO frameworks within such a renewed great power game. The existing Russian ruling coalition is in no sense unitary.65 Particularly in the economic field, pragmatists are firmly ensconced in the Kremlin’s inner circle.66 Their presence is the strongest check

65 On

this view, see Shevtsova 2006. Putin’s pragmatists include those younger economists and executive managers from St. Petersburg who had proven their market value, such as Gazprom Chief Aleksei Miller, First Vice Premier Dmitrii Medvedev, former First Deputy Head of the Presidential Administration Dmitrii Kozak, Head of the Russian Federal Agency for Federal Property Management Valerii Nazarov, and Minister of Economic Development and Trade German Gref.

66

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against a hard-line siloviki takeover of Russian politics. If this pragmatic element, composed of more or less liberal bureaucrats and managers as well as soft-line siloviki, is able to maintain and enhance its voice within the ruling coalition, Russian foreign economic policy will remain sensible and pragmatic, and likely to positively contribute to Asian regionalism. Moscow has recognized the importance of the links between the ESFE and the Asia-Pacific regional economy; its sincere efforts in this direction could breathe new life into such bilateral and multilateral projects as the Tumen river project, the iron silk road project linking the Trans-Siberian Railway to the Trans-Korean Railway, and of course, the energy development and pipeline projects. There is also a possibility of a functional split within the ruling coalition, with the hard-line siloviki controlling security policy and the pragmatic soft-liners overseeing the economic realm. In this case, Moscow would be likely to promote an ever-expanding role for the SCO (in combination with the CSTO) not only in Central Asia, but also in Northeast Asia. If successful, an embryonic “Moscow-Beijing-Delhi strategic triangle” could emerge, aspiring to a global role and status. Under this scenario, economic and strategic calculations would go hand in hand in Moscow, but their marriage would not always be comfortable. Striking and maintaining a balance between the two would be the main political task of the top political leadership. Russia’s oligarchs are politically dormant at the moment, but not defunct. They are still economically powerful and have the means to return to the political forefront. Notably, they have been converting their economic resources into political power at the provincial level since the financial crisis.67 If they were to make a political comeback in alliance with provincial elites, neofeudalism could return – making it once again difficult for Moscow to articulate national, as opposed to sectional, interests. Change of top leadership will determine the future direction of Russia’s Northeast Asia policy. This is not because the political leadership is decisive in foreign policy formulation per se, but rather that leadership change might alter the nature of the neoabsolutist political coalition and ultimately fundamentally transform Russia’s current political governance. The 2008 Russian presidential election resulted 67

Orttung 2004.

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in the selection of Dmitry Medvedev as the third President of Russia. Mr. Medvedev, whose candidacy was supported by incumbent president Putin, received 70.3% of the vote. Medvedev announced that, as President, he would appoint Vladimir Putin to the post of prime minister to head the Russian government. Although constitutionally barred from a third consecutive presidential term, such a role would allow Putin to continue as an influential figure in Russian politics, suggesting continuity in the patterns observed previously. 6.7 Conclusion This chapter has examined Russia’s Northeast Asia policy with a focus on changes in its domestic political governance and ruling coalitions. Figure 6.2 sums up its path in accordance with the analytical framework presented in Sect. 6.2.

Fig. 6.2 Russia’s foreign policy path

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During the Yeltsin period, Russia’s Northeast Asia policy – like its foreign policy more generally – experienced drift. This drift resulted in part from weak state capacity, but more importantly from the state’s subordination to the interests of the neofeudal coalition. Hamstrung by oligarchs and provincial barons, scarce state capacities were diffused and scattered. As a result, there was a huge discrepancy between Moscow’s foreign policy rhetoric and its deeds, while its external behavior drifted between pro-Westernism and Eurasianism. The 1997–1998 financial crises and the 9/11 terrorist attacks played a catalytic role in rectifying this situation. Seizing the opportunities provided by these external shocks, Vladimir Putin consoli dated the enfeebled Russian state by forging a new ruling coalition and politically emasculating the old one. Neoabsolutist domestic governance thus emerged as the crucial source of Russia’s foreign policy behavior, and Moscow did not hesitate to pursue neomercantilist goals in Northeast Asia. Pragmatic neomercantilism, Russia’s current stance, would do no harm to countries of the region or to the rising Asian regionalism. Properly utilized and implemented, it might actually help facilitate bilateral and multilateral cooperation in Northeast Asia. Russia currently seems to have both the intent and the capabilities to pursue this course. Early modern historical experience teaches us, however, how easily mercantilism can become belligerent and lead to aggressive overseas expansion. This possibility cannot be entirely excluded for present-day Russia. Although it is too early to tell in which direction Russia’s neomercan tilism will evolve, we can be sure that it will be shaped in great part by the politico-economic dynamics of Russia’s domestic governance, giving us good reason to keep an eye on inner Russia.

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Brown, Kathryn. 1992. Sakahlin’s Valentin Fedorov Makes Nationalist Allies. RFE/RL Research Report 1 (38):33-38. Daniels, Robert V. 1999. Evgenii Primakov: Contender by Change. Problems of Post-Communism 46 (5):27-36. Evans, Peter. 1979. Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil. Princeton, New Jersey: Princeton University Press. Filippov, Mikhail and Olga Shvetsova. 1999. Asymmetric Bilateral Bargaining in the New Russian Federation: A Path-Dependence Explanation. Communist and Post-Communist Studies 32:61-76. Goskomstat. 1998. Rossiiskii statisticheskii yezhegodnik. Moscow, Russia: Goskomstat. Gourevitch, Peter. 1978. The Second Image Reversed: The International Sources of Domestic Politics. International Organization 32 (4):881-911. Guriev, Sergei and Andrei Rachinsky. 2005. The Role of Oligarchs in Russian Capitalism. Journal of Economic Perspectives 19 (1):131-50. Hellman, Joel. 1998. Winners Take All. World Politics 50 (2):203-234. Hoffman, David E. 2002. The Oligarchs: Wealth and Power in the New Russia. New York: Public Affairs. Horelick, Arnold L. 1974. The Soviet Union’s Asian Collective Security Proposal: A Club in Search of Members. Pacific Affairs 47 (3):269-285. Kim, Taehwan. 2005. Recombinant Capitalism: The Fragmented State and Associated Economy in Post-Socialist Russia. Korea Observer 36 (2):349-376. Kryshtanovskaya, Olga. 2002. Rezhim Putina: liberal’naia militokratsiia? Pro et Contra 7 (4):158-180. Lavrov, Sergei. 2006. The Rise of Asia, and the Eastern Vector of Russia’s Foreign Policy. Russia in Global Affairs 4 (3):68-80. Lo, Bobo. 2003. Vladimir Putin and the Evolution of Russian Foreign Policy. Malden, Mass.: Blackwell. North, Douglas. 1981. Structure and Change in Economic History. New York: W. W. Norton. Nye, Joseph S. 2005. Soft Power: The Means to Success in World Politics. New York: Public Affairs. Olson, Mancur. 1982. The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. New Haven, Conn.: Yale University Press. Orttung, Robert W. 2004. Business and Politics in the Russian Regions. Problems of Post-Communism 51 (2):48-60. Pravitel’stvo Rossiiskoi Federatsii. 2003. Energetichekaia Strategiia Rossii na Period do 2020 Goda. Russian Ministry of Industry and Energy. Available from . Primakov, Yevgenii. 2001. Vosem’ mesiatsev plyus. Moscow, Russia: Mysl’. ———. 2002. Mir posle 11 sentiabria. Moscow, Russia: Mysl’. Rangsimaporn, Paradorn. 2006. Interpretations of Eurasianism: Justifying Russia’s Role in East Asia. Europe-Asia Studies 58 (3):371-389. Putin, Vladimir. 2006. SCO – A New Model of Successful International Cooperation. Speech made at the meeting of the Heads of the States of the Shanghai

Russia in Northeast Asia from Yeltsin to Putin 211 Cooperation Organization, June, Shanghai, China, Available from . Shanghai Cooperation Organization (SCO). 2001. Declaration on Establishment of Shanghai Cooperation Organization. Available from . Shetsova, Lilia. 2006. Russia’s Ersatz Democracy. Current History (October): 307-314. Shkuropat, Anna V. 2002. New Dynamics in Northeast Asia: The Russian Factor. CNAPS Working Paper. Washington, D.C.: Center for Northeast Asian Policy Studies, Brookings Institution. Simonia, Nodari A. 2006. Russia in The Asia-Pacific: The Beginning of a New Era? Asia-Pacific Review 13 (1):16-31. Smith, Graham. 1999. The Masks of Proteus: Russia, Geopolitical Shift and the New Eurasianism. Transactions of the Institute of British Geographers 24 (4):481-494. Synovitz, Ron. 2005. Russia: Putin Says Oil Pipeline Will Reach Far East Coast. RFE/RL, 21 November. Tsygankov, Andrei P. 2006. If Not by Tanks, Then by Banks? The Role of Soft Power in Putin’s Foreign Policy. Europe-Asia Studies 58 (7):1079-1099. UNCTAD. 2006. World Investment Report 2006. New York: United Nations Publications. Vitkovskaia, Galina, Zanna Zaonchkovskaia, and Kathleen Newland. 2000. Chinese Migration into Russia. In Rapprochement or Rivalry? Russia-China Relations in a Changing Asia, edited by Sherman Garnett. Washington, D.C.: Carnegie Endowment for International Peace. Waltz, Kenneth N. 1979. Theory of International Politics. Reading, Mass.: AddisonWesley. Whitmore, Brian. 2005. Russia: The End for Loans-for-Share. RFE/RL Features (September 29). Available from . Wishnick, Elizabeth. 2002. The Regional Dynamic in Russia’s Asia Policy in the 1990s. In Russia’s Far East: A Region at Risk, edited by Judith Thornton and Charles E. Ziegler. Seattle, Wash.: University of Washington Press. Zudin, Aleksei. 2001. Neokorporativizm v Rossii?: Gosudarstvo i biznes pri Vladimire Putine. Pro et Contra 6 (4):171-198.

7 Security in Northeast Asia: Time for New Architecture?

Ellen L. Frost National Defense University, Washington, DC, USA David C. Kang Dartmouth University, Hanover, NH, USA

7.1 Introduction1 Northeast Asia is home to two of the world’s most dangerous trouble spots: the Taiwan Strait and North Korea. The region faces a variety of potential non-traditional security threats such as illicit trafficking, piracy, terrorist attacks, environmental pollution, climate change, and pandemic disease. A growing demand for energy has already fueled occasional gunboat skirmishes in disputed territorial waters. Conflicting versions of Japan’s wartime record and the alleged insincerity of Japanese apologies stoke public spats and preclude close and frequent communication. Tensions are such that small incidents can escalate quickly. Yet no regional security institution has been established to deal with these challenges in a focused and tangible way. At the same time, the economies of Northeast Asia are increasingly interdependent. The region boasts some of the richest and fastest growing territories in the world. Japan, China, Hong Kong, South Korea, and Taiwan are all exceptional examples of successful economic development. The Chinese economy has become a driver of regional economic integration and is now the number-one or number-two 1

We would like to express our appreciation for the comments and editorial assistance of Jonathan Chow, Edward Fogarty, and Kristi Govella.

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trading partner of almost all the countries in Asia. Largely because of China, intra-regional trade within Asia as a whole exceeds NAFTA’s and is approaching the level of the European Union. Similarly intense trade patterns are emerging in Northeast Asia as well: high-technology parts and components from Japan and South Korea are sent to China for further manufacturing and assembly and then re-exported. Although China, Japan, and South Korea are increasingly deeply intertwined economically, they compete politically for influence in the rest of Asia. Each of them has negotiated a preferential trade agreement with the 10-member Association of Southeast Asian Nations (ASEAN), where they are known collectively as the “Plus 3” countries, but they have yet to establish bilateral or sub-regional trade agreements with each other. On the security side, cooperation is also limited. China, Japan, and South Korea have worked closely – and somewhat successfully – to manage the North Korean nuclear problem. They have also cooperated to some extent to counter terrorist groups and criminal activities, and they have begun to conduct joint military exercises, exchange military personnel, and strengthen ties between law enforcement officials. However, the level of trust in Northeast Asia is still low. Until now, the United States has been the main guarantor of stability in Northeast Asia. Although Asian governments welcome China’s resurgence, some appear unsure about Beijing’s long-term intentions. Accordingly, most of them have strengthened rather than weakened their military ties with the United States, while at the same time approaching and accommodating Beijing. For various reasons, the military arrangements that spread out from Washington are mostly bilateral and “customized” to mesh US priorities with each nation’s needs, rather than regional or sub-regional.2 Despite substantially overlapping security needs, the notion of collective security is absent. In short, there is an “organization gap” in this part of the world. Is it time to develop one or more Northeast Asian institutions corresponding to this mix of economic interdependence and unresolved security issues? If so, what are the opportunities? Addressing these questions raises at least three others: First, how have the core relationships in Northeast Asia, particularly the China–Japan–US triangle, 2

For an explanation based on culture, history, and identity, see Hemmer and Katzenstein 2002, 575–607.

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been impacted by (1) the end of the Cold War, (2) the Asian financial crisis, and (3) the terrorist attacks of September 11, 2001 (“9/11”)? Second, to what extent are existing non-Northeast Asian institutions capable of addressing the region’s concerns in this new “post-triple” environment? Third, can new institutions cope with conflicting trade and energy concerns, hostile political relationships, non-traditional security challenges, and above all, the threat posed by North Korean nuclear weapons – or must the states of the region resolve these problems first, before they can create meaningful institutions? This chapter assesses the prospects for “soft” institutionalization in Northeast Asia. By “soft,” we have in mind the so-called “ASEAN way,” an approach characterized by dialogue, community-building, and norms that emphasize the peaceful resolution of disputes. It will be many years, if ever, before Northeast Asia is ready for “hard” institutions in the Western sense, with legally binding rules, but the trend toward “community-building” in East Asia as a whole is unmistakable.3 Our analysis begins by exploring the impact of the “post-triple” external shocks described above and sketches their impact on the security environment in Northeast Asia.4 It adds four new regional factors: the resurgence of China, the emergence of Japan as a more active and engaged military power in the region, the upsurge of non-conventional threats, and the growth of East Asian regionalism. We then describe existing institutions and assess their ability to cope with Northeast Asian security needs. Finally, we focus on the possible institutionalization and broadening of the Six-Party Talks. Our main conclusion is that although the prospects for regional architecture in Northeast Asia appear dim at the moment, the continued existence of the Six-Party Talks and the efforts of participant countries to resolve the North Korean nuclear issue exhibit the first instance of a genuine multilateral approach to solving an intense regional security issue. This multilateral behavior also provides the basis of cooperation upon which states in the region may begin to build a more lasting regional security framework. The attention and energy of the United States will be critical to the success of this framework. 3 4

For examples, see Frost 2008, Chap. 7–9. See the introduction to this volume.

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7.2 Changes in the External Environment 7.2.1 The End of the Cold War The end of the Cold War eliminated the Soviet–US competition for influence, dried up Russian support for North Korea, sparked closer US–China relations, and substantially narrowed the political gap between China and Japan. These changes made it easier for widely differing Northeast Asian states to cooperate with each other, but as long as Cold War divisions persisted between the major powers, the creation of regional institutions in Northeast Asia remained impossible. In Southeast Asia, by contrast, ASEAN was formed in 1967 with the goal of resisting the spread of communism. Certain aspects of today’s Northeast Asia stand in stark contrast to the normative power mosaic that prevailed during the Cold War. The Russians no longer wield major influence in the region. South Koreans, no longer threatened, have distanced themselves somewhat from Washington. They harbor warm feelings toward China and bitter feelings toward Japan, and they strongly favor closer engagement with North Korea. Taiwan boasts a prosperous economy that is now closely integrated with China. All this was virtually inconceivable a few decades ago. The most dramatic development since the end of the Cold War has been the continuing transformation of China from the mid-1990s on. China epitomizes the “everything has changed, but nothing has changed” contrast reflected in post-Cold War Northeast Asia. On one hand, China has transitioned from an inward-looking, socialist, and occasionally bellicose power to an outward-looking, increasingly market-oriented, and constructive player whose huge market and surging growth attracts all the countries of the region. On the other hand, Chinese leaders bridle at perceived US “encirclement” and “containment,” criticize Japan’s more active strategic presence, and continue to boost military spending at a double-digit rate. There is even talk of a “new Cold War of ideas.” Indeed, other systemic aspects of the situation in Asia have continued unaltered, despite the end of the Cold War. North Korea remains a totalitarian communist dictatorship. Japan, after a decade of economic stagnation, remains a close ally of the United States.

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The status of Taiwan remains unresolved. The new government in Taipei will almost certainly improve cross-Strait relations, but it is hard to envision Beijing altering its insistence that Taiwan is a domestic issue. On the other side of the globe, the United States remains the dominant world military power and its hunger for imports continues to spur Northeast Asia’s economic growth, although it has clearly lost influence relative to China. According to Alexa Olsen, “China is at least as powerful a force in Asia and within APEC as is the United States.”5 Some believe that China is rapidly expanding its “soft power,”6 but others point to America’s substantial strengths in the region and the many domestic and international weaknesses that China must overcome.7 7.2.2 The Asian Financial Crisis The 1997–98 Asian financial crisis spurred both an awareness of the economic interconnectedness of the region and a profound sense of vulnerability. South Korea suffered severely from the crisis, as did most of Southeast Asia (especially Indonesia). Tsutomu Kikuchi remarked that the crisis engendered “a feeling of humiliation shared by many East Asian countries.”8 In the tumultuous aftermath of the Asian financial crisis, China and Japan emerged as regional leaders. China, unscathed by the crisis because of its capital controls, earned diplomatic credit by not devaluing its currency and by offering seemingly generous trade deals. Japan took the lead on pan-Asian financial initiatives. Tokyo’s proposal to establish an Asian Monetary Fund ran into opposition from the United States, the rest of the Group of 7, and the International Monetary Fund and was subsequently dropped, but ASEAN Plus Three financial ministers succeeded in establishing a network of bilateral currency swap arrangements called the Chiang Mai Initiative. These and other evolving financial initiatives receive active support from the Asian 5

“China Edging out U.S. for APEC leadership,” Associated Press, 16 November 2005. 6 Kurlantzick 2007. 7 Sutter 2005. 8 Kikuchi 2002, 1–23; Bowles 2002, 230–56; and Kahler 2000, 661–84.

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Development Bank. Although such support would cover only a fraction of South Korea’s future needs (and are mostly irrelevant to China and Japan), the arrangements are psychologically reassuring and something to be proud of. Equally important, they also signal stronger political ties between Northeast and Southeast Asia. Another result of the crisis was the widespread feeling that the United States had lost interest in Asia. When the crisis spread from Indonesia and swept through the region, Washington did nothing, despite having assisted Mexico to surmount a similar crisis a mere three and a half years prior. Donald Emmerson notes that, “…from within ASEAN…Washington was reproached for hostility, or indifference, or both – for torching the region’s economies and then letting them burn.”9 Such sentiments were not helped by official US pronouncements such as Treasury Secretary Robert Rubin’s comment that the Thai currency implosion was only a “glitch in the road.”10 In fairness, at that time the Clinton administration was pressing the Congress to approve a replenishment of the World Bank’s soft-loan window and had no wish to rekindle the storm of protest incited by the Mexican package. Moreover, some officials feared that a rescue package would encourage governments to pursue irresponsible economic policies (the so-called “moral hazard” argument). But justified or not, US inaction meant a lost strategic opportunity, leaving ASEAN Plus Three to steam along on its own. China’s refusal to take advantage of the 1997 Asian financial crisis fostered Southeast Asian views of China as a responsible actor in the region. China did not devalue its currency at the time, and this was interpreted by ASEAN as a sign of goodwill. China pledged $1 billion to Thailand to help assuage its foreign exchange problem, committed $400 million to Indonesia in stand-by loans as part of an IMF package, and further extended $200 million to Indonesia in export credits.11 In 1998, then-ASEAN Secretary-General Rodolgo Severino, Jr., said that, “China is really emerging from this [crisis] smelling good. We still have a territorial problem with China, but otherwise things here are

Emmerson 2005, 1–21. Rubin 2005. 11 Leifer 1999, 104. 9

10

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going well between ASEAN and Beijing.”12 Malaysian leader Mahathir bin Mohamad said in 1999: China’s performance in the Asian financial crisis has been laudable, and the countries in this region….greatly appreciated China’s decision not to devalue the yuan. China’s cooperation and high sense of responsibility has spared the region a much worse consequence. The price China has to pay to help East Asia is high, and the Malaysian people truly appreciate China’s stand.13

7.2.3 9/11 and Its Aftermath The US reaction to the 9/11 attacks had two main consequences for Northeast Asia. First, it reinforced the sense that America’s strategic attention was focused elsewhere. The Bush administration’s Global War on Terror (GWOT) seemingly narrowed the US foreign policy agenda to “homeland security” regardless of the problems that others might have in dealing with domestic extremists. The implication was that Asians were to be judged as “either for us or against us.” Although Washington’s polarizing rhetoric has eased somewhat, there is still concern in the region that the United States – distracted by the war in Iraq, preoccupied with Iran, and weighed down by domestic scandals and the 2008 presidential election – is focused exclusively on North Korea’s nuclear weapons program and terrorist threats against the United States, regardless of Asia’s needs. This perception has led some Asian governments to seek ways to re-engage the United States, while others have become concerned about US unilateralism and the possibility that the US would interfere in their own affairs. While these states are all concerned about terrorism, some states – especially those with large Muslim populations – are also concerned with the possibility of unilateral American actions in the region, including the possibility that the US might take preventive military action against them, or use the GWOT as cover for creating a containment coalition against China. Although the US has close working relations with many countries in the region, the GWOT “caused severe damage” to US–Southeast Asian relations, notes Blair King, and “had a very 12 13

International Herald Tribune, 17 April 1998, 6. Ba 2005, 637.

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negative impact on the image of the US military in the region.”14 Singaporean Ambassador Chan Heng Chee noted that, “Some ASEAN countries felt that all the US cared about was the war on terrorism…democracy and human rights proved to be also complicating issues between the US and some ASEAN nations. A further warming up to China and other powers as a result of the discomfort with the US cannot be discounted.”15 In addition, the anti-terrorism campaign has sparked a stepped-up campaign to establish joint procedures to detect and counter violent groups. US–China relations have improved accordingly. Communication between and among military and police authorities in Northeast Asia and with the United States has deepened. 9/11 also stimulated a renewed effort on the part of the US Pacific Command to initiate joint military exercises to police the region. Within the Asia Pacific Economic Cooperation (APEC) forum, 9/11 gave rise to a thicket of new security initiatives justified in the name of “human security” and centered on the struggle against terrorism. These measures included the Counter-Terrorism Task Force, simulation exercises focused on sea lane disruption, a new work program on maritime trade and port security known as Secure Trade in the APEC Region (STAR), and measures to prevent attacks on airplanes using man-portable air defense systems (MANPADS). A “health security” initiative has also been launched to deal with both bioterrorism and the threat of pandemic disease.16 Many of these moves overlap with the work program of the ASEAN Regional Forum and are staffed by many of the same people, creating a professional security community of sorts. Looking westward, China established the Shanghai Cooperation Organization (SCO), which is comprised of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. The SCO is focused on nontraditional security threats such as terrorism, but also includes confidence building, force reductions, and increasingly, economic cooperation among the states. At the 2003 annual meeting, Chinese Premier Wen Jiabao proposed creating a free-trade zone among the

14

Pan 2006. Chee 2006. 16 Ravenhill 2005, Chap. 7. 15

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member states. The SCO has also called for removing “foreign” (i.e. US) troops from the area. All in all, 9/11 provided a limited, halting, but tangible push toward cooperation among all the governments of Northeast Asia except North Korea. It had a markedly positive impact on US–China relations. At the same time, however, it compounded the feeling that the United States is so preoccupied with its own security that it can no longer play the stabilizing leadership role it had for the past half century. 7.3 Other Changes in the Regional Environment 7.3.1 The Resurgence of China All the governments in Northeast Asia have begun to adjust their foreign policies to deal with China’s resurgence as a regional power. In the past decade, China’s influence in Northeast Asia has sharply increased, creating repercussions for both the US–ROK alliance and the US–Japan alliance. Like every other country in the world, both Japan and South Korea see their economic fates bound up in the future of the Chinese economy. The potential benefits are large, especially given the geographic proximity and cultural similarities they share. There is a clear concern in Japan and Korea regarding the rapid rise of Chinese manufacturing and technological prowess, yet this has not stopped the headlong rush of their firms into China. Taiwanese companies have also invested heavily in China. Thanks to production networks, high-technology parts and components are exported to China from South Korea and Japan and combined with parts and materials from other parts of Asia and from China itself. The product is then exported to major markets and labeled “Made in China.” Japanese economic interaction with China has steadily increased since the early 1990s. In 1997, bilateral trade volume between Japan and China amounted to $570 billion, 52 times greater than in 1972. In 2002, China passed the United States as the largest exporter to Japan. China is now Japan's second-largest trading partner for total

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trade while Japan ranks as China’s largest trading partner. Japan currently runs a $27 billion trade deficit with China,17 but China is also the largest recipient of Japanese investment in Asia. Japanese investment in China continues to expand, and Japanese companies are increasingly seeing their fortunes as tied to the Chinese market. Japan’s bilateral trade with the United States and the European Union “has switched to a triangular trade format via China,” observes analyst Sourabh Gupta.18 As Saadia Pekkanen notes, “it is difficult perhaps for Americans to appreciate just how much – in perception and also increasingly in fact – the US has slipped and China has loomed on the Japanese trade policy horizon.”19 Such trade is closely linked to investment. In 2002 then-Prime Minister Junichiro Koizumi said, “I see the advancement of Japan–China economic relations not as hollowing out of Japanese industry but as an opportunity to nurture new industries in Japan.”20 Japan accounted for two-thirds of all China’s receipts of bilateral aid from 1980–2000, while the United States did not give any aid to China.21 In cultural flows as well, China has rapidly become a major source and destination for informal ties between the two countries. For example, more than a million Japanese tourists visit China each year, and by 2003, more Chinese students were studying in Japan than in the United States.22 South Korea, too, has been drawn more closely toward China. In 2003, China surpassed the United States as the largest export market for South Korean products, a position the US had held since 1965.23 In fact, China also became South Korea’s largest trade and investment partner in 2003.24 In that year Korea invested more in China than did the United States: $4.7 billion to $4.2 billion. Over one million South

Kruger and Fuyuno 2002, 28–34. The Nelson Report, 9 May 2007. 19 Pekkanen 2004, 17. 20 “China’s Rivals Slow to Grasp Export Might: Beijing Building Trade Powerhouse,” Washington Post, 25 May 2002. 21 Arase 1994, 171–200. 22“The Sun and the Dragon: The Fantasy of Sino-Japanese Enmity,” The American Conservative, 2 August 2004, 9. 23 Korea International Trade Association 2004. 24 Snyder 2004. 17 18

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Koreans visited China in 2000, and the number continues to grow.25 Over 25,000 Korean companies now produce in China.26 Woori Bank has a 150-member research group focused on China, and all the major Korean banks had opened branch offices in China by 2004.27 For now, it is safe to say that most countries in East Asia are quickly building economic links to China, but at the same time, they are hedging their bets about China’s future evolution by maintaining or even strengthening military ties with the United States. 7.3.2 The Emergence of Japan as a Regional Military Power Japan has recently taken small steps away from the narrowly defined interpretation of national security that has prevailed for the last five decades.28 These steps include naming China as a potential threat in the future, dispatching troops to the Middle East to support the US-led war on terror and stabilization of Iraq, and hosting increasingly frequent discussions by prominent politicians regarding the modification of Article Nine of the Constitution. However, these actions hardly constitute a full-scale rearmament, nor are they the steps that a major power would take. The selection of Yasuo Fukuda as prime minister in September 2007 marks a probable return to a more balanced Japanese approach, with an emphasis on improving relations with China while maintaining close relations with the US. Indeed, much of Japan’s recent behavior has been designed to reassure other Asian states that it has no intention of revisiting the past. The January 2000 Report of the Prime Minister’s commission on Japan’s Goals in the 21st Century argued that, “in the twenty-first century the use of military might to secure national development and

25“China ‘Looming Large’ in South Korea as Biggest Player, Replacing the U.S.,” New York Times, 3 January 2003. 26 “Korea’s China Play,” BusinessWeek, 29 March 2004, 32. 27Kim Chang-gyu, “Korean banks race into China market,” JoongAng Ilbo, 1 July 2004. 28 Mainichi Shimbun, “Japan adopts new defense policy guidelines,” December 8, 2004. Available from

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settle disputes will increasingly lose legitimacy.”29 Public opinion remains deeply against major military rearmament, as well.30 In December 2004, Japan released its “New Defense Program Guidelines,” the first major updating of Japanese defense policy since the mid-1990s. The main points of the guidelines are: increased efforts to cooperate with the United States on a missile defense system, the specific naming of China and North Korea's as potential threats to Japanese security, and increased anti-terror efforts. The new guidelines shift Japan’s focus from defending Japan from a possible Russian invasion to guarding the country from possible North Korean or Chinese threats. The plan also includes measures to ease somewhat its “Three Principles on Arms Exports,” which prohibit arms exports to “communist bloc” countries, countries that are targets of arms embargoes imposed by the UN Security Council, and countries likely to erupt in violent conflict. Japanese policy also prohibits arms-related overseas investment.31 Japan’s search for a way to “normalize” its foreign policy and strengthen its relations with the United States has exacerbated unresolved relations with its East Asian neighbors, precisely because of uncertainty in the region about its identity, and its ultimate place in the region. Indeed, discussion over whether or not Japan can become a “normal country” exemplifies both the central importance of identity in East Asia and Japan’s unresolved role in East Asia. What is normal and what is not, and how Japan defines its role in the region, are primarily issues of identity rather than power. As a Pentagon expert points out, in military terms the changes in Japan’s military posture are fairly small.32 Significantly, a senior US administration official said in 2005 that “we see changing Article IX as meaning Japan can be more involved in peacekeeping operations, anti-piracy, and anti-terrorism. We have no indications or fears that Japan would militarize. The question is whether East Asian countries would see it the same way.”33 As Eric 29

Heginbotham and Samuels 2003, 99. Ibid. 112. 31 Available from 32“Bomb by Bomb, Japan Sheds Military Restraints,” New York Times, 23 July 2007, A9. 33 Private communication, 4 October 2005. 30

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Heginbotham and Richard Samuels note, “in the short-to mid-term, Japan is likely to continue incrementally strengthening both the military and economic components of its security strategy, but it is unlikely to undertake any fundamental change in the way in which it balances them.”34 Although Prime Minister Shinzo Abe had made clear his desire to change the constitution and in particular, Article IX, his abrupt departure in September 2007 after being in power for only one year has signaled the possibility of a reduced attempt to raise Japan’s global profile. Kosei Ueno, a former Liberal Democratic lawmaker close to Fukuda, was quoted as saying that, “Unlike Mr. Abe and Mr. Koizumi, he’s clearly shown great understanding in dealing with China and South Korea, and problems like Yasukuni.”35 Opposition leader Ozawa has fiercely criticized the dispatch of Japanese ships to the Indian Ocean in support of US-led efforts in Afghanistan and Iran. Japan’s unresolved identity is both reflected in, and exacerbated by, Japan’s close alignment with the United States. Japan’s willingness to ally with the United States since World War II reflects a longstanding Japanese tendency to rarely challenge a dominant, stable power. At the same time, Japan and the US tended to reinforce each other’s distaste for multilateralism in the region, and their alliance partially prevented Japan from crafting a stable relationship with the rest of East Asia, by allowing both Japan and other East Asian states to avoid dealing with the difficult political issues that divide them. Economic interdependence has also had little effect on political relations in the region; they have instead moved in parallel with each other. In fact, Japan has not crafted enduring political ties with Russia or the two Koreas, despite the increasingly interconnected economic relations that characterize these nations’ relations with each other. Relations between China and Japan continue to run fairly smoothly on a professional level. Military exchanges have become routine, and finance ministers meet regularly. On a political level, however, the Sino-Japanese relationship has soured considerably in the past few years, to the point where low-level strategic rivalry appears to 34

Heginbotham and Samuels 2003, 98. “Yasuo Fukuda, a moderate, is chosen to lead Japan,” International Herald Tribune, 23 September 2007. Available from . 35

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be hardening, constraining opportunities for bargaining on both sides. Contributing factors to bilateral tensions include a lingering culture of victimization, distorted teaching of history, widespread ignorance among youth in both countries, rising Chinese nationalism, and seemingly deliberate stubbornness and incomprehension on the part of Japanese leaders. Japan is hedging in a number of directions. Although its chief security concern is China, it is also worried about the depth and reliability of its alliance with the US. These two concerns are not symmetrical; Japan and the United States have a strong alliance, and that alliance appears set to endure well into the future. Although the consensus behind the postwar Yoshida doctrine has evaporated, Japan has not yet arrived at a new consensus about its grand strategy for the 21st century. It does appear, however, that such a grand strategy will involve elements of the “comprehensive security” policy that Tokyo has pursued in the past. As Richard Samuels notes, Japan is seeking a “Goldilocks consensus” – “not too big, not too small, but just right” – that will allow it to “exist securely without being too dependent on the United States or too vulnerable to China.”36 Amidst its hedging efforts, Japan has also engaged vigorously in commercial diplomacy. Unable to offer liberalization in agriculture, Japan has added topics such as investment and services to what Tokyo calls “economic partnership agreements.” In 2004, the Japanese Ministry of Economy, Trade, and Industry (METI) created a permanent division of Economic Partnership, employing an unusually large staff of over eighty-five personnel, while the Ministry of Foreign Affairs created a similar Economic Partnership division of forty staff members.37 Despite inevitable disagreements and bureaucratic fights, both agencies share similar goals: making sure that Japan participates fully in regional economic integration, keeping up with Chinese and Korean diplomatic competition in Southeast Asia, and creating a little “policy space” between Japan and the United States in order to reinforce Japan’s identity as a good citizen of Asia.

36 37

Samuels 2007, 14. Pekkanen 2004, 1.

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7.3.3 The Upsurge of Non-Conventional Threats Among many sources of change in Northeast Asia, the rise of nontraditional threats ranks high in importance. In the age of globalization, many threats take trans-national forms. The perpetuators are not state-sponsored commando units but rather non-state actors. Ease of transport and communication facilitates coordinated terrorist attacks, money laundering, high-technology piracy, and illegal trafficking in narcotics, weaponry, endangered resources, and people. The uneven distribution of wealth associated with rapid globalization undermines social stability and raises the likelihood of local riots and insurgencies. Criminal activities help finance bankrupt regimes. Military resources alone cannot cope with ethnic and religious violence, health and environmental disasters, sudden and massive floods of refugees, and humanitarian crises. The combination of mounting terrorist attacks and piracy at sea has stimulated some Asian police and coast guard officials to meet regularly and exchange information. In response to piracy in the Straits of Malacca, an initiative called “Eyes in the Sky” has institutionalized joint patrols and realtime intelligence sharing among Indonesia, Malaysia, and Singapore. Since ships from Northeast Asia are among the targets of piracy, those governments have offered to provide technical assistance. Another threat is the spread of pandemic disease. The outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003 stifled economic growth in the region, but only for a few months. If avian flu becomes a pandemic, the disaster could overwhelm public health facilities in Northeast Asia and set back growth for years. A threat that spans both economic and security concerns is a consequence of rapid growth: competition for energy supplies. Energy security – defined here as adequate supplies of energy at reasonable, market-based prices that are capable of being transported safely – has become a major strategic challenge. Spiraling energy demand in China has sparked an effort to purchase or otherwise lock up longterm energy supplies in some of the world’s most repressive or dysfunctional countries. India’s hunger for energy is growing similarly. The search for energy under the ocean floor has hardened maritime territorial disputes.

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On the positive side, the same forces that empower criminal networks, permit the spread of disease, and fuel the scramble for energy have also spurred the region’s economy. Even Japan appears to be recovering from its long slump. Globalization has had uneven and disruptive effects, but it has lifted tens of millions of people out of absolute poverty. Thanks to globalization, market-oriented policies, and strong export performance, Northeast Asia has bounced back from the Asian financial crisis and the SARS epidemic to recapture some of the highest growth rates in the world. Websites and blogs bring fresh ideas and new commercial opportunities into the region. These sources of change are even seeping into North Korea. 7.3.4 East Asian Regionalism T.J. Pempel has identified two broad processes that are occurring in East Asia: regionalism and regionalization. Regionalism “involves the process of institution creation…when nation-states come together through top-down activities.”38 In contrast, “regionalization” is a process that “develops from the bottom up through societally driven processes…such as] markets, private trade and investment flows, and the policies and decisions of companies.”39 Despite the weakness of regional institutions, East Asian regionalism has experienced a marked upsurge in the past two decades.40 This trend is demonstrated by unique characteristics that differ substantially from what has evolved in Europe.41 Forward movement is largely driven by ASEAN, a motley collection of ten mostly small countries, with most of the leadership coming from the grouping’s five founding members (Indonesia, Malaysia, the Philippines, Singapore, and Thailand).42 A Southeast Asian regional identity has developed to some extent, shaped by norms of cooperation and dialogue, consensus, 38

Pempel 2005, 19. Ibid., 19. 40 On multilateral institutions in Asia, see Frost 2008; Acharya 2003, 210–240; and Pearson 1999, 207–234. 41 See Acharya 2001; Ravenhill 2001; Rozman 2004; Katzenstein 2005; and Krauss and Pempel 2004. 42 Brunei joined ASEAN in 1984; Cambodia, Laos, Myanmar (Burma) and Vietnam – the so-called “CLMV” group – joined in the 1990s. 39

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informality, and compromise, often dubbed the “ASEAN way.”43 The heart of the ASEAN way, codified in the Treaty of Amity and Cooperation (TAC), reflects the so-called Five Principles: equality, national sovereignty, respect for territorial integrity, non-interference, and the peaceful settlement of disputes.44 ASEAN has a mixed record. On the one hand, ASEAN members have not gone to war with each other since ASEAN’s founding in 1967. On the other hand, the required consensus and the lack of enforceability of agreements add up to very little in the way of tangible achievement. ASEAN also lacks a strong identity and a legal personality. To correct these problems, a new “ASEAN Charter” was drafted under the group supervision of some of Asia’s most distinguished “eminent persons” and adopted in 2007, although it has still not been ratified by all members. But even if ASEAN leaders accept the Charter’s terms, it will be a long time before its principles are put into practice uniformly. The dramatic economic growth in the region, combined with the expansion of North–South economic ties, has resulted in states whose fortunes are rising and whose interconnectedness continues to increase. East Asian growth has been predicated on outward looking, exportoriented development strategies that exhibit a mixture of deep government involvement in the economy.45 This model, often called “the developmental state” is one that creates the conditions for states to increasingly interact with each other over economic issues. Financial cooperation is also increasing. In June 2003, China and ten other East Asian countries agreed to establish an Asian Bond Fund of $1 billion that would create a regional bond market, funnel foreign exchange reserves back into the region, and respond to “economies in crisis.” A second bond fund, established in December 2004, was valued at $2 billion.46 Another significant move was the Chiang Mai Initiative – a currency swap arrangement among Asian states designed to help avoid the currency crisis that led to the 1997–98

43

Alagappa 1998; and Acharya 2001. Acharya 2004, 239–75; and Ball 1995, 44–74. 45 Johnson 1982; Haggard 1990; and Woo 1990. 46 Brekcon 2003. 44

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crisis.47 Between 1997 and 2003, local currency East Asian bond markets tripled in size, with the Asian Development Bank supporting the ASEAN Plus Three (ASEAN and China, South Korea, and Japan) initiative.48 China, initially wary of multilateral organizations, also branched out into security diplomacy.49 In October 2003, China became the first large power from outside of ASEAN to sign the Treaty of Amity and Cooperation in Southeast Asia. Japan, Russia, South Korea, India, Australia, and others have all followed suit. The Treaty includes pledges to resolve disputes by peaceful means and renounces even the threat of force.50 Significantly, the United States has thus far refused to sign the treaty. Moreover, in November 2002, China signed the Declaration on the Conduct of Parties in the South China Sea, a memorandum that requires the signatories not to resort to the use of force to settle rival claims over the oil-rich Spratly Islands and other disputes in the area.51 The other aspect of Asian integration is “regionalization” – the increasing web of business and cultural relationships that are weaving East Asia together, particularly in coastal provinces, port cities, and maritime zones.52 Regionalization in modern East Asia is characterized by three major strands of relationships. The first strand was initiated by Japanese corporations and took the form of Japanese-led production networks. The so-called , “flying geese” pattern, centered on Japanese capital and technology, tied other East Asian states’ economic fortunes into a Japanese corporate model.53 The second strand was the re-emergence and revitalization of the Chinese diaspora 47

“Envisioning a Single Asian Currency,” Bloomberg, 28 March 2006. Asian Development Bank 2004. 49 Wu 1998, 115. For extended discussion, see Johnston and Ross 1999. 50 Treaty of Amity and Cooperation in Southeast Asia, Chap. 1, Article 2, Section E. Available from . See also East Asia Study Group 2002, 79; and ASEAN–China Expert Group on Economic Cooperation 2001. 51 Declaration on the Conduct of Parties in the South China Sea, signed at the Eighth ASEAN Summit in Phnom Penh, November 2002. Available from . For an assessment of the details of the agreement, see Guan 2004, 6; Thao 2003, 279–285; and Buszynski 2003, 343–62. 52 Frost 2008, especially Chaps. 4 and 5. 53 Hatch and Yamamura 1996. 48

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that had spread throughout Southeast Asia. Firms headed by overseas Chinese families and clans took early advantage of China’s opening market and helped tie China more closely into the regional economy. The third strand has been other East Asian business conglomerates, such as those from South Korea and Taiwan, which have increasingly invested not only in the US and Europe, but throughout East Asia as well. Although much of this regionalization is commercial in nature, flows of people, culture, religion, and ideas are substantial. In 2004, over 4.4 million Chinese tourists visited Southeast Asia, and almost 3.5 million Japanese tourists did so. South Korean television dramas are popular in Taiwan, Japan, China, and the Philippines (“hallyu,” or “the Korean wave”). Japanese anime, pop music, and fashion are known throughout the region. So are Hong Kong movie directors such as Wong Kar-wai.54 On balance, the new East Asian regionalism contributes to regional stability and fosters the peaceful settlement of disputes as a regionwide norm. Such agreements bring government officials together in close working relationships and signify a certain degree of trust and cooperation. One advantage of the frequent ASEAN Plus Three meetings is that Chinese, Japanese, and South Korean delegates can hold talks on the sidelines without the posturing and publicity that accompanies bilateral meetings. Nevertheless, it seems unlikely that a viable Northeast Asian security structure can evolve under the umbrella of East Asian regionalism. The current arrangement, featuring ASEAN as a diverse and loosely organized “hub” and China, Japan, and South Korea as the separate “spokes,” does not seem conducive to more active institution-building among the three “spokes,” let alone with North Korea. With the very partial exception of the political repression in Myanmar, ASEAN Plus Three continues to uphold ASEAN’s principle of non-interference even though threats in the region are increasingly transnational. As in other forums, China refuses to permit any discussion of Taiwan. Likewise, South Korea keeps any topic pertaining to North Korea off the table. 54 “Asia rides wave of Korean pop culture invasion,” Chicago Tribune, 23 December 2005; and Leheny 2006.

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7.4 The Adequacy of Existing Institutions In the social science literature, the study of regional and international institutions typically draws on the experience of Western Europe and the United States. Many political scientists assume that at a minimum, an international body must have centralized tasks and legally enforceable rules to qualify as an “institution.” Some add the notion that institutions must produce durable and binding outputs, embody the transfer of jurisdiction, develop differentiated processes, and establish channels of influence facilitating the involvement of outside parties.55 Others adopt a different definition of institutions, viewing them as places or spaces where governments can express their preferences, develop trust, and exercise collective choices. Institutions provide a mechanism by which states can communicate and learn about intentions and beliefs. Political economist C. Randall Henning uses the term “institutions” to encompass not only formal bureaucratic organizations but also “decision-making procedures, informal consultative forums, patterns of cooperation, and informal agreements among states that facilitate cooperation and international exchange.”56 Asian organizations correspond to this institutional pattern. 7.4.1 ASEAN, ASEAN Plus Three, and the East Asia Summit Of all the organizations associated with ASEAN, ASEAN Plus Three is the most highly institutionalized (in the Asian sense). Consisting of the 10 members of ASEAN plus China, Japan, and South Korea, this group coalesced informally in preparation for the first Asia–Europe Meeting (ASEM) in 1996 and began to take on institutional characteristics in the wake of the Asian financial crisis of 1997–98. It holds regular meetings, establishes committees and working groups, and fosters studies of trade expansion. The ASEAN Secretariat has recorded literally dozens of ASEAN Plus Three working groups. In December 2005, the first East Asian Summit (EAS) was convened. Hosted by Malaysia, the EAS consists of the 13 ASEAN Plus Three 55 56

For example, see Wessels 1997, 267–99. Henning 2004, 4–5.

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member states, in addition to India, Australia, and New Zealand. Its heads of state have no stated agenda other than to encourage closer cooperation and to meet annually. Could ASEAN Plus Three serve Northeast Asian security needs more directly? The motives of the various members of ASEAN Plus Three include both closer economic integration and protection against more rapid forms of economic globalization, but they are primarily concerned with political and security matters. Ritualistic proclamations repeatedly confirm that ASEAN is in the “driver’s seat” of the whole process, but ASEAN has its hands full already and is not a fully coherent group. It is unlikely that ASEAN would want to wade into Northeast Asian waters, and if it did, it might not be taken seriously except as a friendly mediator. Probably the most that the architecture of ASEAN Plus Three can accomplish is to keep up the pressure on the “Plus Three” countries to figure out how to get along better. The chaotic architecture of East Asian regionalism that ASEAN has created is consciously designed to embed a rising China in a web of commitments and structures and to prevent a potential schism between pro-US democracies on the rim of Asia and undemocratic, Chinaoriented governments on the mainland. No government wants to be forced to choose between Beijing and Washington. China in turn sees the East Asian Community as an opportunity to reassure its neighbors, extend its influence, and outshine Japan in a forum that does not include the United States. All three of the “Plus Three” countries have signed ASEAN’s signature Treaty of Amity and Cooperation, as have Australia, India, and Russia (but not the United States). Moreover, ASEAN members have floated an informal, non-binding “Code of Conduct in the South China Sea,” to which all claim to subscribe. ASEAN Plus Three has also branched out into non-traditional security fields such as maritime safety and anti-piracy. The ASEAN Regional Forum, a regional security dialogue, brings together foreign ministry representatives from Asia, North America, Russia, and Europe. It encourages discussion and provides useful opportunities for bilateral meetings on the side, but it has achieved nothing of note because serious security issues are excluded by one government or another. The Shangri-La Dialogue, established by the

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London-based International Institute of Strategic Studies, brings defense ministers together with non-government experts and business executives. Attendees in 2007 included the US secretary of defense and China’s deputy chief of staff. China’s Boao Forum, loosely modeled on the World Economic Forum in Davos, is high-level and broadly inclusive but tends to focus on economic topics. A “Track 2” (non-governmental) group called the Committee on Security and Cooperation in the Asia Pacific (CSCAP), established in 1993, brings together experts and intellectuals. Various )CSCAP working groups and committees present policy recommendations to their governments but have no official standing. Also relevant to Southeast Asia is an agreement known as the Five Power Defense Arrangements, which groups Indonesia and Malaysia with the United Kingdom, Australia, and New Zealand. This grouping commands significant military resources and, equally as important, promotes cooperation between Jakarta and Kuala Lumpur. However, the Arrangement is not designed to address the security needs of Northeast Asia. 7.4.2 APEC The trans-Pacific counterpart to ASEAN Plus Three is the Asia Pacific Economic Cooperation (APEC) forum, established in 1989. APEC now has 21 “member economies,” including Taiwan and Hong Kong as well as the United States and Canada.57 Thanks in part to Australian and US leadership, APEC reached a peak in 1993–94, but thereafter it gradually lost momentum. Frequently cited causes include APEC’s unwieldy size and diversity, its failure to achieve meaningful results through its announced “Early Voluntary Sectoral Liberalization” initiative, its ineffectiveness during the Asian financial crisis, and its slow, consensus-based style of decision-making.58 APEC’s commitment to “free and open trade and investment” by 2010 (2020 for developing 57 The 21 APEC members are Australia, Brunei, Canada, China, Chile, Hong Kong, Indonesia, Japan, (South) Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taiwan, Thailand, the United States, and Vietnam. 58 For a comprehensive analysis, see Feinberg 2003.

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countries) – which makes far more economic sense than free trade within East Asia alone59 – is no longer taken seriously. APEC was not set up to deal explicitly with security. In fact, the notion of including security was vigorously resisted.60 The ultimate objective of those who lobbied to create APEC was nonetheless to enhance the prospects for peaceful relations in the Asia-Pacific region. The path to security was believed to lie through expanded trade and investment. APEC’s main focus is still centered on facilitating trade, but a number of security issues have crept into the discussions. Not all of them appear in APEC’s official documentation. In 1999 the group adopted a common approach to the North Korea problem, which marks the only time when APEC leaders have commented on an individual country. Also in 1999, a special meeting of foreign ministers helped gain ASEAN acceptance of a UN peacekeeping force dispatched to East Timor. APEC’s Energy Working Group has been particularly active from the start. Energy is a both an economic and a security issue. APEC energy ministers have met frequently and have endorsed two sensible initiatives. One is an Asia-Pacific Energy Research Center to monitor supply and demand trends. The other is an Energy Security Initiative, which is charged with developing plans to deal with supply disruptions. Other ideas include emergency-sharing stockpile arrangements, stepped-up efforts to resolve energy-related border disputes, and even a “Northeast Asian Energy Community” based on the European-inspired Energy Charter Treaty.61 So far, however, few tangible results have been achieved, as energy is often a focus of competition, not cooperation. In short, ASEAN, the ASEAN Regional Forum, and APEC offer useful space for dialogue and mediation, but they have little tangible influence on the security issues roiling Northeast Asia. Barriers to “community-building” appear to be higher in Northeast Asia than in ASEAN. The one potential exception is the forum known as the “SixParty Talks” (SPT), discussed below. 59

Lincoln 2004. For a summary of arguments against including security issues in APEC, see Sopiee 1997, 207–209. 61 Financial Times, 14 November 2005, 17. 60

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7.5 Institution-Building in Northeast Asia Ideas on how to forge institutional links among the countries of Northeast Asia go back for decades, but few have come to fruition.62 Despite obvious complementarities within the region, even preferential trade offers and economic partnership agreements are directed southwards towards ASEAN rather than towards neighboring countries. Discussions of a proposed free trade agreement between Japan and South Korea began in 2003, but South Korea chose to conclude an agreement with the United States instead. There has been intermittent cooperation on a bilateral or informal basis, as the governments of South Korea, Japan, and China have increasingly met to coordinate ways of handling issues arising from piracy, tourism, travel, and financial dealings.63 However, this cooperation has yet to be institutionalized in a meaningful manner. 7.5.1 Current Efforts Current proposals to establish even “soft” security institutions in Northeast Asia have sparked vigorous disagreement among officials and experts alike. On the one hand, those who lean toward institutionbuilding argue that the “hub and spoke” system of military alliances centered on the United States is reassuring but inadequate.64 In an area long divided by culture and memories of war, new partnerships have sprouted along with new trans-national threats. China’s posture in the region, once threatening and suspicious, is now mostly constructive and relatively restrained vis-à-vis Taiwan. Japan is assuming more security responsibilities, and South Korea’s “sunshine” policy toward North Korea is slowly producing results despite – or perhaps because of – the Bush administration’s aggressive rhetoric. Economic and commercial relationships grow deeper by the day. Sooner or later, the argument goes, North Korea is bound to succumb to capitalist 62

For an outstanding, in-depth survey, see Rozman 2004. Rozman argues that the prime culprit in the failure to achieve regionalism is modernization with insufficient globalization. 63 Kang and Lee 2006. 64 Blair 2002.

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forces, evolve into a “soft authoritarian” entity, and become engaged with the region. A new institution will encourage the trust and communication needed to bring about these changes and deal with common challenges. On the other hand, skeptics reply that the landscape of the region is still pockmarked with rivalry and tension. Governments prefer to deal with the US bilaterally. The Taiwan problem still festers, but China refuses to discuss it in regional forums. Pyongyang still clutches its right to pursue a nuclear weapons program and is more likely to choose deceit over abandonment. China’s authoritarian government favors regional stability because economic modernization is its number-one priority, but its defense budget is burgeoning and its toplevel leadership struggles remain secretive and unpredictable. Its landbased territorial disputes with its neighbors are mostly settled, but its maritime disputes remain unresolved. Sino-Japanese trade and investment are booming, but diplomatic relations still lag behind. A new institution would prove to be either unworkable or irrelevant. Who is right? One way to phrase the question is to ask whether or not there is a sufficient degree of common purpose. Even amidst the numerous tensions of the Cold War, all parties wanted to avoid nuclear annihilation. They were all conscious of the dangers of a chaotic struggle for “loose nukes.” But in Northeast Asia, unlike in postwar Europe, the players have different goals but no overriding purpose. Many if not most of these differing goals are negative, at least in the short term: governments want to avoid something. Specifically, the rulers of North Korean regime want to avoid external invasion and internal collapse. Japan wants to avoid bestowing legitimacy on Pyongyang until the fate of Japanese kidnapping victims is known and North Korea gives up its nuclear program. Japan, South Korea and China want to avoid a sudden collapse within the neighboring country, which would trigger both an economic disaster and a destabilizing flood of hungry refugees. Seoul wants to avoid both great-power interference with its engagement policy and pressure to choose between the United States and China. China wants to avoid losing a buffer state and facing a unified, nuclear-armed Korea with friendly, or at least less than hostile, feelings towards the United States – and conceivably a continued US troop presence on its border. Russia wants to restrain potential Chinese hegemony and to avoid

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being marginalized. The United States wants to avoid a nuclear North Korea because the US wishes to stop the spread of nuclear weapons in general, and because it fears that the only Asian member of the “axis of evil” would blackmail US allies and sell nuclear technology to terrorists. Other aspects of South Korea’s agenda are more positive. Advocates of the “sunshine” policy believe that economic engagement will eventually soften North Korea’s repressive regime and open up its society, as was the case in China. Seoul also wants to reintegrate North Korea into Asia. South Koreans companies see an opportunity to use North Korea’s cheap labor and disciplined work force instead of, or in addition to, their own high-wage workers. South Koreans do not fully trust the Chinese, but Seoul leans toward China and often acts as North Korea’s interpreter and lawyer. To put the concerns of these various governments in perspective, if North Korea collapses, and if North Koreans are desperate enough to migrate, the number of North Korean refugees could conceivably exceed the entire global refugee population of 2006.65 Even assuming a best-case scenario in which collapse does not turn violent, the regional economic and political effects would be severe. Economic growth in all neighboring countries would be affected, if only because of the disruption from refugees and the increased demand on resources placed on all the governments. Politically, China, South Korea, Japan, and Russia would have to coordinate policies and actions in a rapidly changing environment. Whether or not unification occurs, integrating North Korea back into the region will be harder than it appears. Except for sporadic attempts to create special economic zones such as the Kaesong Industrial Complex, North Koreans have a primitive economy. North Korean refugees often find it difficult to adjust to a market economy. The Chinese, however, are more upbeat, perhaps because of the speed and depth of their own transition. Piao Jianyi of the Institute of Asia Pacific Studies in Beijing declared, “Although many of our friends see it as a failing state, potentially one with nuclear weapons, 65

In 2006 the office of the UN High Commissioner for Refugees listed 8.4 million refugees. Available from . North Korea’s population is estimated at 23 million.

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China has a different view. North Korea has a reforming economy that is very weak, but every year is getting better, and the regime is taking measures to reform its economy, so perhaps the US should reconsider its approach.”66 7.5.2 The Six-Party Talks The Six-Party Talks (SPT) discussions on North Korea’s nuclear program, involving the United States, North and South Korea, China, Japan, and Russia, are the most active of Northeast Asian regional security talks. After four years of meetings, the talks have begun to make progress toward their ultimate goal of North Korean denuclearization. In 2007 Pyongyang shut down its main nuclear site at Yongbyon, but its record of manipulation and deceit suggests that the battle is far from over. However, central to the Six-Party Talks are two aspects. First, within the framework is a set of working groups, one of which is explicitly focused on building a regional security architecture. Second, that all six countries have focused on solving one goal, and have managed to continue cooperating toward that goal for over three years despite varying pressures and agendas. The real question is whether the SPT’s mode of problem solving can or should be institutionalized into a permanent and regular structure of meetings. The Six-Party Talks have provided a forum to discuss and coordinate policy even over issues that are of central importance to the countries involved. Whether this level of commitment can be continued is another question entirely. The “strategies of avoidance” described above are fully reflected in the SPT. In addition, specific differences emerge, especially when “technical” issues acquire political flavor (e.g., standards for verification). There have been differences among the six countries within the SPT, however. Top Japanese officials have not wanted to “reward” Pyongyang by acceding to its demand for direct negotiations with Washington and reportedly felt betrayed when the United States appeared to abandon its opposition to that idea in 2007. Russia seems least interested in the process but wants to remain engaged because a small piece of 66 “Doubting U.S., Chian is Wary of Korea Role,” New York Times, 19 February 2005.

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its territory borders North Korea and thus could be flooded with refugees if the regime were to collapse. Russia also stands to benefit economically if the North Korean problem is actually resolved and trade can begin to flow through the peninsula to Russia. The United States seems to view the purpose of the SPT as halting Pyongyang’s nuclear weapons program, period. However, despite these differences, the progress in the Six-Party Talks has been greater than many observers predicted. Could the SPT become the platform for the creation of a permanent, institutionalized security forum in Northeast Asia? This depends ultimately on the success of the SPT in its main goal, which is removing North Korean nuclear weapons. Integral to the stated goals of the participants is that denuclearization will be accompanied by normalization of ties between the countries. Thus, if the SPT succeeds, we may be witnessing a dramatically different Northeast Asian regional context. If it fails, the region will remain in its present state. Teaming up to stamp out a threat is not the same as laying the foundations for a true community. The establishment, scope, and nature of such a forum in Northeast Asia depends centrally on whether six countries with such different goals and interests on the Korean peninsula can resolve the North Korean issue in a manner satisfactory to all parties. Although the SPT process has made progress in fits and starts, the process is moving forward. It has provided the first instance of the Northeast Asian states working directly with each other to coordinate policy and solve – or at least contain – an extremely tense situation. While the likelihood of turning the process into a permanent institution is low at the moment, it is a positive sign that such diplomacy could even work in the region. Despite vast differences in interests and outlook, in the last two years there have been ongoing, active discussions within the SPT framework, with and without North Korea. 7.6 Conclusion The current prospect for new, institutionalized security architecture in Northeast Asia is dim. The Six-Party Talks have revealed deep differences of opinion about how best to deal with the North Korean problem, and Japan and China are wary of each other, to say the least.

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Constructing a new security architecture that deals with Northeast Asia will surely require at least some improvement in Sino-Japanese relations. Since mutual mistrust among Asians still persists and US power in the region is both massive and tangible, in the short run, US alliances are likely to continue to provide more integrating “glue” than anything emerging from Asian capitals. When it comes to making bottom-line security calculations, bilateral consultations with the United States still appear to be the channels of choice. Moreover, Washington is too distracted by its two wars – the “war on terror” and the war in Iraq – to provide the kind of leadership that new security architecture would require. Its third preoccupation, non-proliferation, partially blinds top US leaders to other countries’ legitimate security needs. Nevertheless, compared to a decade ago, the region has already made great strides in economic integration and coordination of some difficult political issues. Both economic integration and some degree of cooperation against non-traditional threats are proceeding apace. The question is whether existing institutional arrangements are likely to contribute to peace and stability in Northeast Asia, or whether the SPT framework should gradually become broader and more institutionalized. There is a case for trying, very carefully and slowly, to pursue the latter option. References Acharya, Amitav. 2001. Constructing a Security Community in Southeast Asia: ASEAN and the Problem of Regional Order. London, UK: Routledge. ———. 2003. Regional Institutions and Asian Security Order. In Asian Security Order, edited by Muthiah Alagappa, 210-240. Stanford, Calif.: Stanford University Press. ———. 2004. How Ideas Spread: Whose Norms Matter? Norm Localization and Institutional Change in Asian Regionalism. International Organization 58 (2):239-275 Alagappa, Muthiah, ed. 1998. Asian Security Practice: Material and Ideational Influences. Stanford, Calif.: Stanford University Press. Arase, David. 1994. Public-Private Sector Interest Coordination in Japan's ODA. Pacific Affairs 67 (2):171-200. ASEAN-China Expert Group on Economic Cooperation. 2001. Forging Closer ASEAN-China Relations In The Twenty-First Century. Paper prepared for ASEAN. Available from .

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Asian Development Bank. 2004. East Asian Local Currency Bond Markets Tripled since 1997. 22 November. Available from . Ba, Alice. 2005. China and ASEAN. In Betwixt and Between: Southeast Asian Strategic Relations with the U.S. and China, edited by Evelyn Goh, 637. Institute of Defense and Strategic Studies Mono 7. Ball, Desmond. 1995. Strategic Culture in the Asia-Pacific Region. Security Studies 3 (1):44-74. Blair, Dennis. 2002. Beyond Hub-and-Spokes. Washington Quarterly Bowles, Paul. 2002. Asia’s Post-Crisis Regionalism: Bringing the State Back In, Keeping the (United) States Out. Review of International Political Economy 9 (2):230-56. Brekcon, Lyall. 2003. SARS and a New Security Initiative from China. Comparative Connections 103. Available from . Buszynski, Leszek. 2003. ASEAN, the Declaration on Conduct, and the South China Sea. Contemporary Southeast Asia 25 (3):343-62 Chee, Chan Heng. 2006. China and ASEAN: A Growing Relationship. Speech given to the Asia Society Texas Annual Ambassador’s Forum and Corporate Conference, Houston, Texas, 3 February. Available from . East Asia Study Group. 2002. Final Report of the East Asia Study Group. Paper presented at the ASEAN+3 Summit, 4 November, Phnom Penh, Cambodia. 79. Emmerson, Donald K. 2005. What do the blind-sided see? Reapproaching regionalism in Southeast Asia. The Pacific Review 18 (1):1-21. Feinberg, Richard E., ed. 2003. APEC as an Institution: Multilateral Governance in the Asia-Pacific. Singapore: Institute for Southeast Asian Studies. Frost, Ellen. 2008. Asia’s New Regionalism. Boulder, Colo.: Lynne Rienner Publishers. Guan, Ang Cheng. 2004. The South China Sea Dispute Revisited. Australian Journal of International Affairs 54 (2):206. Haggard, Stephan. 1990. Pathways from the Periphery. Ithaca, New York: Cornell University Press. Hatch, Walter and Kozo Yamamura. 1996. East Asia in Japan’s Embrace: Building a Regional Production Alliance. Cambridge, UK: Cambridge University Press. Heginbotham, Eric and Richard J. Samuels. 2003. Japan. In Strategic Asia 2002-03: Asian Aftershocks, edited by Richard J. Ellings and Aaron L. Friedberg with Michael Wills, 98-99. Seattle, Wash.: National Bureau of Asian Research. Hemmer, Christopher and Peter J. Katzenstein. 2002. Why Is There No NATO in Asia? Collective Identity, Regionalism, and the Origins of Multilateralism. International Organization 56 (3):575-607. Henning, C. Randall. 2004. Regional Economic Integration and Institution Building. Paper presented at the G-20 Workshop on Regional Economic Integration in a Global Framework, 22-23 September. 4-5. Johnson, Chalmers. 1982. MITI and the Japanese Miracle. Stanford, Calif.: Stanford University Press.

Security in Northeast Asia: Time for New Architecture? 243 Johnston, Alastair Iain and Robert Ross, eds. 1999. Engaging China: The Management of an Emerging Power. London, UK: Routledge. Kahler, Miles. 2000. Conclusion: the Causes and Consequences of Legalization. International Organization 54 (3):661-84. Kang, David and Jiyoung Lee. 2006. Japan and Korea: Missiles and Prime Ministers May Mark a Turning Point. Comparative Connections 8 (3). Available from < http://www.csis.org /index. php?option = com_csis_ pubs& task = archive & curyear= 2006&type=1&sort=datedesc&filter=title&keyword=Comparative% 20Connections>. Katzenstein, Peter J. 2005. A World of Regions: Asia and Europe in the American Imperium. Ithaca, New York: Cornell University Press. Kikuchi, Tsutomu. 2002. East Asian Regionalism: A Look at the ‘ASEAN plus Three’ Framework. Japan Review of International Affairs 16:1-23. Korea International Trade Association. 2004. Bridging the Pacific XXXIV. Krauss, Ellis and T.J. Pempel, eds. 2004. Beyond Bilateralism: U.S.-Japan Relations in the New Asia-Pacific. Stanford, Calif.: Stanford University Press. Kruger, David and Ichiko Fuyuno. 2002. Innovate or Die: Reinventing Japan. Far Eastern Economic Review 28-34. Kurlantzick, Joshua. 2007. Charm Offensive: How China’s Soft Power is Transforming the World. New Haven, Conn.: Yale University Press. Leheny, David. 2006. A Narrow Place to Cross Swords: ‘Soft Power’ and the Politics of Japanese Popular Culture in East Asia. In Beyond Japan: The Dynamics of East Asian Regionalism, edited by Peter Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell University Press. Leifer, Michael. 1999. Indonesia and the Dilemmas of Engagement. In Engaging China: The Management of an Emerging Power, edited by Alastair Iain Johnston and Robert S. Ross, 104. London, UK: Routledge. Lincoln, Edward J. 2004. East Asian Economic Integration. Washington, D.C.: The Brookings Institution. Pan, Esther. 2006. New Focus on U.S.-Southeast Asia Military Ties. Council on Foreign Relations, 2 February. Available from . Pearson, Margaret. 1999. The Major Multilateral Economic Institutions Engage China. In Engaging China, edited by Alastair Iain Johnston and Robert S. Ross, 207-234. London, UK: Routledge. Pekkanen, Saadia. 2004. Japan’s FTA Frenzy. Unpublished Manuscript, University of Washington, Seattle, Wash. 1, 17. Pempel, T.J. 2005. Introduction. In Remapping East Asia: The Construction of a Region, edited by T.J. Pempel, 19. Ithaca, New York: Cornell University Press. Ravenhill, John. 2005. Mission Creep or Mission Impossible? APEC and Security. In Reassessing Security Cooperation in the Asia-Pacific: Competition, Congruence, and Transformation, edited by Amitav Acharya and Evelyn Goh. Cambridge, Mass.: MIT Press. ———. 2001. APEC and the Construction of Pacific Rim Regionalism. Cambridge, UK: Cambridge University Press.

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Rozman, Gilbert. 2004. Northeast Asia’s Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization. Cambridge, UK: Cambridge University Press. Rubin, Robert. 2003. In an Uncertain World: Tough Choices from Wall Street to Washington. New York: Random House. Samuels, Richard J. 2007. Securing Japan. Ithaca, New York: Cornell University Press. Snyder, Scott. 2004. The Beginning of the End of the U.S.-ROK Alliance? PacNET 36, 26 August. Sopiee, Noordin. 1997. Should APEC Address Security Issues? In Whither APEC? The Progress to Date and Agenda for the Future, edited by C. Fred Bergsten, 207-9. Washington, DC: Institute for International Economics. Sutter, Robert G. 2005. China’s Rise in Asia: Promises and Perils. Lanham, Maryland: Roman & Littlefield Publishers, Inc. Thao, Nguyen Hong. 2003. The 2002 Declaration on the Conduct of Parties in the South China Sea: A Note. Ocean Development and International Law 34: 279-285. Wessels, Wolfgang. 1997. An Ever Closer Fusion? A Dynamic Macropolitical View on Integration Processes. Journal of Common Market Studies 35 (2):267-99. Woo, Jung-en. 1990. Race to the Swift. New York: Columbia University Press. Wu, Xinbo. 1998. China: Security Practice of a Modernizing and Ascending Power. In Asian Security Practice, edited by Muthiah Alagappa. Stanford, Calif.: Stanford University Press.

8 The Future of Northeast Asia’s Institutional Architecture

Vinod K. Aggarwal University of California, Berkeley, CA, USA Min Gyo Koo Yonsei University, Seoul, South Korea Seungjoo Lee Chung-Ang University, Seoul, South Korea

8.1 Introduction1 This volume has focused on how and to what extent the triple post shocks – namely the post-Cold War, the post-Asian financial crisis of 1997–98, and the post-September 11, 2001 attacks – have helped Northeast Asian countries secure inclusive club goods to realize free trade, financial stability, and collective security. The emerging institutional architecture in Northeast Asia has been marked by the proliferation of free trade agreements (FTAs), preferential financial arrangements, and both formal and informal security dialogues. The institutional architecture under the San Francisco system served Northeast Asia well for the Cold War period, obviating the need for any significant regional institutionalization of both economic and security affairs. In the hub-and-spokes network of the San Francisco system, the US served not only as the principal architect of regional order, but also as a power balancer between Japan and China, as well as between the two Koreas and the two Chinas. US hegemony also played a critical role in gluing together its key allies through open 1 We are deeply indebted to Jonathan Chow, Edward Fogarty, and Kristi Govella for their comments and editorial assistance.

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access to its market, thus creating a unique institutional mix of bilateralism and multilateralism. More recently, however, the traditional institutional equilibrium in Northeast Asia has come under heavy strain. The changes are subtle but significant in both the economic and security issue areas. Although Northeast Asian countries continue to pay lip service to their commitment to global economic institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF), the erosion of their confidence in such global multilateral mechanisms is clearly visible in the proliferation of FTAs and currency swap agreements.2 In the security issue area, there have emerged various official and unofficial, formal and informal, bilateral and minilateral dialogues to resolve regional security imperatives, ranging from the rise of China, the Taiwan Strait issue, and the North Korean nuclear crisis. Although the strength and effectiveness of these security fora remain uncertain, the increasing number of channels for security dialogue and negotiations indicate positive and dynamic processes of promoting regional peace and stability.3 This concluding chapter proceeds as follows. Section 8.2 summarizes our theoretical arguments. To systematically analyze the evolution of new institutional architecture in Northeast Asia, we developed an institutional bargaining game framework, focusing on the interplay of four broadly defined causal elements – namely initial shocks, goods, individual bargaining situations, and the existing institutional context. Based upon this conceptual framework, Sect. 8.3 analyzes the evolution of national strategies vis-à-vis the emerging regional institutional order, while summarizing key findings of country case chapters on South Korea, China, Japan, North Korea, Russia, and the US. Finally, Sect. 8.4 highlights the nexus between economics and security and draws policy implications for the future of economic and security institution building in Northeast Asia.

2

Aggarwal and Koo 2005a; Pempel 2005; Aggarwal and Urata 2006; and Solis and Katada 2007. 3 Evans and Fukushima 1999; Buzan 2003; Job 2003; Prichard 2004; and Bullock 2005.

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8.2 An Institutional Bargaining Game Approach: Initial Shocks, Goods, Individual Bargaining Situations, and Institutional Fit The process of a shift from an initial institutional equilibrium to a new one generally comes about with some initial shocks that create pressure for change. Initial shocks may stimulate or impede the supply of certain types of goods that pertain to either economics or security, or both. While there are many factors that might affect national responses to initial shocks and subsequent change in the provision of goods, the most significant elements are countries’ individual bargaining situations, consisting of their international position, domestic power structures, and elite beliefs. Finally, if countries choose to create new regional institutions or modify existing ones, they must decide on whether and to what extent those institutions are to be influenced by the context of global multilateral institutions. In this section, we briefly summarize the key arguments of our institutional bargaining game approach. 8.2.1 Initial Shocks At the outset of the Cold War, the San Francisco system put Northeast Asian countries on a unique institutional path consisting of bilateralism and multilateralism in both economic and security issue areas. The San Francisco system offered America’s Northeast Asian allies access to the US market in return for hub-and-spokes alliances. At the same time, US allies were encouraged to participate in globally-focused multilateral fora such as the WTO, the IMF, and the UN. Aside from informal networks based on corporate and ethnic ties, the San Francisco system created few incentives for Northeast Asian countries to develop exclusive regional economic and security arrangements.4 Yet, the pressure for a shift from traditional to new institutional equilibrium has come about through three major initial shocks: the end of the Cold War, the Asian financial crisis, and the September 11 attacks. First, the post-Cold War shock in the early 1990s produced an outpouring of proposals aimed at developing economic regionalism in Northeast Asia. However, the contribution of the end of the Cold 4

Calder 2004; and Katzenstein 1997.

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War to Northeast Asia was more visible in the security issue area, as seen in the Nakayama proposal, the operation of the Korean Peninsula Energy Development Organization (KEDO), and the establishment of the ASEAN Regional Forum (ARF) as well as a series of Track Two initiatives. The second turning point came in the wake of the Asian financial crisis of 1997–98. The financial crisis revealed a number of shared weaknesses among Northeast Asian economies. Concurrently, Northeast Asian countries’ commitment to a broad-based, multilateral trade and financial regime eroded significantly. Recognizing that tighter institutionalization of intraregional commercial and financial ties might be a better commitment mechanism for providing economic security, Northeast Asian countries began to weave a web of preferential economic arrangements. The latest turning point for the institutional order in Northeast Asia came with the September 11, 2001 terrorist attacks. The American global war on terror and America’s subsequent departure from its conventional emphasis on bilateral security ties under the San Francisco system have brought about fundamental shifts in Northeast Asia’s balance of power politics. As seen in the current Six-Party Talks process to deal with the North Korean nuclear issue, many regional experts became more hopeful about the possibility of a more formal organizational framework for minilateral security cooperation in Northeast Asia. 8.2.2 Goods In dealing with the emerging institutional architecture, we focus on the three most prominent goals of institutional cooperation: trade liberalization, financial stability, and regional security. We assume that the provision of these goals may take on four different types of goods depending on the degree of rivalry and excludability: private goods, club goods, common pool resources, and public goods. In terms of goods, Northeast Asia’s new appetite for preferential economic arrangements and regional security dialogues reflects a convergence of interests in securing inclusive club goods in the face of growing economic and security uncertainties. Put differently, the political initiatives and intrinsic interest in creating regional economic

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and security arrangements reflect the growing need for an insurance policy to realize free trade, financial stability, and regional security when traditional mechanisms under the San Francisco system stall or dismantle steadily in the post-triple period. More specifically, with traditional mechanisms within the WTO offering no salient solutions, Northeast Asian countries quickly turned toward FTAs to assure a market for their products. Currently, the stalemated Doha Development Round of WTO talks add greater enthusiasm to Northeast Asian countries’ turn toward FTAs. In the financial issue area, a conspiracy theory still haunts many East Asians that the US was behind the Asia-bashing and severe austerity programs imposed by the IMF in the middle of the financial crisis. East Asian countries’ deepening distrust of global public goods exclusively provided by the IMF has thus motivated them to establish their own regional financial mechanisms such as the Chiang Mai Initiative (CMI) and Asian Bond Market Initiative (ABMI). The ASEAN Plus Three (APT) mechanism has proven effective in promoting financial cooperation in recent years. Finally, although the web of bilateral security alliances under the San Francisco system will not come to an end anytime soon, the traditional approach to the provision of regional security as a bilateral club good is increasingly incapable of meeting new collective security needs. As will be discussed shortly, the rise of China and the relative decline of US hegemony are the main causes. As such, Northeast Asian countries are now considering a variety of regional alternatives, among which the Six-Party Talks process offers a prototype of a collective mechanism to deal with common regional security problems, departing from traditional reliance on bilateral mechanisms led by the US. 8.2.3 Individual Bargaining Situations Among the most significant elements that determine national responses to external shocks and the changes in the provision of goods, we focused on three sets of broadly defined elements as causal variables: (1) an actor’s relative position within the international distribution of capabilities; (2) domestic power structures that reflect coalitions and political regime type; and (3) elite beliefs and ideas about issue linkages.

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In Northeast Asia, two aspects of the shifting international context have been the basis for exploring institutional cooperation in trade, finance, and security. The first factor is the relative decline of the US in both economic and security affairs in Northeast Asia. The second factor concerns the rise of China along the international continuum of economic and strategic development. As Kun-Chin Lin notes in this volume, it may be too early to determine whether China’s strategic shift has created a regional dynamic in favor of an anti-US institutional equilibrium. Notwithstanding, the combination of these two strategic developments has brought about significant changes in Northeast Asian balance of power politics, thus undermining the San Francisco system and encouraging the development of an alternative mechanism for economic and security cooperation. Concurrently, political developments at the national level have altered the economic and security payoffs confronting individual countries as many, if not all, Northeast Asian countries move toward liberalization, rendering cooperative outcomes at the regional level more likely and the requirements of institution-building less daunting. But equally important, as Northeast Asian countries move from authoritarianism toward greater political pluralism, the twin challenges of responding to nationalist sentiments and maintaining political legitimacy may constrain their political leeway to deal with complex economic and security interdependence and institution-building processes. As both international and national variables have negative, as well as positive, impacts on institutionalization, materially-focused variables alone cannot determine the likely institutional outcomes in Northeast Asia. The direction of change and how it is to be achieved really depend on elite beliefs and ideas about the causal connections among issues and the need to handle problems on a multilateral, minilateral, bilateral, and/or unilateral basis. In this context, there is a strong indication of new ideational formulas that support regional alternatives for economic and security cooperation. Such ideational and perceptional changes will provide Northeast Asian countries with the basic conditions for improving their relationship in the long run and lay the groundwork for a potentially robust regional institutional architecture.

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8.2.4 Institutional Fit Our institutional bargaining game approach posits that as countries attempt to meet their trade, financial, and security nee ds in a new environment, they often negotiate the number of participants, geographic coverage, scope and strength of new arrangements, or modify existing ones. At the same time, they strategically interact with each other within the context of broader institutional arrangements such as the WTO, the IMF, and the UN. To this point, Northeast Asia’s new appetite for FTAs is geographically open with a focus on both intra- and extra-regional arrangements. Also, many of these agreements attempt to cover broader areas and elements beyond trade. This indicates that these FTAs are WTO-plus or an attempt at institutional division of labor. In the financial issue area, Northeast Asia’s nascent but promising efforts at institutionalizing its financial and monetary relations revolve around a more exclusively “Asia”-focused institutions such as the CMI, the ABMI, the Asian Currency Unit (ACU), and the Asian Monetary Fund (AMF). These regional efforts might implicitly challenge the IMF-centered US dollar-based financial system, but there is an equally strong possibility that they will be soundly nested within global institutions. In Northeast Asia, the geographic scope of regional security dialogues is mixed. Some prominent examples – such as the ARF, the Council on Security Cooperation in the Asia-Pacific (CSCAP) ), and the Northeast Asian Cooperation Dialogue (NEACD) – have broadbased membership that extends beyond the geography of Northeast Asia, although Northeast Asian membership outweighs its non-Asian counterpart in terms of political significance, with the exception of the US. Despite potential tensions stemming from the shifting global and regional balance of power, the goals and operations of these institutions have largely been compatible with US-designed global security architecture thus far. 8.3 Cross-national Developments In their analysis of evolutionary dynamics in South Korea’s regional strategy in Chap. 2, Seungjoo Lee and Chung-in Moon find that South

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Korea’s survival strategy – centered on its bilateral security alliance with the US and active participation in GATT-led trade liberalization – largely remained intact until the early days of the post-Cold War period. Even when it embraced regionalism, South Korea preferred regional arrangements with multilateral character as much as possible. South Korea’s institutional choice of APEC is a prime example. Lee and Moon argue, however, that the outbreak of the Asian financial crisis spurred South Korea to critically re-evaluate its traditional foreign economic policy. The (mis-) management of the crisis by the U.S and the IMF and APEC’s inability to supply a regional solution to the crisis combined to raise South Korea’s interest in creating regional cooperative mechanisms. Two major policy initiatives under the Kim Dae-jung government were APT and FTAs. Perceiving APT as a useful venue for South Korea to project its own regional visions, the Kim government played a pivotal role in establishing the East Asia Vision Group (EAVG) and the East Asia Study Group (EASG). FTAs provided another alternative for South Korean policymakers. Interestingly, before it started negotiations with foreign governments, the Kim government embarked on organizational reform to streamline bureaucratic coordination for foreign economic policymaking that ultimately led to the creation of the Office of the Minister for Trade (OMT). South Korea’s regional policy took another turn as Roh Moo-hyun came to power in the aftermath of 9/11. By unveiling an ambitious regional plan, the Northeast Asian Cooperation Initiative (NEACI), the Roh government hoped to build a regional community of mutual trust, reciprocity, and symbiosis. Although the NEACI’s narrow geographical focus on Northeast Asia may be viewed as a break from South Korea’s traditional regional policy, Lee and Moon contend that its main thrust is to contribute to regional and global peace and prosperity by settling tensions and problems in the proximate region. Lee and Moon also argue that as it became obvious that the NEACI had not produced expected outcomes, the Roh government gradually turned to FTAs as an alternative. What is noteworthy in South Korea’s FTA strategies is that the Roh government somewhat surprisingly embarked on the Korea–US (KORUS) FTA negotiations when the chances for a trilateral FTA among South Korea, China, and Japan were slim. Lee and Moon stress that the Roh government made an

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early push for the KORUS FTA in order to improve economic ties as well as overall diplomatic and security relations between Seoul and Washington. In short, they argue that South Korea’s FTA strategy has turned more proactive under the Roh government, in stark contrast to the reactive approach taken by the Kim Dae-jung government. In the analysis of China’s evolving regional strategies presented in Chap. 3, Kun-Chin Lin finds that China skillfully took advantage of the triple shocks to establish itself as a pacifist actor in the region. In the aftermath of the Asian financial crisis, explains Lin, a China that had traditionally lent lukewarm support to regional institutionalization began to project its own regional visions. As it did not fall victim to the Asian financial crisis, China with boosted confidence ambitiously promoted various regional schemes not just in the economic arena (ASEAN Plus Three), but also in security areas (the Shanghai Cooperation Organization). Lin argues that 9/11 provided China with another golden opportunity to consolidate its regional strategies. On the one hand, China exploited US preoccupation with Iraq and Afghanistan to find a niche role in the regional institutionalization. On the other hand, acknowledging US leadership in the region, China endeavors to assure its neighbors that its rise will not hamper the existing order in the region, but generate overall welfare gains. Lin concludes that the doctrine of “peaceful rise” aptly characterizes China’s sensible approach to institutionalization in Northeast Asia. In Chap. 4, Saori Katada and Mireya Solis examine Japanese regional economic policy in the post-Cold War period, finding that two of the triple shocks – the end of the Cold War and the Asian financial crisis – were particularly crucial in driving Japan’s regional policy into a new direction. First, they argue that the end of the Cold War presented the Japanese government with a formidable challenge in formulating its regional policy: how to deal with the rise of China when the US commitment to East Asian security seemed to be declining. In their view, concern about the Sino-Japanese rivalry motivated Japan to play an active role in regional institution building because Japan found it necessary to “lock in” institutions before the balance of power between the two countries could swing in favor of the latter. Second, Katada and Solis contend that the Asian financial crisis, which revealed starkly different perceptions about the nature of the

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crisis between the US (and IMF) and Japan (and other East Asian countries), also catalyzed Japan to seek regional institutionalization in the economic arena as an effective means to preempt another potential crisis. The crisis also revealed Japan’s frustration with an APEC that was initially founded on the principle of open regionalism. Fissures began to grow between the Japanese voluntaristic and informal approach and the US legalistic approach to trade liberalization. It was against this backdrop that Japan turned to bilateral FTAs. With FTAs, argue Katada and Solis, Japan sought to gain much more control over the pace and scope of liberalization. They also point out that whereas Japan’s embrace of FTAs indeed signifies an important policy shift, its FTA strategies are constrained by domestic politics as well as regional factors. First, squeezed between internationally competitive export-oriented businesses and a heavily protected agricultural sector, the Japanese government was forced to launch FTA negotiations primarily with small economies and exclude politically sensitive items. Second, concerned about China’s hub-and-spoke strategy, Japan had to speed up its FTA negotiations with Southeast Asian countries. Such competitive dynamics between the two countries, to significant degrees, pushed Japan to seek FTA strategies tilted toward forming rivaling hub-and-spoke FTA networks rather than a region-wide trade bloc. Finally, Katada and Solis explain why, in contrast to its gradual approach to trade institution building, Japan took a more significant role in constructing regional monetary and financial institutions. In their view, the sectoral difference derives from a variety of factors: the main sources of policy change in the respective issue area; conflicting interests and mutual distrust between Japan and China; and the reaction of the US. As a result, they conclude that although they are still in a nascent stage, Japanese efforts at building financial institutions in East Asia have produced a more tangible outcome. In Chap. 5, Sang-young Rhyu examines how throughout the postCold War period North Korea has attempted to break out of its decades-long isolation to engage in the regionalization process in Northeast Asia. Rhyu observes that the disintegration of the Soviet bloc posed a devastating threat to the Kim Il-sung regime, as its relationship with Russia and China, two principal supporters of the North Korean regime, turned sour. Ironically, this diplomatic impasse motivated North Korea to take a conciliatory approach toward South

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Korea, culminating in mutual recognition through the United Nations, reaffirmation of the goal of a nuclear-free Korean Peninsula, and signing of the South–North Basic Agreement. Rhyu argues that this rapprochement in inter-Korean relations in the early post-Cold War period largely stemmed from North Korean initial attempts to rehabilitate its faltering economy by participating in global institutions and regional networks. Even economically isolated North Korea was not completely immune to disturbances of the Asian financial crisis, as trade with South Korea, a direct victim of the crisis, fell. From this period, argues Rhyu, North Korea and international financial institutions (the IMF, World Bank, and the ADB() began to search for a potential path toward North Korea’s integration with the global economy and regional partners. North Korea’s efforts to improve relations with major international economic and financial institutions continued in the 2000s, as demonstrated in its application for membership in the Asian Development Bank in 2001. On the security front as well, North Korea took halting steps toward greater regional security cooperation by joining the ARF. The 9/11 attacks brought indirect yet negative consequences to North Korea when it was designated as a member of the “axis of evil” by the Bush administration. Under pressure from this new development, North Korea established Special Economic Zones including the Gaeseong Industrial Complex. Rhyu argues that the North Korean regime strove to revive its economy by linking its country to the East Asia market through inter-Korean economic cooperation. However, Rhyu concludes by cautioning that despite North Korea’s efforts to participate in East Asian regionalism, the prospects for North Korea’s real integration into the region are slim without a fundamental resolution to the North Korean nuclear issue. In his examination of Russia’s regional policy in Chap. 6, Taehwan Kim poses an interesting question: Why has Russia under Vladimir Putin made a dramatic shift in its regional policy toward growing assertiveness and vigorous involvement in the region? He answers that this policy shift has to do with fundamental changes in domestic political governance that took place in the midst of regime changes from the Yeltsin and Putin regimes. That is, political transition from Yeltsin’s neofeudal governance to Putin’s neoabsolutism was crucial in Russia’s projection of a neomercantilist strategy into Northeast Asia.

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He further argues that the triple shocks were closely intertwined with these domestic governance changes, paving the way for the effects of this policy shift to materialize. First, in the immediate post-cold war period, Russia showed signs of inconsistency in its regional policy, as the Yeltsin regime had to succumb to the political and economic interests of the neofeudal coalition, impairing effective and consistent policy coordination. Russia’s marginalization in Northeast Asia was inevitable. Second, explains Kim, the aftermath of the Asian financial crisis turned out to be a critical juncture in Russian politics in that political balance between the Putin regime and major oligarchs radically changed. Badly damaged by the crisis, oligarchs had no alternative but to watch their political power quickly evaporate, while Putin firmly established his political dominance. The near dissolution of the neofeudal coalition and a quick recovery from the crisis gave the Putin regime greater leeway to conduct regional policies in a more centralized manner. With greater confidence, Russia implemented a series of policy initiatives in Northeast Asia, making efforts to improve its bilateral relationships with tradition allies, actively participate in regional economic and security organizations such as ASEAN, ARF, and APEC, and strengthen its Track II diplomacy. Finally, Kim argues that the Putin regime consolidated its power domestically by skillfully linking the 9/11 attacks and the Chechen war. Subsequently, analyzes Kim, Russia’s regional policy began to display “neomercantilist” features, as the country strategically took advantage of its abundant energy resources as bargaining leverage in dealing with Northeast Asian countries. Kim argues that Russia could carry out its neomercantilist policy in a coherent manner because Putin successfully installed a neoabsolutist governance system backed by a new political ruling group, siloviki. In Chap. 7, Ellen Frost and David Kang examine the way in which each of the triple shocks has affected the role of the US in Northeast Asian regionalism. In their view, despite its military prowess and economic vitality, US regional influence has decreased in the post-Cold War period, particularly compared to that of China. Moreover, the passive American policy stance vis-à-vis the Asian financial crisis, strikingly different from its firm commitment to the Mexican crisis, substantially heightened Northeast Asian countries’ suspicions that

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the US was unreliable as an extra-regional. Finally, while the 9/11 incident increased US incentives for military cooperation with Northeast Asian countries to cope with new security threats, the excessive American focus on North Korean nuclear issues again created a perception among Northeast Asian countries that the region did not hold high priority on US policy agenda. On the future of Northeast Asian regionalism, Frost and Kang find that the prospects for institutionalization in Northeast Asia are not bright. For example, the track record in the security area shows that regional institutions such as the Six-Party Talks and the ASEAN Regional Forum have resulted in limited success at best. On the economic front as well, despite high-level economic integration, institutional arrangements were formed primarily on a bilateral basis. However, on the positive side, the authors caution that it would be premature to underestimate Northeast Asia’s potential for institutionalization, because Northeast Asian countries have cultivated institutional foundations in their own way. They argue that in Northeast Asia, “soft” institutionalization based on the principles of dialogue, community-building, and the peaceful resolution of disputes have already produced some meaningful successes in resolving and coordinating sensitive regional issues. 8.4 The Future of Economic and Security Institutional Building in Northeast Asia The traditional institutional order in Northeast Asia has come under heavy strain in light of the triple post shocks. The abrupt end of the Cold War bipolarity, which had acted as the source of regional reluctance to institutionalize economic and security relations, has made it politically easier for Northeast Asian countries to consider institutionalizing their ties. The Asian financial crisis of 1997–98 clearly revealed a number of institutional weaknesses that Northeast Asian economies shared. The September 11 terrorist attacks, and the subsequent American war on global terrorism, have called into question the fate of the Northeast Asian balance-of-power system, which in turn has created additional incentives for Northeast Asian countries to cope with growing economic and security uncertainties through institutional mechanisms.

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In view of these triple post shocks, Northeast Asian countries’ growing preferences for “club goods” – as opposed to public or private goods – are at the heart of Northeast Asia’s drive for a new institutional architecture. As this volume has argued, the triple post shocks have altered the supply of trade liberalization, financial stability, and national security from de facto public goods under the San Francisco system to de jure club goods. In an effort to understand the shifting institutional dynamics, we have examined countries’ individual bargaining situations, focusing on their international strategic and economic interests, domestic power dynamics, and elite beliefs about the value of pursuing regional alternatives. We also showed how the changing nature of broader institutions interacted with country characteristics to alter institutional payoffs in the region. In view of the tremendous political and economic uncertainties in the contemporary period, the path to deeper and wider economic and security integration in Northeast Asia is likely to be complex. Despite enormous complexities and uncertainties, however, we are sure about one thing: Northeast Asia will remain an open region due to its economic and security links to global politics and economies, particularly to those with the US.5 Yet in the face of the triple post shocks and the resultant changes in Northeast Asian countries’ preferences for different types of goods, it is more useful to explore the conditions under which new institutional mechanisms are likely to evolve into broader accords and those under which they might lead to “pernicious” regionalism that undermines global institutions by failing to be firmly nested in the global regime. Using the institutional map developed and applied in this volume, we can construct simplified scenarios of possible institutional paths that Northeast Asia is likely to take. For us, the openness of Northeast Asian regionalism primarily depends on the following causal variables: (1) the strength of global institutions such as the WTO, the IMF, and the UN in their respective areas; (2) the Sino-Japanese relationship; (3) economic complementarity among countries; and (4) the “balance

5

Among others, see Katzenstein 2005.

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of interests” between the US and the EU concerning Northeast Asia as their economic and security partner region.6 With respect to trade liberalization, the weakness of the WTO opens up institutional space for Northeast Asian trade fora by affecting the provision of public goods and thus the incentives for club goods. In a similar vein, the eroding confidence of Northeast Asian countries in the IMF-centered US dollar-based financial system has motivated them to seek alternative regional club goods such as the CMI, the ABMI, the ACU, and the AMF(. Finally, the erosion of America’s military commitment to Northeast Asia in the post-triple period has made everyone in the region scramble in search of alternative security mechanisms. In a nutshell, many of their future developments depend on the possibility of a tripartite entente among the US, China and Japan, and the resolution of the North Korean issue in both economic and security terms. If China and Japan reach a political alliance, the formation of a strong Northeast Asian Free Trade Agreement (NEAFTA) is highly likely. If economic complementarities exist among member countries, they will broaden the scope of product coverage; otherwise, we can expect a strong but narrow (or sectoral) NEAFTA. By contrast, if there is no alliance between China and Japan, a NEAFTA is not a possibility. Certainly Northeast Asia, and more broadly East Asia, will remain an open region, if either the US or the EU, or both, maintain(s) a strong focus on the region. However, if the US continues its focus on the Free Trade Area of the Americas (FTAA) and the EU continues on an eastward and possibly southward expansion path, others may feel excluded. Under these circumstances, the decade-long perception between Northeast and Southeast Asians that Western regional arrangements are forming against them may well rekindle the Mahathir-promoted notion of an exclusive East Asian bloc – be it the East Asia Summit or ASEAN Plus Three (or Plus Six) – or a new China-centered regional hierarchy. Although it is easy to dismiss the talk in Asia of ASEAN Plus Three (which includes Japan, South Korea, and China) versus ASEAN Plus Six (which also further incorporates Australia, New Zealand, and India), the November 2006 announcement that the US would like to 6

See Aggarwal and Koo 2005b.

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promote a Free Trade Agreement of the Asia-Pacific (FTAAP) suggests that these new efforts to promote Asian regionalism, on the one hand, and the rise of China, on the other, are garnering concern among policymakers in Washington. We believe that regional institutions are becoming viable means for creating norms and rules of interstate behavior that are essential for establishing regional institutional architecture to manage collective trade, financial, and security issues, the process of which could possibly take at least a few decades, if not centuries. However, we do not claim by any means that we are sure about the future directions of Northeast Asian economic and security regionalism. Rather, we believe that systematic exploration of key variables and their impact in the context of the design of institutions may be better in providing us with more precise, albeit contingent, outcomes. References Aggarwal Vinod, K. and Shujiro Urata, eds. 2006. Bilateral Trade Arrangements in the Asia-Pacific: Origins, Evolution, and Implications. New York: Routledge. Aggarwal, Vinod K. and Min Gyo Koo. 2005a. Beyond Network Power? The Dynamics of Formal Economic Integration in Northeast Asia. The Pacific Review 18 (2):189-216. ———. 2005b. The Evolution of APEC and ASEM: Implications of the New East Asian Bilateralism. European Journal of East Asian Studies 4 (2):233-261. Bullock, Todd. 2005. U.S. Hopes Six-Party Talks Can be Model for Northeast Asia: State’s Hill says Talks on North Korea’s Weapons Programs Strengthen Ties. Washington D.C.: The Washington File, U.S. Department of State. Buzan Barry. 2003. Security Architecture in Asia: The Interplay of Regional and Global Levels. The Pacific Review 16 (2):143-173. Calder, Kent E. 2004. Securing Security through Prosperity: The San Francisco System in Comparative Perspective. The Pacific Review 17 (1):135-157. Evans, Paul and Akiko Fukushima. 1999. Northeast Asia’s Future Security Framework: Beyond Bilateralism? Tokyo, Japan: National Institute for Research Advancement. Available from . Job, Brian. 2003. Track Two Diplomacy: Ideational Contribution to the Evolving Asia Security Order. In Asian Security Order: Instrumental and Normative Features, edited by Muthiah Alagappa. Stanford, Calif.: Stanford University Press.

The Future of Northeast Asia’s Institutional Architecture 261 Katzenstein, Peter J. 1997. Introduction: Asian regionalism in comparative perspective. In Network power: Japan and Asia, edited by Peter Katzenstein and Takashi Shiraishi. Ithaca, New York: Cornell University Press. ———. 2005. A World of Regions: Asia and Europe in the American Imperium. Ithaca, New York: Cornell University Press. Pempel TJ, ed. 2005. Remapping East Asia: The Construction of a Region. Ithaca, New York: Cornell University Press. Pritchard, Jack. 2004. Beyond Six Party Talks: An Opportunity to Establish a Frame-Work for Multilateral Cooperation in the North Pacific. Paper presented at the Hokkaido Conference for North Pacific Issues, October, Hokkai Gakuen University. Solis, Mireya and Saori Katada. 2007. Understanding East Asian Cross-Regionalism: An Analytical Framework. Pacific Affairs 80 (2):229-258.

Index

9/11 attacks, 17, 83, 85, 197, 198, 219, 255, 256

A Abe, Shinzo, 225 Afghanistan, 86, 98, 116, 198, 225, 253 Agreed Framework between United States and North Korea (1994), 11 ASEAN. See Association of Southeast Asian Nations ASEAN Plus Six, 259, See also East Asia Summit ASEAN Plus Three (APT), 7, 26, 38, 42, 44, 45, 46, 49, 51, 82, 93, 94, 99, 217, 218, 230, 231, 232, 233, 234, 249, 252, 259 ASEAN Regional Forum (ARF), 8, 75, 156, 195, 220, 235, 248, 257 ASEAN+3. See ASEAN Plus Three (APT) Asia-Europe Meeting (ASEM), 7 Asian Bond Fund (ABF), 137, 139, 229 Asian Bond Market Initiative (ABMI), 7, 26, 31, 137, 138, 139, 249, 251, 259 Asian Currency Unit (ACU), 7, 137, 251 Asian Development Bank (ADB), 79, 134, 137, 156, 159, 218, 230, 255 Asian financial crisis (AFC) role of IMF, 14 role of the United States, 68, 256 Asian Monetary Fund (AMF), 14, 21, 26, 31, 45, 131, 132, 142, 251, 259 Asian Monetary Union (AMU), 137

Asia-Pacific Economic Cooperation (APEC) Bogor Declaration, 42 Early Voluntary Sectoral Liberalization (EVSL), 42, 121, 234 Individual Action Plans (IAPs), 6, 96 Association of Southeast Asian Nations (ASEAN) ASEAN way, 215, 229 FTAs with China (ACFTA), 7, 15, 26, 45, 89, 94, 96 with Japan, 15 Axis of evil, 17, 90, 157, 164, 197, 238, 255

B Bilateral trade agreements, 26, 73, 83, 94, 95, 96, 121, 186, 196, See also Free Trade Agreements Bush, George H.W., 74 Bush, George W., 16, 17, 19, 83, 88, 90, 98, 110, 116, 117, 141, 157, 158, 164, 165, 169, 171, 173, 196, 197, 219, 236, 255

C Chiang Mai Initiative (CMI), 26, 31, 132, 134, 138, 140, 142, 249, 259 China China threat, 81, 88 peaceful rise, 66 framing, 66, 77, 87, 95, 98 FTAs with ASEAN (ACFTA), 89 with Chile, 6 with Japan, 83 with South Korean, 81

264

Index

New Security Concept (NSC), 77 People’s Liberation Army (PLA), 72 relations with Japan, 73 relations with Korean Peninsula, 67, 70, 81, 85, 90, 97 relations with Russia, 74 relations with the United States, 73 Taiwan Strait, 73, 85, 89 Tiananmen Square, 69, 71, 75 WTO accession, 83, 113 China Taiwan Strait, 75 Clinton, Bill, 14, 74, 83, 84, 111, 112, 154, 158, 167, 218 Cold War end of, 11, 30, 49, 58, 70, 71, 109, 110, 111, 140, 152, 181, 184, 216, 247, 253, 257 system, 39 Collective Security Treaty Organization (CSTO), 204, 205, 206, 207 Commonwealth of Independent States (CIS), 204, 205 Complete, verifiable and irreversible dismantlement (CVID), 165 Comprehensive Economic Partnership in East Asia. See Japan, Comprehensive Economic Partnership in East Asia Comprehensive Test Ban Treaty (CTBT), 113 Council for Security Cooperation in the Asia-Pacific (CSCAP), 8, 13, 26, 75, 195, 234, 251

D Declaration on the Conduct of Parties in the South China Sea, 89, 230 Deng Xiaoping, 71, 72, 76 Diaoyu Islands, 89 Doha Round. See World Trade Organization (WTO), Doha Round Dokdo Islands, 51

E East Asia Study Group (EASG), 44, 252 East Asia Vision Group (EAVG), 44, 252 East Asian Community (EAC), 38, 45, 49, 58, 96, 233 East Asian Economic Caucus (EAEC), 7, 42 East Asian Economic Group (EAEG), 40, 41 East Asian Free Trade Area (EAFTA), 45 East Asian Monetary Fund, 45 East Asian Summit (2005), 45, 51, 96, 143, 232 Economic Partnership agreement. See Japan, Economic Partnership Agreement Energy Security Initiative, 235 European Union (EU), 19, 38, 51, 52, 83, 86, 96, 158, 259

F Flying geese model, 3, 49, 79, 230 Four-Party Talks, 15, 74, 91 Free Trade Agreement of the AsiaPacific (FTAAP), 260 Free trade agreements (FTAs), 4, 46, 121, 245, See also Preferential Trade Agreements Fukuda, Yasuo, 223, 225

G General Agreement on Tariffs and Trade (GATT), 2, 3, 8, 26, 37, 39, 40, 41, 57, 118, 252 Global War on Terror (GWOT). See War on terrorism

H Hu Jintao, 87 Hub and spokes, 82, 236

Index 265

I Institutional bargaining game approach domestic coalitions, 23, 249 elite beliefs and ideas, 24, 250 goods, 19 institutional fit, 251 international positions, 249 political regime type, 23, 249 Institutional bargaining game approach individual bargaining situations, 22 Institutional bargaining game approach international positions, 22 Institutional bargaining game approach institutional fit, 26 Institutional bargaining game approach goods, 248 Institutional bargaining game approach individual bargaining situations, 249 International Atomic Energy Agency (IAEA), 11, 17, 27, 73, 154, 164, 166, 173 International Monetary Fund (IMF), 3, 8, 14, 21, 26, 30, 43, 78, 79, 114, 115, 116, 131, 139, 142, 156, 218, 246, 247, 249, 251, 252, 254, 255, 258, 259 Iran, 17, 92, 157, 197, 205, 219, 225 Iraq War. See United States, Iraq War

J Japan alliance with the U. S., 116 anti-terrorism special measures law, 116 article nine, 223

comprehensive economic partnership in East Asia, 114, 116 Economic Partnership Agreement (EPA), 125 FTAs with ASEAN, 122, 130 with China, 119 with Malaysia, 125 with Mexico, 124 with Singapore, 122, 126 with South Korea, 119, 129 Keidanren, 128 Ministry of Economic, Trade and Industry (METI), 122 Ministry of Economy, Trade, and Industry (METI), 226 Ministry of Finance (MOF), 114 Ministry of Foreign Affairs (MOFA), 226 Ministry of International Trade and Industry (MITI), 120, 128 new defense guidelines (1997), 112 new Miyazawa Initiative, 133 relations with China, 113 relations with North Korea, 113 Self-Defense Force (SDF), 112 U.S.-Japan Declaration on Security (1996), 73 Yoshida doctrine, 226 Jiang Zemin, 71, 82, 83, 189 Joint Declaration on the Denuclearization of the Korean Peninsula (1992), 153

K Kim Dae-jung, 15, 44, 46, 47, 51, 56, 57, 58, 81, 167, 252, 253 Kim Il-sung, 151, 153, 154, 254 Kim Jong-il, 81, 91, 150, 154, 157, 159, 168, 169, 171, 172 Kim Jong-Il, 161 Koizumi, Junichiro, 51, 83, 116, 129, 130, 158, 196, 202, 222, 225

266

Index

Korean Peninsula Energy Development Organization (KEDO), 11, 17, 74, 154, 248 Kozyrev, Andrei, 189, 190 Kurile Islands, 189

M Mao Zedong, 71 Medvedev, D., 200, 203, 208 Mohamad, M., 40, 219

N Nesting, 27, 68, 94, 99, 100 Newly industrialized economies (NIEs), 49 North American Free Trade Agreement (NAFTA), 19, 41, 96, 120, 125, 126, 128, 142, 214 North Atlantic Treaty Organization (NATO), 7, 96, 194, 197, 204, 205 North Korea Gaeseong Special Economic Zone nuclear crisis, 159, 162, 163 relations with China, 156, 159 relations with South Korea, 155 relations with the United States, 164, 166, 168, 172 relations with the USSR/Russia, 151 sanctions, 157, 168, 169, 171, 175 UN, 153 North Korea Gaeseong Special Economic Zone nuclear crisis, 157 North Korea Gaeseong Special Economic Zone nuclear crisis, 159 Northeast Asian Cooperation Dialogue (NEACD), 8, 13, 26, 251 Northeast Asian Cooperation Initiative (NEACI), 48, 50, 252

Northeast Asian Free Trade Agreement, 7, 259 Northeast Asian Security Dialogue (NEASD), 15, 18 Northern Territories. See Kurile islands Nuclear Nonproliferation Treaty (NPT), 154 Nuclear Non-Proliferation Treaty (NPT), 9, 11, 17, 27, 164, 166

O Ozawa, I., 112, 225

P post triple-shocks period, 27, 31, 253 post-triple shocks period, 1, 2, 4, 25, 27, 30 Powell, C., 84 Preferential Trade Agreements (PTAs), 2, 100, 118, 122, 123, 125, 128, 141, 214, See also Free Trade Agreements Primakov, Y., 190, 193 Proliferation Security Initiative (PSI), 9, 16, 169, 197 Putin, V., 28, 82, 180, 181, 183, 192, 193, 194, 195, 196, 197, 198, 199, 200, 201, 202, 203, 206, 255, 256

R Regionalization, 228, 230, 231, 254 Rice, C., 98 Roh Moo-hyun, 38, 48, 49, 51, 52, 55, 56, 197, 252 Roh Tae-woo, 40, 48, 152 Russia neoabsolutism, 180, 199, 255 neofeudalism, 207 neomercantilism, 201, 203, 206, 209 relations with China, 188, 189, 204

Index 267 relations with South Korea, 187, 190 relations with the United States, 194 siloviki, 199, 206, 207, 256

S San Francisco system, 16, 21, 30, 111, 245, 247, 248, 249, 250, 258 San Francisco System, 1, 2, 10, 20 Secure Trade in the APEC Region (STAR), 220 Senkaku Islands, 89 Severe Acute Respiratory Syndrome (SARS), 227 Shanghai Cooperation Organization (SCO), 8, 82, 92, 96, 97, 99, 220 Shanghai Five, 74, 82, 204 Six-Party Talks, 8, 17, 21, 27, 50, 58, 91, 112, 149, 157, 163, 164, 166, 168, 172, 205, 215, 239, 249, 257 South China Sea Code of Conduct in the South China Sea, 233 South Korea alliance with the United States, 39 FTA policy, 46, 47 FTAs with Chile, 47 with China, 52 with Japan, 52 with Singapore, 52 with the United States (KORUS), 57 Ministry of Foreign Affairs and Trade (MOFAT), 46 Northeast Asia Cooperation Initiative, 48, 252 Office of the Minister for Trade (OMT), 46, 56 sunshine policy, 17, 158, 171, 238

Soviet Union. See also Russia collapse of, 12, 151, 152, 153, 179, 184, 193 Spratly Islands, 89, 230

T Taiwan, 3, 8, 12, 64, 67, 69, 70, 73, 75, 84, 85, 88, 89, 97, 98, 175, 213, 217, 231, 234, 237 Takeshima islands, 51 Track Two diplomacy, 25 Treaty of Amity and Cooperation (TAC), 229 Treaty on the Southeast Asia NuclearWeapon-Free Zone (SEANWFZ), 81 Triple shocks, 24, 28, 30, 109, 118, 140, 180, 181, 183, 206, 256

U United Nations (UN) United Nations Development Program (UNDP), 7, 153 United Nations Educational, Scientific, and Cultural Organization (UNESCO), 153 United Nations Industrial Development Organization (UNIDO), 153 United States alliance with Japan, 111 alliance with South Korea, 39 Bush Doctrine, 158 FTA with South Korea (KORUS), 19, 55, 57, 252 Global Posture Review (2002), 16 Iraq war, 194, 198 role in Asian financial crisis, 68, 256 U.S.-Japan Declaration on Security (1996), 73

268

Index

W War on terrorism, 63, 64, 68, 90, 98, 110, 116, 117, 196, 197, 198, 220 Weapons of mass destruction (WMDs), 86, 90 Wen Jiabao, 204, 220 World bank, 8, 114, 156, 218, 255 World Trade Organization (WTO) Doha round, 13, 99

Y Yasukuni shrine, 51, 113, 130 Yeltsin, B., 29, 180, 181, 183, 185, 186, 189, 190, 191, 193, 194, 206, 255