Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions (The Political Economy of the Asia Pacific)

The Political Economy of the Asia Pacific

Series Editor Vinod K. Aggarwal

For other titles published in this series; go to http://www.springer.com/series/7840

Vinod K. Aggarwal • Seungjoo Lee Editors

Trade Policy in the Asia-Pacific The Role of Ideas, Interests, and Domestic Institutions

Editors Vinod K. Aggarwal Department of Political Science University of California Berkeley, CA USA [email protected]

Seungjoo Lee Department of Political Science Chung-Ang University, Seoul South Korea [email protected]

ISSN 1866-6507 e-ISSN 1866-6515 ISBN 978-1-4419-6832-6 e-ISBN 978-1-4419-6833-3 DOI 10.1007/978-1-4419-6833-3 Springer New York Dordrecht Heidelberg London Library of Congress Control Number: 2010938432 # Springer Science+Business Media, LLC 2011 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper Springer is part of Springer ScienceþBusiness Media (www.springer.com)

Preface

The trade institutional landscape in the Asia-Pacific is in rapid flux. Countries in the transpacific region have been pursuing a web of bilateral and minilateral trade agreements. Controversy over which institutional configuration is best suited for the region has reached a high pitch, with leaders formulating new configurations on a regular basis. These ideas for new institutions come in the context of an already crowded field of arrangements and a moribund World Trade Organization (WTO). These include the ASEAN Free Trade Agreement (AFTA), the ASEAN + 3 (including Japan, China, and South Korea) discussions, the East Asia Summit (EAS), which include these three plus India, Australia, and New Zealand, and APEC, with its 21 member economies (with Taiwan and Hong Kong, hence the term “economies”). More recently, we have seen a proliferation of bilateral free trade (or preferential, depending on one’s degree of cynicism) agreements. New efforts to bring some semblance of order to the potpourri of trade accords include the Trans-Pacific Strategic Economic Partnership (TPP), which would link existing and create new bilateral trade agreements among Asia-Pacific countries. Ironically, in the 1980s, analysts expressed concern over the lack of institutional arrangements to manage economic relations in Asia. Although trade in Asia had grown rapidly with the networking role of Japanese firms and Chinese ethnic groups, some expressed concerns about the lack of formalized institutions. With the end of the Cold War, the Asian financial crisis, rising Sino-Japanese rivalry, and now the global financial crisis, scholars have often focused on these shocks as driving the institutional transformation of the Asia-Pacific. Yet this research on the East Asian region and the Asia-Pacific region more generally tends to be statecentric, focusing on characterizing actors’ national interests, but without paying adequate attention to key subnational players. Although shocks and systemic changes are undoubtedly crucial catalysts in accounting for the newfound rush to bilateral and minilateral efforts, these explanations fall short of fully capturing the crucial differences in national responses to common external shocks. This book attempts to address this lacuna in the examination of different types of East Asian trade policies and American strategies through the careful characterization of types of accords and then the development of a systematic domestic v

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Preface

bargaining game approach focusing on idea, interests, and institutions to account for different types of arrangements. It is our claim that a focus on the interplay of these three driving forces can provide much deeper insight into the trajectory of trade institutions in the Asia-Pacific than a state-centric, billiard ball approach. The Kim Dae-jung Presidential Library, Yonsei University, was instrumental in bringing this effort to fruition. The foundation’s financial generosity is much appreciated. Its support allowed us to host two major conferences at the University of California at Berkeley. These meetings and opportunities for interaction have greatly strengthened our work and also helped to build enduring ties among scholars that geographically span more than half the globe. At our first meeting in Berkeley in December 2007, the participants benefited from the insightful comments of Alexsia Chan, Crystal Chang, Kristi Govella, Rongbin Han, Joon Seok Hong, Kenji Kushida, and Sara Newland. Based on their valuable suggestions, authors revised their papers and we held a second meeting in December 2008 at Berkeley. At this conference, we received comments from Kristi Govella, Kenji Kushida, Sara Newland, Seo-Hyun Park, and Darren Zook. The work of the Berkeley APEC Study Center staff proved crucial. Without the leadership of Project Director Kristi Govella, this book would never have seen the light of day. She provided insightful comments to the chapter authors and helped to manage the publication process. In these tasks, a number of undergraduates, who for the most part have worked or currently work at BASC as part of the Berkeley Undergraduate Research Apprenticeship program, also helped. For their work in managing the Berkeley conferences, we are particularly grateful to Bao Kham Chau, Robert Chen, Cindy Cheng, Ross Cheriton, Nathan DeRemer, Michelle Haq, Cindy Hwang, Vaishnavi Jayakumar, Andrew Kim, Anne Meng, and Aroon Vijaykar. In preparing the manuscript, we greatly benefited from the editing work of Kathy Bowen, Michelle Chang, Ren Yi Hooi, Robert Nelson, and Peter Volberding. We are indebted to the Ron and Stacy Gutfleish Foundation for their generous annual contributions to support BASC’s work. Finally, we would like to thank Jon Gurstelle of Springer Verlag for his help and support. We, of course, remain responsible for any errors or omissions.

Introduction

The book is divided into three parts. Part I is comprised of three chapters that review the literature deemed relevant by the author to developing and maintaining effective ASD educational programs. Chapter 1 provides information on the characteristics of the Autism Spectrum Disorders (ASD). This information is needed to increase understanding of the unique and related features of the autism spectrum and the specific issues and considerations in educational program planning and implementation. Chapter 2 provides a brief review of the ASD intervention and treatment literature and identifies components that comprise the ASD Program Model, which is then described fully in Sect. 2 Information is provided on the current evidence-base for effective ASD interventions, identifies the gaps that still exist in our knowledge of effective methods and practices, and provides considerations for evaluating new and emerging information on ASD intervention and treatment. Chapter 3 provides a review of program evaluation practices in education. Program evaluation is essential to successful program development and maintenance. This is particularly so for ASD programming because the neurodevelopmental nature of the disorder and the current gaps in knowledge about effective practice requires continuous evaluation of student need and program components to guide decisions about appropriate and effective educational programs and services. Part II describes the components of the ASD Program Development and Evaluation Protocol to develop an ASD program. This section is comprised of eight chapters, each focusing on a component of the protocol and the procedures used for an ASD program development initiative. Chapter 4 provides a description of the Needs Assessment protocol. Needs assessment is the necessary first step in any program development initiative. Data obtained on student need and school program infrastructure identifies gaps in program areas and informs ASD program development planning decisions. Chapter 5 focuses on program planning and provides the reader with a description of the ASD Program Development Action Planning System. Readers are guided through the elements and process for developing their own action plan. Chapter 6 describes the ASD Staff Training Model that was used in the author’s program development work. An important component of vii

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Introduction

this model is the use of a train-the-trainer model with case study approach, which was applied to assist administrators in developing and evaluating ASD programs and to train professional staff in evidence-based practices and developing their capacity to train other staff in applying these practices in ASD education. The chapter provides information on the content and format of the staff training model and provides readers with considerations in developing program infrastructure to support staff development in ASD. Chapter 7 describes the ASD Classroom Development System that specifies the steps to establishing and maintaining a classroom that supports students with ASD. In the ASD Program Development and Evaluation Protocol, a model ASD classroom is used to train school administrators on developing school infrastructure to support the development and application of all ASD Program Model components, based on their specific ASD Program Development Action Plan, and used to train classroom teams on effective practices in ASD education. This “case study” approach creates the mechanism for translating research into practice. Moreover, in larger program development initiatives, the model classroom is replicated to assist in developing a continuum of program placement options and building capacity across grades, schools, and personnel practices. Chapter 8 presents the student evaluation protocol that is applied in the ASD Classroom Model. Student evaluation is used to gather data on student learning characteristics, for monitoring student progress and evaluating outcomes, and for identifying and solving student learning and behavior difficulties. The chapter reviews the various methods and measures that were used in the ASD Classroom Model and provides the reader with information on how assessment data inform decisions about educational and behavioral interventions and supports. Chapter 9 describes the collaborative student support team and problem-solving model used in the ASD Classroom Model. The chapter provides information on team composition, roles and responsibilities of each team member, team meeting structure and the collaborative team process. A problem-solving process forms the foundation of the collaborative team and is essential to identifying and solving student learning and behavioral difficulties. Chapter 10 describes the Family-School Collaborative Model applied in the ASD Classroom Model. Family-school collaborations are an integral part of student education. Parents play an important role in educational decisions for their child and in supporting their child’s learning. Research shows that when parents are involved in this process, student achievement is improved. The chapter provides information on the components of the model and provides the reader with some considerations in developing and maintaining the model within their school program. Chapter 11 describes the ASD Program Evaluation Protocol. Readers are provided with information on the methods and measures used for continuous assessment of their ASD program and how to analyze the data in a systematic way to inform program planning activities and to problem solve program development difficulties.

Introduction

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Part III provides the reader with several case examples and illustrates the applicability of the ASD Program Development and Evaluation Protocol to program development projects that had different goals and scope of programmatic change. Chapter 12 describes how the protocol was applied to assist one school in developing inclusive programming for four elementary students with ASD. Chapter 13 describes how the protocol was applied to assist a school to redesign its program model to an evidence-based program model for students with ASD and related disorders. Chapter 14 describes how community need contributed to the development of the ASD Program Development and Evaluation Protocol and allowed the author and her colleagues to apply the protocol to build regional capacity and a range of ASD programs. It is hoped that readers will find the information contained in this book useful in their ASD program development activities. While the information contained in some of the chapters can be applied very specifically to develop one specific component (e.g., the Student Support Team: Collaborative Team & Problem Solving), the book is designed to be read and used in its entirety. The information and structure of the book represents the program development and evaluation process that the author used to assist school districts in creating ASD educational programs that were based in research but translated and applied to meet their specific program development objectives and to fit their unique school contexts. This process, standardized by the author, is designed to be used flexibly and to encourage the reader to use program evaluation data to guide program planning and problem-solving decision making. This process enabled the author to assist school personnel to avoid the “cookie cutter” approach that so often characterizes ASD interventions that are described in the literature. Instead, the process focuses on program development initiatives and corresponding activities that are data driven and address the unique and specific needs of a school and its students. The alignment of ASD program model with student need is essential to providing an appropriate educational experience for the student and for affecting student achievement, and for sustaining the ASD program overtime.

Contents

1

2

3

4

5

6

The Domestic Political Economy of Preferential Trade Agreements in the Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vinod K. Aggarwal and Seungjoo Lee

1

The Domestic Political Economy of China’s Preferential Trade Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ming Wan

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The Domestic Politics of Japan’s Regional Foreign Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ellis S. Krauss and Megumi Naoi

49

South Korea’s Political Dynamics of Regionalism: A Comparative Study of Korea–Japan FTA and Korea–U.S. FTA . Sang-young Rhyu

71

The United States and Asian Regionalism: The Politics of Reactive Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amy Searight

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The Politics of Singapore’s Bilateral Free Trade Agreements: Enlightened Self-interest to Promote East Asian Regionalism in the New Millennium?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lee Lai To and Ren Yi Hooi

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Evolving Trade Strategies in the Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . Vinod K. Aggarwal and Seungjoo Lee

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Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Contributors

Vinod K. Aggarwal is Professor of Political Science, Affiliated Professor in Business and Public Policy at the Haas School of Business, and Director of the Berkeley APEC Study Center at the University of California at Berkeley. Ren Yi Hooi is an undergraduate majoring in economics and a research assistant at the Berkeley APEC Study Center, University of California at Berkeley. Ellis S. Krauss is Professor of Japanese Politics and Policymaking at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. Lee Lai To is Associate Professor at the Department of Political Science at the National University of Singapore. Seungjoo Lee is Associate Professor in the Department of Political Science at Chung-Ang University. Megumi Naoi is an Assistant Professor in the Department of Political Science at the University of California at San Diego. Sang-young Rhyu is an Associate Professor in the Graduate School of International Studies at Yonsei University and formerly served as Director of the Kim Dae-jung Presidential Library and Museum, Yonsei University. Amy Searight is an Adjunct Fellow at the Center for Strategic and International Studies in Washington, DC, and Adjunct Professor at the Elliott School of International Affairs at George Washington University. Ming Wan is a Director of the Global Affairs Program and Professor of Government and Politics at George Mason University.

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Abbreviations

ACFTA AFTA AMF APEC ARF ASEAN ASEM

ASEAN-China Free Trade Area ASEAN Free Trade Area Asian Monetary Fund Asia Pacific Economic Cooperation ASEAN Regional Forum Association of Southeast Asian Nations Asia-Europe Meeting

BTA

Basic Telecom Agreement

CAFTA CEPEA CER

China ASEAN Free Trade Agreement Comprehensive Economic Partnership in East Asia Closer Economic Relations

DDR DPJ DRC

Doha Development Round Democratic Party of Japan Development Research Center

EAEC EAS EASG EAVG EFTA EU EVSL

East Asian Economic Caucus East Asia Summit East Asia Study Group East Asia Vision Group European Free Trade Area European Union Early Voluntary Sector Liberalization

FDI FSA FTA FTAAP

Foreign Direct Investment Financial Services Agreement Free Trade Agreement Free Trade Area of the Asia Pacific

GATT GCC

General Agreement on Tariffs and Trade Gulf Cooperation Council

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Abbreviations

IMF ITA

International Monetary Fund Information Technology Agreement

KORUS

United States-South Korea Free Trade Agreement

LDP

Liberal Democratic Party

MAFF METI MITI MMM MOFA MTI

Ministry of Agriculture, Forestry and Fisheries Ministry of Economics, Trade, and Industry Ministry of International Trade and Industry Mixed Member Majoritarian Ministry of Foreign Affairs Ministry of Trade and Industry

NAFTA NATO

North American Free Trade Agreement North Atlantic Treaty Organization

OECD

Organization for Economic Co-operation and Development

PAFTA PAFTAD PBEC PECC PR PTA

Pacific Free Trade Area Pacific Trade and Development Forum Pacific Basin Economic Council Pacific Economic Cooperation Council Proportional Representation Preferential Trading Agreements

SACU SMD SNTV

South Africa Customs Union Single Member District Single Non-Transferable Vote

TAC TPP

Treaty of Amity and Cooperation Trans-Pacific Strategic Economic Partnership

USTR

US Trade Representative

VER

Voluntary Export Restraint

WTO

World Trade Organization

Chapter 1

The Domestic Political Economy of Preferential Trade Agreements in the Asia-Pacific Vinod K. Aggarwal and Seungjoo Lee

1.1

Introduction

East Asian countries are now pursuing greater formal economic institutionalization, weaving a web of bilateral and minilateral preferential trade agreements (PTAs).1 This new dynamic was driven home most dramatically with regard to the Association of Southeast Asian Nations (ASEAN). In February 2003, China signed a surprise PTA framework agreement with the 10 ASEAN countries pledging free trade by 2010. In response, in October 2003, Japan signed a PTA framework agreement with ASEAN. Alarmed by Sino-Japanese competition in Southeast Asia, South Korea jumped ahead of Japan and signed a PTA of its own with ASEAN in May 2006. The ASEAN + 3 (including Japan, China, and South Korea) has been having regular meetings and the East Asia Summit (EAS) brings together an additional three countries including India, Australia, and New Zealand. Meanwhile, the USA has become an active promoter of a Free Trade Area of the Asia Pacific (FTAAP) under the auspices of Asia Pacific Economic Cooperation (APEC) and more recently of the Trans-Pacific Strategic Economic Partnership (TPP) that would link existing, and create new, bilateral trade agreements among Asia-Pacific countries. Despite this now apparent proliferation of minilateral initiatives, the most significant development in terms of clear specification of rules and procedures, as well as in directly impacting trade, has been the active pursuit of bilateral accords by countries in the region. Indeed, Korea recently concluded an accord with India,

1 We use preferential and free trade agreements (FTAs) interchangeably although the more accurate usage is PTA.

V.K. Aggarwal (*) University of California, Berkeley, CA, USA e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_1, # Springer Science+Business Media, LLC 2011

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V.K. Aggarwal and S. Lee

China is actively negotiating with Australia, and Japan concluded an accord with Switzerland, to name just a few examples. In an area that has been long described as under-institutionalized, the dramatic move toward a host of bilateral and minilateral accords provides a puzzle as to the driving forces behind these trends. In particular, this book examines the most significant of these accords in terms of effect on trade — bilateral accords — with an eye to understanding the relationship between these arrangements and further expansion of broader minilateral arrangements in the Asia-Pacific. More specifically, the book focuses on the dynamic interplay of interests, ideas, and domestic institutions as key forces in driving the variety of accords we now see in the region. In the 1980s and 1990s, analysis of the stimulants and deterrents to integration in East Asia focused on the growth of economic interactions, the networking role of firms and ethnic groups, disputes among major states, and the role of ideas. In the new millennium, however, scholarly analysis of “formal” East Asian regionalism has focused on international political and economic factors such as the end of the Cold War, the Asian financial crisis, rising Sino-Japanese rivalry, and the like.2 Other scholars have emphasized that East Asian countries’ trade policies and American strategy in the region are a reaction to the global proliferation of bilateral trade agreements in the aftermath of the problems in concluding the Doha Development Round (DDR) of the World Trade Organization (WTO).3 Yet this new research on the East Asian region tends to be state-centric, focusing on characterizing actors’ national interests,4 but without paying adequate attention to key subnational players.5 Although shocks and systemic changes are key catalysts in accounting for the newfound rush to bilateral and minilateral efforts, these explanations fall short of fully capturing the crucial differences in national responses to common external shocks. For example, South Korea turned to PTAs in the aftermath of the financial crisis, as the crisis opened up political space for executive initiative. The economic crisis muted South Korea’s once rigid protectionist voices, thus providing the government with a more favorable atmosphere for neoliberal economic reform, coupled with the adoption of PTA strategy. By contrast, PTA politics in Japan and China follows a different logic, as both countries avoided the worst of the Asian financial crisis.

2

See for example, Aggarwal and Koo (2007) and Pempel (2006). See Baldwin (1993) on what he terms a “domino effect.” 4 This emphasis on government-led national strategies no doubt emerges from the relative difficulty of understanding the interplay of key actors in authoritarian states as in the case of China. In other cases, in the area of foreign policy, the view that bureaucratic strong states set policy on their own is a common belief, and provides an additional reason for the dominance of a state-centric approach. 5 For exceptions, see the work on domestic politics and security regionalism by Solingen (1998, 2005, 2006). On domestic factors and the creation of APEC in Australia, the USA, Japan, and China, see the appropriate chapters in Aggarwal and Morrison (1998). On the role of domestic factors in Japan and its views on APEC, see Krauss (2000, 2004). 3

1 The Domestic Political Economy of Preferential Trade Agreements

3

As these examples suggest, key countries’ preferences for PTAs or broader trade initiatives vary significantly. To fully understand this cross-national variance in East Asia, we argue that researchers must give greater attention to the domestic politics within East Asian countries and the USA, involving the interplay of government agencies, business groups, labor unions, and NGOs across the region. Specifically, we need to open the black box of each country’s decision-making process by examining how contingent shocks and critical junctures have affected coalition politics among different veto holders within and outside the government. Much analysis of the phenomenon of East Asian and American trade strategies is generally underspecified. Most studies fail to adequately characterize different types of arrangements, often lumping together bilateral accords with minilateral ones, and transregional agreements with those within the region.6 This jumbled analysis of types of accords makes it more difficult to examine the policy process within countries and specify actors’ preferences for bilateral versus minilateral versus global accords, or the motivation of states in constructing agreements marked by geographic propinquity versus those that are geographically dispersed, the choice of partners, the nature of accords, and the like. This book attempts to address these lacunae in the examination of different types of East Asian trade policies and American strategies through the careful characterization of types of accords, and then the development of a systematic domestic bargaining game approach focusing on ideas, interests, and institutions to account for different types of arrangements. With respect to domestic politics, we show how subnational actors engage in lobbying, both of their own governments and through their links to others in the region. In addition, we trace the evolution of interests and ideas over time, thus helping us to generate a better understanding of historical trends in the region based on changing preferences. And from an empirical standpoint, in view of the relative difficulty of any single scholar having credible expertise on a host of subnational processes across East Asia, we draw on leading country and regional specialists whose main focus is on economic policymaking. The chapter is organized as follows. Section 1.2 begins by providing a typology to characterize types of trade strategies, focusing on several dimensions that differentiate types of trade arrangements. Section 1.3 uses these elements to examine what we term “trade policy constellations” in the Asia-Pacific. In Sect. 1.4, we provide a brief review of the literature that has considered the causal factors leading to various facets of these trade accords. Section 1.5 then turns to an exposition of our analytical model to provide a template for the case studies that will allow us to systematically compare differences and similarities across countries in the region in the concluding chapters.

6 For exceptions to this generalization about adequately characterizing types of accords in the region, see Aggarwal and Koo (2007) and Aggarwal et al. (2008). For an insightful analysis of what they term “cross-regional” accords, see Katada and Solı´s (2007).

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1.2

V.K. Aggarwal and S. Lee

Categorizing Types of Trade Agreements

East Asian countries and the USA have utilized a host of measures to regulate trade flows. Yet for the most part, the literature on Asian regionalism fails to distinguish among various modes of economic governance. While lacking wellinstitutionalized organizations like the European Union (EU), East Asian countries have relied on a me´lange of institutional and semi-institutional measures to manage their trade relations. These measures can be characterized according to various criteria, but eight main features, grouped into three categories, are particularly important.7 First, from an individual country’s foreign policy perspective, actors choose: (1) the number of accords sought (say, many bilateral PTAs and/or minilateral and global multilateral agreements) and (2) the sequencing of trade policies in terms of types of agreements and where they are pursued (say, moving from bilateral to minilateral or the reverse and in what geography). Second, in terms of agreement characteristics, countries may have differing preferences with respect to the characteristics of three dimensions, involving the number of actors in an agreement, their locations, and sizes: (1) actor scope, which refers to whether the agreement is bilateral, minilateral, or multilateral8; (2) geography, which refers to the question of whether countries seek agreements within East Asia or with actors outside of the region; and (3) the size of partners, that is accords with large or smaller countries. Third, we look at the specific characteristics of agreements in three dimensions: (1) issue scope, the range of issues that a policy or arrangement deals with runs from narrow to broad; (2) the nature of the agreements, which in trade can be market opening or closing; and (3) the strength of the arrangement being negotiated, particularly in terms of the degree of institutionalization.

1.2.1

An Example: The Actor Scope and Geography of Trade Arrangements

As a first illustrative cut of the six agreement characteristics over which actors may have preferences, we first focus on two salient features that characterize East Asia’s trade strategy profiles, namely actor scope and geography. This approach allows us to initially explore these dimensions in more detail before turning to a classification 7 Aggarwal (2001) and Aggarwal and Koo (2007) develop these ideas at length, both from a theoretical and empirical perspective on Asia, respectively. Given our interest in developing an explanation of these, the reader is referred to these works for detailed discussion of these dependent variables. 8 Because we are interested in negotiated accords, we do not consider unilateral measures to control or manage economic flows. See Aggarwal (2001) for discussion of this question.

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Table 1.1 Categorizing trade arrangements on the dimensions of actor scope and geography Bilateral Minilateral Geographically concentrated Japan–South Korea FTA (under negotiation)

Geographically dispersed Singapore–New Zealand CEP (2000)

China–South Korea FTA (under study) Japan–China, Japan South Korea, and China South Korea swap arrangements

Japan–Singapore China-ASEAN PBEC (1980) EPA (2002) FTA (2003) Korea–Chile FTA Northeast Asian APEC (1989) (2002) FTA (proposed) US–Singapore FTA (2003) Taiwan–Panama FTA (2003) Japan–Mexico FTA (2004) Korea–Singapore FTA (2005) Japan–Malysia FTA (2005) China–Chile FTA (2005)

Geographically Geographically concentrated dispersed AFTA (1991) PAFTAD (1968)

EAEC (1994)

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

FSA (1999)

ASEM (1996) ASEAN Plus Three (1998) South KoreaASEAN FTA (2006) South Korea–EFTA FTA (2005) ASEAN-Japan Closer Economic Patnership (under negotiations) ACU (under study)

Korea–US FTA (2007) Adapted from Aggarwal (2001) and Aggarwal and Koo (2007). Updated as of January 2010 with illustrative examples.

of East Asian strategies based on the additional elements noted above. Table 1.1 illustrates different types of international economic arrangements. The first category we focus on is when two countries negotiate a geographically concentrated agreement (bilateral regionalism). The prospective Japan–South Korea and South Korea–China FTAs fall into this category. More often than not, such agreements indicate not only geographic, historic, and cultural affinity but also complementary industrial structures. The second category of bilateral arrangements consists of two actors in a geographically dispersed accord or bilateral transregionalism. Trade arrangements that fall under this rubric include the bilateral FTAs between Singapore and New Zealand (2000), Japan and Singapore (2002), South Korea and Chile (2002), Singapore and the USA (2003), Japan and Mexico (2004), and South Korea and the USA (2007), to name just a few.

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V.K. Aggarwal and S. Lee

Table 1.2 Membership in East Asian focused regional and transregional institutions ASEAN PECC APEC AFTA EAEC ASEM ASEAN + 3 (1967) (1980) (1989) (1991) (1994) (1996) (1998) Korea O O O O O Japan O O O O O China O O O O O Indonesia O O O O O O O Malaysia O O O O O O O Singapore O O O O O O O Thailand O O O O O O O USA O O

Expanding the number of actors, the next category consists of geographically concentrated or minilateral regionalism. In the trade realm, such agreements include Southeast Asian initiatives at the minilateral level such as AFTA and the 2002 ASEAN-China Free Trade Area (ACFTA) framework agreement. In Northeast Asia, Japan, China, and South Korea are increasingly discussing the potential benefits of institutionalizing economic relations at the regional level. The next category refers to geographically dispersed accords with restricted membership, or minilateral arrangements that span regions. These accords can be of two types: transregional or interregional. The former involve states as individual members such as APEC (1989), whereas the latter reflect customs unions as members such as EU-Mercosur or CER-AFTA. Hybrid examples include the Asia–Europe Meeting (ASEM, 1996), ASEAN Plus Three (1998), or the South Korea-ASEAN FTA (2006). The creation of semi-institutionalized, nongovernmental institutions as confidence-building instruments and icebreakers prior to the founding of official transregional and interregional institutions has also become an established practice in the Asian region. For instance, the Pacific Trade and Development Forum (PAFTAD), Pacific Economic Cooperation Council (PECC), and Pacific Basin Economic Council (PBEC) preceded the establishment of APEC. The final category includes global arrangements. Trade organizations in this realm include broad-based multilateral arrangements such as the GATT (1947) and its successor, the WTO (1995). East 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). These two dimensions of agreement characteristics, actor scope and geography, illustrate how we might categorize agreements. We next consider trade choices, or what we term “trade policy constellations” before the 2000s in the Asia-Pacific.

1.2.2

East Asian and USA Trade Accords prior to the 2000s

From the establishment of ASEAN in 1967 until 2000, Southeast Asian countries increased the diversity of their arrangements by increasing the actor scope through

1 The Domestic Political Economy of Preferential Trade Agreements

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adding new members, widening the scope of issues covered, promoting greater liberalization, and strengthening the institutional capacity of the organization, albeit not always with great success with respect to the latter. Toward the end of the 1990s, they attempted to utilize ASEAN (and the free trade agreement, AFTA) as a stepping stone to building a region-wide institution. By contrast, instead of making concerted efforts to institutionalize regionalism, Northeast Asian countries preferred regional (EAEC) or transnational institutional arrangements (PECC and APEC) (see Table 1.2). Meanwhile, with the exception of APEC in 1989, the USA broke with its exclusive focus on multilateralism in the 1980s by signing PTAs with Israel, the Caribbean countries, and Canada.9 East Asian and American trade strategies continued to diverge in the late 1990s. China and Japan, the archrivals in the region, have taken diametrically different approaches. While China chose to consolidate its ties with ASEAN countries first, Japan preferred a wider version of East Asian regionalism through a broad transregional ASEAN + 6 approach, as a means of balancing against growing Chinese power. Aspiring to bridge conflicting interests between China and Japan, South Korea began to formulate its own strategy under the Kim Dae-jung government by calling for the establishment of the East Asia Vision Group (EAVG) and the East Asia Study Group (EASG).10 In short, while East Asian countries shifted to a regional focus in the 1990s, their specific strategies and preferred institutional choices were different. For its part, the USA shifted to a multipronged strategy in the 1990s, with the negotiation of the North American Free Trade Agreement (NAFTA) as a successor to the Canada–USA free trade agreement.

1.3

Diverging Trade Strategies after 2000

The 2000s have been marked most prominently by a dramatic turn to bilateral PTAs. Such accords have been pursued by nearly all states in the region, with Singapore being the leader in terms of number of bilateral PTAs signed, and others such as China, Japan, Korea, and the USA not far behind. In many cases, these agreements have not been region-specific, but rather transregional in geographic terms (see Table 1.3). The discussion regarding this table examines all eight dimensions of agreements that we have considered; for presentational purposes, however, Table 1.3 does not show the issue scope, nature, or strength of agreements, although these elements are discussed in the text below. We begin our discussion with the country-specific dimensions of number of partners and sequencing, before turning to the other variables.

9

Note that there was also a sector-specific bilateral accord between the USA and Canada in the 1960s. 10 Lee and Moon (2008).

Total: 15

China

Korea Total: 16

Japan Total: 16

Sub-total 9

Sub-total 10

Under negotiation

Signed

Sub-total 6

Sub-total 5

Under negotiation

Signed

Sub-total 11

Signed

Table 1.3 Profile of East Asian and US FTAs

Pakistan (2006)

Chile (2005)

Canada Mexico Australia New Zealand Colombia Peru

US (2007)a India (2009)

Chile (2003)

India Australia Peru

Mexico (2004) Chile (2007) Switzerland (2009)

Bilateral

4

6

3

3

3

APEC

EU GCC

EFTA (2005) APEC

GCC

APEC

Subtotal Minilateral

Trans-regional agreement

0

2

1

1

0

Subtotal

Hong Kong (2003) Thailand (2005)

Macau (2003)

Japan China

Singapore (2005)

Korea

Singapore (2002) Malaysia (2005) Philippines (2006) Brunei (2007) Indonesia (2007) Thailand (2007) Vietnam (2007)

Bilateral

Regional agreement

4

2

1

1

7

Sub-total

ASEAN (2002)

ASEAN (2005)

ASEAN (2008)

Minilateral

1

0

1

0

1

Sub-total

Singapore Total: 24

Sub-total 16

Sub-total 8

Under negotiation

Sub-total 6

Signed

Under negotiation

Canada Mexico Ukraine Pakistan

Australia (2003) Jordan (2004) India (2005) Panama (2006) Peru (2008) Qatar (2008)

US (2003)

New Zealand (2000) Chile (2002)

Iceland Australia Costa Rica Norway

New Zealand (2008) Peru (2008)

6

9

4

MERCOSUR

EFTA (2002) APEC Trans Pacific SEP Agreement (2005): Brunei–Chile– New Zealand– Singapore GCC (2008)

GCC SACU

1

3

2

Sri Lanka

Japan (2002) Korea (2005) China (2008)

Singapore (2008)

1

3

0

0

1

(continued)

AFTA (1992)

0

a

Not ratified yet

US Total 20

Sub-total 14

Sub-total 6

Signed

Under negotiation United Arab Emirates (UAE) Thailand (N)

Malaysia

Israel (1985) Jordan (2001) Chile (2003) Singapore (2003) Morocco (2004) Australia (2004) Bahrain (2006) Oman (2006) Peru (2007) Colombia (2006)a Panama (2007)a South Korea (2007)a

Costa Rica Egypt

3

12

Free Trade Area of the Americas (UN) South African Customs Union FTA (N) P7/TPP

Dominican RepublicCentral America FTA (2004)

3

1

NAFTA (1994)

1

1 The Domestic Political Economy of Preferential Trade Agreements

1.3.1

11

Country Specific Dimensions: Number of Partners and Sequence

East Asian countries’ move toward PTAs accelerated in the late 1990s, because their enthusiasm for multilateral accords faded with the ineffectiveness of APEC and the repeated suspension of the Doha Round. All East Asian countries have been involve with ASEAN + 3 and/or 6 discussions. The USA also promoted regional and transregional bilateral FTAs as well as a Free Trade Area of the Asia Pacific under APEC auspices. As of the end of 2009, Singapore was the most aggressive pursuer of FTAs, having been involved in a total of 24 FTAs plus participation in APEC, either signed or currently being negotiated. Japan has concluded or is in negotiations on 16 FTAs plus APEC, South Korea 16 as well, and China 15. For its part, after signing a large number of FTAs with relatively small states, the USA is not actively negotiating with other countries, as the USA president no longer has Trade Promotion Authority as of July 2007. One can also find significant differences in the sequence of FTAs, of which the prime examples are Chinese and Japanese approaches to FTAs with ASEAN countries. China embarked on FTA negotiations with individual ASEAN countries such as Thailand (2005) and Singapore (2008) only after it concluded an FTA with ASEAN as a whole in 2002. By contrast, Japan initially preferred FTAs with individual ASEAN countries. From 2002 to 2007, Japan concluded FTAs with six individual countries in ASEAN before it finally signed an FTA with ASEAN in 2008. With the exception of an FTA with Singapore in 2005, South Korea largely took a Chinese approach to Southeast Asian countries by signing an FTA with ASEAN in 2006.

1.3.2

Agreement Specific Dimensions: Actor Scope, Location, Size

As we have already seen in our example relating actor scope and geography, the new emphasis in agreement scope has focused heavily on the negotiation of bilateral PTAs. Thus, while countries continue to discuss the benefits of minilateral arrangements, both regional and transregional, such as ASEAN + 3, East Asia Summit, and APEC, they have actively pursued a bilateral PTA strategy. Japan seems to place a higher priority on forming FTAs with East Asian countries, although it does not dismiss a transregional track. Out of a total of 10 bilateral FTAs it has signed, 7 are with Southeast Asian countries. Meanwhile China and South Korea take a more balanced approach. China concluded five FTAs with neighboring countries such as Macau (2003), Hong Kong (2003), Thailand (2005), Singapore (2008), and ASEAN (2002), while it signed four transregional FTAs with Chile (2005), Pakistan (2006), New Zealand (2008), and Peru (2008). South Korea has signed two FTAs with Southeast Asian countries (Singapore and ASEAN) and three FTAs with Chile (2003), EFTA (2006), and the USA (2007).

12

V.K. Aggarwal and S. Lee

Singapore has been most aggressive in concluding transregional FTAs, both bilaterally and minilaterally. Among the 14 bilateral FTAs it has concluded so far, 9 FTAs are with countries outside the region. Starting with its first FTA with New Zealand in 2000, Singapore completed FTA negotiations with Chile (2002), the USA (2003), Australia (2003), Jordan (2004), India (2005), Panama (2006), and Peru (2008). For its part, since the USA had agreements with Canada, Mexico, and the Caribbean, it has now focused on transregional accords. In terms of size, although Japan, South Korea, and Singapore concluded an FTA with Chile, respectively, they demonstrate substantial differences in selecting transregional FTA partners.11 Korea, for example, was keen to start with a country that was small and in a different hemisphere while Japan first sought to negotiate with Singapore and then move on to a large country, Mexico. For Japan, the Japan–Mexico FTA was an attempt to alleviate negative impacts of NAFTA and the EU–Mexico FTA on its competitive advantage in the USA market.12 Rather than taking such a detour, South Korea and Singapore were more aggressive in concluding FTAs with a large country, the USA, even though the KORUS FTA has yet to be ratified.

1.3.3

Agreement Specific Characteristics: Issue Scope, Nature, and Strength

East Asian countries and the USA have also shown distinctive features in terms of the design of FTAs. In terms of the scope of FTAs, the USA pursues comprehensive FTAs by demanding that its FTA partners include various sectors such as telecommunications services, financial services, and entertainment. The FTAs in which the USA is involved also typically include provisions about intellectual property, labor, and environmental standards that go beyond the WTO agreements.13 Furthermore, the USA takes advantage of its asymmetric power to elicit reciprocal trade liberalization from its FTA partners and also designs FTAs of which the effects take place immediately.14 By contrast, China prefers narrow and simple FTAs in terms of scope and coverage, reflecting that Chinese regulatory frameworks about intellectual property rights, financial services, and investment measures are still under-developed. China usually restricts trade liberalization primarily to trade in goods by excluding or delaying liberalization in services. Another feature is that it tends to include provisions related to economic cooperation when it forms FTAs with other developing countries.15 The scope and coverage of Japanese and South Korean FTAs are in the middle of the USA and Chinese FTAs. However, there are still significant differences 11

Lee (2007). Solis (2003). 13 Ravenhill (2008). 14 Feinberg (2003). 15 Dent (2007). 12

1 The Domestic Political Economy of Preferential Trade Agreements

13

between the two countries. In terms of trade liberalization, Japan seeks asymmetric agreements by making fewer concessions vis-a`-vis its FTA partners. Japan’s tariff elimination ratio ranges from 87% (Japan–Mexico FTA) to 99.9% (Japan–Brunei FTA), while the ratio for its counterparts usually hovers around 97–100%. Because it has a clear preference for enhancing economic partnership that goes well beyond trade liberalization, Japan incorporates provisions about intellectual property rights, financial services and investment. Compared to Japan, South Korea takes a more progressive approach in terms of trade liberalization, while it places less emphasis on economic cooperation. South Korea is one of the few major economies to enter into an FTA with the USA, which will inevitably create a massive scale of economic restructuring.16 In this agreement, South Korea agreed to eliminate 99.7% of the existing tariffs. South Korea’s aggressive approach to FTAs is expected to boost the ratio of its trade covered by FTAs to about 66%, if South Korea concludes the FTAs currently under negotiations. With respect to strength of agreements, the USA seeks the most binding accords with legal dispute settlement mechanisms while most Asian countries have been willing to sign accords without elaborate specification of duties, obligations, and dispute resolution. In a nutshell, the above discussion demonstrates that East Asian countries have shown significant variation in formulating their trade strategies in terms of membership in regional institutions, choice of their FTA partners, sequence of FTAs, and scope and coverage of FTAs.

1.4

Existing Explanations for Asia-Focused Trade Strategies

We now turn to an examination of the literature on trade and regional strategies of East Asian countries. One can categorize each country’s trade strategy as being driven by economic, political or security factors, and further differentiate between domestic and international considerations.

1.4.1

Economic Gains

Economists have focused primarily on the global economic gains from liberalizing trade.17 The standard economic approach focuses on efficiency gains from a 16

Chae et al. (2007). A key economic driving force behind bilateral agreements is related to investment gains. Bilateral FTAs often include an investment treaty, and are likely to trigger an investment creation/expansion effect as well. In the developing Asia-Pacific region in particular, foreign investment has been both exposed to relatively high risks and constrained by strict regulations such as local content rules. See Aggarwal (2006) for a discussion of this factor and also monetary cooperation benefits. 17

14

V.K. Aggarwal and S. Lee

division of labor from increasing trade. The analytical technique to estimate such gains is generally computable general equilibrium models, which have consistently shown greater gains from broader as opposed to narrower agreements.18 Following this logic, almost all economists note that liberalization through the WTO is preferable to narrower liberalization efforts on a minilateral or bilateral basis.19 Thus, many economists see minilateral and bilateral agreements as second best solutions, particularly those on a multi-product basis. Moreover, larger trade agreements not only provide companies with the ability to exploit larger economies of scale, but also to reduce the information and organizational costs associated with individually negotiating agreements with large numbers of countries.20 Using simulation estimation techniques, economic studies explain East Asian countries’ shift to PTAs by pointing to the expected gains at the aggregate level. While not dismissing the necessity for strategic choice of PTA partners, this view suggests that East Asian countries seek PTA negotiations with as many countries as possible to maximize economic gains from trade and investment ahead of their rivals.21 In terms of partner selection, gravity models that link geographic distance and economic size to the formation of preferential trading agreements provide more logically coherent suggestions. In order to reduce the costs related to geographic distance and to maximize the benefits from economic size, the gravity model suggests that a country prefers FTAs with neighboring countries.22 The country creates a natural trading bloc not simply because low transaction costs facilitate trade expansion but also because they can implement policy coordination with neighboring countries. From this perspective, East Asian countries are expected to form natural trading blocs with the neighboring countries to maximize welfare gains, but place low priority to the formation of unnatural trade blocs between distant and/or small economies because they will produce marginal welfare effects. However, the track record of East Asian countries’ PTAs reveals the gravity model’s limited explanatory utility. It is unable to explain why Northeast Asian countries — South Korea, Japan, and China — have not formed a trading bloc among themselves, even though they would most likely be better off if they removed existing trade and investment barriers by establishing a trilateral FTA.23 18

See Whalley and White (1985), Deardorff and Stern (1986), and Dervis et al. (1982) on CGE models. For a critique of such models, see Kimura (2006) among others. 19 Yet bowing to the need to liberalize in the face of problems in concluding broad negotiating rounds under WTO auspices, some economists endorse alternatives, both that focus on fewer issues and those that focus on fewer partners. With respect to a multilateral sectoral focus, for example, Tyson (2000) has argued that among multilateral trade options, a sectoral approach is a sound alternative to the multi-sector WTO approach. 20 On transactions costs arguments and international regimes, see Keohane (1984). 21 Cheong (2005), Schott and Choi (2001), Nam et al. (2004), and Urata (2002). 22 Frankel, Stein, and Wei (1997), Krugman (1991), Bhagwati and Panagariya (1996). 23 Sohn and Yoon (2001).

1 The Domestic Political Economy of Preferential Trade Agreements

1.4.2

15

Political Economic Considerations

In contrast to the economic logic about benefits from larger agreements and agreements with neighbors (although this depends on the complementarities of production structures as well), political considerations suggest a different logic. Trade diversion from other countries’ bilateral agreements may create strong incentives for countries to pursue their own bilateral accords in a “domino effect.”24 But a key debate in this literature revolves around whether sector-specific or factorbased organizations wield more political influence on trade policymaking, and on what their trade preferences will be. In this view, rather than choosing PTA partners purely based on economic gains, governments facing cross-cutting political pressure will prefer PTA partners that can alleviate the domestic politically negative effects of trade liberalization. Noting that purely economic explanations are not readily applicable to East Asia, more sophisticated political economy explanations have emerged to address an analytical pitfall left by economic studies. Undoubtedly, PTAs can produce overall welfare gains by promoting trade, investment, and technology transfer. Yet the economic studies disregard the political costs of trade liberalization. A key debate in this literature revolves around whether sector-specific or factor-based organizations wield more political influence on trade policymaking such as the selection of PTA partners.25 Globally competitive and/or export-oriented industries should have policy preferences different from those of domestic-oriented import competing industries. And trade strategy will reflect the political competition between the two opposing groups.26 In this view, rather than choosing FTA partners purely based on economic gains, the governments under cross-cutting political pressure will prefer FTA partners that can alleviate negative effects of trade liberalization. It is noteworthy that in contrast to their counterparts in Europe and North America, East Asian countries have displayed a transregional or cross-regional orientation in the early stage of PTAs.27 Japan, South Korea, and Singapore have been active in pursuing trans-regional FTAs with distant economies, both small and large. The Japan–Mexico, Korea-EFTA, Korea–USA, and Singapore–USA FTAs are cases of unnatural trading blocs. Furthermore, both Japan and Korea concluded FTAs with small economies such as Chile, even though their bilateral trade volume with Chile will remain insignificant, if not negligible.28 Katada and Solı´s argue that East Asian countries’ preference for transregional partners reflects their political interests in ameliorating domestic opposition to comprehensive trade liberalization.29 24

Baldwin (1997). For a discussion of factor versus sectoral explanations, see Rogowski (1987), Brawley (1997), and Hiscox (2001). 26 Frieden (1991). See also Solingen (1998). 27 Katada and Solı´s (2007). 28 Koo (2005), p. 144. 29 Katada and Solı´s (2007). 25

16

1.4.3

V.K. Aggarwal and S. Lee

Motivations for Domestic Reforms

A more statist approach can shed light on national policy making, even in countries with relatively weak states such as the United States.30 Thus, states may attempt to pursue some type of industrial policy, either to defend existing industries or promote new ones. There is also an extensive literature on the relationship between types of states and societal groups in a variety of East Asian countries. It is often claimed that the negotiation of bilateral PTAs will help to facilitate the streamlining, upgrading, and restructuring of their economies. In this vein, countries enter PTAs to lock in domestic reforms so that they may use PTAs for domestic political leverage to pry open protectionist sectors. This tied hands strategy is expected to neutralize resistance by traditionally protected sectors.31

1.4.4

Power Asymmetry

International relations scholars generally argue that power dictates the nature of FTAs. Bringing their asymmetric power to the negotiation table, major powers tend to impose their own distinctive “FTA templates” to elicit greater concessions from their partners.32 In this view, bigger partners with the ability to extract greater concessions dictate the overall nature of FTAs. In this regard, the USA seeks the most comprehensive FTAs, including trade liberalization in goods and services such as financial services, media, and entertainment sectors as well as various “WTO Plus” provisions such as intellectual property, labor, and environment standards, while excluding politically sensitive sectors from reciprocal liberalization.33 However, USA FTAs do not insert explicit provisions on economic co-operation or development assistance into the FTA text.34 In the face of mounting pressure from bigger partners, smaller countries are forced to concede more in FTA negotiations. The USA FTAs with Australia, Korea, and Singapore as well as Japan’s FTA with ASEAN countries are such cases. Why then do smaller countries enter into FTA negotiations in which they are expected to give up more? Recognizing the voluntary nature of smaller countries’ decisions to 30

Krasner (1978). Ravenhill (2005). 32 Dent (2007). 33 Feinberg (2003). 34 Not all bigger countries try to elicit greater concessions from their smaller partners. China is a good case in point. As evidenced in the “Early Harvest” provisions in its FTA with ASEAN, China, aspiring to forge a long-term cooperative relationship with ASEAN, gave more concessions to its smaller partners. However, this does not necessarily suggest China’s inclination to conciliatory approach to FTAs. China’s approach may differ in dealing with big advanced countries. Furthermore, its posture toward neighboring developing countries is likely to change in the long term, leading it to seek more reciprocal concessions. For the nature of China’s FTA strategy see Yang (2009). 31

1 The Domestic Political Economy of Preferential Trade Agreements

17

enter FTAs, Gruber argues that the fear of exclusion forces smaller countries to engage in FTA negotiations. According to this logic, a bigger country with “go-italone-power” motivates the smaller country to voluntarily choose to form an FTA, even if the latter prefers the status quo.35 One may argue that the KORUS FTA and the USA–Singapore FTA illustrate that the fear of exclusion from the USA market was a significant catalyst in both countries’ decision to start FTA negotiations with the USA despite serious concerns within and outside the partner governments about “controlling” USA actions.

1.4.5

Diplomatic and Security Concerns

Diplomatic and security motivations also influence the nature of FTAs.36 A growing number of scholars explains the way in which government policymakers take diplomatic and security considerations into account in negotiating PTAs.37 The USA government has been explicit in closely linking foreign economic and security policy, which utilized FTAs as a reward for allies. This tendency was demonstrated in the cases of the USA–Israel FTA and the USA–Jordan FTA. The “securitization” of USA FTA policy has further accelerated in the post-9/11 era.38 Both China and Japan also used FTAs as an instrument of foreign and security policy goals. China concluded the China-ASEAN FTA primarily for diplomatic reasons to deepen diplomatic and political ties as well as secure deep integration in the long run even though the current economic structures of China and ASEAN are competitive rather than complementary.39 Concerned about China’s rising influence in the region, Japan’s FTAs are not purely driven by economic factors, but also reflect a desire to rejuvenate its presence in the region.40

1.5 1.5.1

The Role of Ideas, Interests, and Domestic Institutions Four Types of Trade Strategy Constellations

Thus far, we have demonstrated that East Asian countries have formulated different trade strategies in terms of partners, geography, sequence, issue scope, and nature. 35

Gruber (2000). In addition, government may seek raw materials through FTAs, as China appears to be doing. See Ravenhill (2008) on motivations for PTAs in the Western Pacific. Ravenhill considers the opportunity to introduce new issues into PTAs (WTO plus) to be a possible economic motivation. 37 Feinberg (2003), Ravenhill (2008). 38 Higgott (2004). 39 Wong and Chan (2003). 40 Capling (2008). 36

18

V.K. Aggarwal and S. Lee

In order to effectively capture this divergence, we introduce four distinctive types of “new trade strategy constellations.” The first type of constellation is the continuation of the status quo where no changes in existing trade strategy take place. Given that all East Asian countries and the USA shifted to embrace bilateral and minilateral FTAs in the face of external changes, no countries fall into this category. In the second type of constellation, modest or limited change is expected. Countries in this category tend to prefer FTAs with features such as primarily few regional partners, limited coverage (many exceptions), and weak liberalization. China and Japan fall into this category, although Japan displays a more transregional orientation than China. The third type of constellation, where substantial changes in trade strategy are likely, demonstrates combined features of the second and the fourth types. Countries in this type take quite a balanced approach in terms of the number of partners, geography, and sequence. In addition, while they generally pursue comprehensive FTAs with strong liberal orientation, they sometimes try to incorporate protectionist element with many exceptions into FTAs, depending on partner countries and domestic political situation. The fourth type of constellation, opposite to the second one, is the case in which fundamental departures from the existing trade strategy occur. Countries in this category attempt to conclude FTAs with as many countries as possible, with either regional or transregional partners. The scope and nature of the FTAs is comprehensive and strong liberal. Singapore falls into this category, for example. Most explanations of East Asian and American trade arrangements tend to posit changes in the international environment as a primary driving factor shaping their trade strategies. The exclusive focus is on exogenous factors such as the end of the Cold War and the Asian financial crisis. However, this neither adequately explains the differing responses by East Asian countries and the USA to external shocks, nor does it offer an effective theoretical foundation for similar responses. While changes in the external environment broadly set the boundary within which East Asian countries adapt, they alone cannot explain divergence because external changes do not deliver a uniform effect on East Asian countries’ trade strategies.41 Existing explanations fall short of illuminating deeper micro-foundations of how each country’s regional and trans-regional strategies are formulated in the domestic arena. In order to fill in this gap we, in particular shed light on how ideas, interests, and domestic institutions interact with each other in the face of external shocks (see Fig. 1.1).

1.5.2

Ideas, Interests, and Institutions in the Formation of Trade Strategy

We introduce three variables as key to the formation of new trade strategy: ideas, interests, and domestic institutions. First, perceptions and ideas held by major 41

Aggarwal and Koo (2005), Aggarwal et al. (2008).

1 The Domestic Political Economy of Preferential Trade Agreements

External Shocks

Perceptions and Ideas − Defensive motives − Linkage with economic reform − Renewed understanding of new trade policy

19

New Trade Strategy Number of agreements Sequencing

Existing Trade Strategy

Interests − Interest configuration − Policy preferences

Domestic Institutions − Veto points − Policymaking structure − Organized interest groups

Actor Scope Geography Size of partners Issue Scope Nature Strength

Fig. 1.1 Key variables in the formation of new trade strategy

players matter because they help policymakers and other players identify and interpret the nature of external changes, which suggests that the choice of a specific trade strategy is not an automatic response to external changes. Second, it is crucial to examine how major players with reconfigured interests coalesce into a new trade strategy. Third, we examine domestic institutional features related to trade strategies such as veto points, governmental policymaking structure, and institutionalized opposition to analyze how external changes and reconfigured interests are channeled in the domestic policymaking process.

1.5.3

Changes in Perceptions and Ideas

Perceptions about the changing external environment push major players to rethink the efficacy of the existing strategies, paving the way for alternative ideas. Three factors are particularly important in explaining this transition: defensive motives, the idea of connecting FTAs to economic reform, and a renewed understanding of FTAs. While a defensive motive is a factor shared in common by East Asian countries, the latter two items have had differing impacts, which has resulted in variations in trade strategies between countries. First, East Asian countries’ shift to new trade strategies such as bilateral FTAs has been inherently seen as a defensive reaction to the rapid proliferation of FTAs in other regions.42 They jumped on the FTA bandwagon, fearing that if they got behind in this new trend, they would be at a disadvantage vis-a`-vis their competitors

42

Katada and Solis (2007).

20

V.K. Aggarwal and S. Lee

in major exporting markets. This explains why most East Asian countries were eager to conclude FTAs with countries outside the region such as the USA and EU. Second, another idea prevalent in each country is that the new trade strategy (FTAs) will be better able to lock in domestic economic reforms than the existing trade strategy (multilateral trade liberalization). Policymakers attempting to lock in their reform agenda by way of FTAs are less likely to face fierce opposition in the domestic arena, because by choosing suitable FTA partner(s), the policymaker can control the economic adjustment process with relative ease. But the idea of linking FTAs to domestic economic reform has been embraced in East Asian countries to varying degrees. For example, policymakers in Korea and Singapore are more explicit in connecting FTAs to the domestic political goal than their counterparts in Japan and China. These differences largely have to do with the combination of the following two factors: (1) how urgent the political leadership perceives economic reform and (2) how much the political leadership relies on vested interests that need continued protection.43 Both South Korea and Singapore are cases where governments actively sought to establish a linkage between FTAs and domestic reform. The Singaporean government was, from the beginning, explicit in its use of FTAs to upgrade its economic system to a knowledge-based economy.44 The South Korean government could only substantially accelerate the pace of FTA negotiations after it linked FTAs to economic reform. The Roh Moo-hyun government’s idea that FTAs could be tied to the goal of locking in its neoliberal reform packages elevated South Korea’s FTA policy to a core element of its reform policy. This is in clear contrast to its peripheral status under previous administrations.45 Third, a renewed perception about the merits of regional and bilateral FTAs enabled East Asian countries to change their exclusive reliance on multilateralism. Traditionally, the governments of East Asian countries had long held a firm belief that preferential trade agreements would bring detrimental effects to the highly tradedependent countries, as they would create trade diversion. However, a new consensus has emerged within these countries’ policy circles that a preferential approach to trade liberalization — both bilateral and minilateral — may not necessarily conflict with a multilateral strategy. They regarded the shift to a preferential approach as essential to their economic survival in a world of competitive export markets.

43 For the Japanese case, see Pempel and Urata (2005), Katada and Solis (2007), and Ravenhill (2005). 44 Low (2004). 45 Because South Korea’s FTA policy under the presidency of Kim Dae-jung was initially conceived as a reactive and defensive strategy to cope with the rise of regionalism in other parts of the world, the linkage between FTAs and domestic reforms was not clearly defined or deliberately minimized. Lee and Koo (2006).

1 The Domestic Political Economy of Preferential Trade Agreements

1.5.4

21

Interest Reconfiguration

Given that changes in external environments affect domestic players’ interests, it is necessary to identify the domestic players involved in formulating trade strategies. The examination of business firms as a source of foreign economic policy provides a useful analytical perspective given that the formation of a new trade strategy is usually constrained by conflicting societal interests.46 For this, we examine how industries with divergent interests reconfigure their preferences about a new trade strategy. For example, globally competitive and export-oriented industries should have policy preferences different from those of domestic-oriented import competing industries. The nature and scope of the new trade strategy will reflect the political balance between these two opposing camps. Powerful lobbying by export-oriented industries fearing trade diversion effects of FTAs in other countries drives governments to formulate new trade strategy. By contrast, politically entrenched groups in import-competing or declining industries often pressure politicians and bureaucrats to delay and mitigate the scope and depth of FTAs, alleviating the negative effects of trade liberalization. And FTAs are likely to be negotiated when internationalists gain political strength vis-a`-vis nationalists.47 However, one should keep in mind that the way in which actors with substantial stakes in the formation of a new trade strategy articulate their policy preferences is likely to vary in East Asian countries. On the one hand, potential losers of trade liberalization tend to express their policy preferences explicitly and organize themselves to oppose liberalization.48 On the other hand, potential beneficiaries may be muted in articulating their preferences for the new trade strategy.49 Players who have forged long-term relationships with their business partners tend not to explicitly seek their own interests at the expense of others.50 In both cases, the government should have difficulty in taking a bold approach to new trade strategies. In order to explain this variation, it is paramount to examine the way in which players with reconfigured interests articulate their preferences in the real policymaking process.

46

For example, Helen Milner argues that while increasing returns to scale (IRS) industries tend to mount greater pressure on politicians for higher level of trade liberalization, the sectors that are expected to suffer from new trade agreements are more likely to oppose them. Milner (1997). 47 Frieden (1991). See also Solingen (1998). 48 This imbalance has been a perennial problem for the South Korean government in ushering in full-scale trade liberalization (Lee and Koo 2006). 49 Vogel (1999). 50 Streeck and Yamamura (2003).

22

1.5.5

V.K. Aggarwal and S. Lee

Domestic Institutions

To examine cross-national variation in domestic institutions, we focus on the following points: (1) veto points; (2) the formal policymaking structure; and (3) the presence of organized interest groups. East Asia is a good test case to examine whether specific political regime types are more suitable to trade liberalization than others. East Asian countries have a variety of political regime types, ranging from fullfledged democracy (Japan) and new democracies (South Korea and Taiwan) to quasi-authoritarian regimes (Singapore) and socialist regimes (China and Vietnam). However, it is extremely difficult to properly capture the nature of political regime types and their impact on the formation of trade strategies. The examination of veto points could be an alternative to the analysis of each country’s trade policymaking structure. By figuring out the number of veto players, one can effectively compare the institutional impacts on the formulation of a new trade strategy. A smaller number of veto players will result in drastic policy changes, while a larger number of veto players will lead to maintenance of the status quo, strengthening vested interests. Under an institutional structure with a small number of veto points, the government and private actors will find it easier to establish new trade strategies that are fundamentally different from past ones. Meanwhile, multiple veto players are likely to result in an institutional gridlock that inhibits drastic changes in trade strategy, even if politically powerful players are in favor of new strategies. Next, the analysis of veto points needs to be supplemented with analysis of the trade policymaking structure because the latter will guide us to understand which players – government and private actors – are involved in the policy-making process and the way in which these players interact with each other to formulate a new trade strategy. If multiple government ministries and political actors are involved in formulating trade strategies, the formal trade policymaking structure is fragmented.51 In this case, enacting fundamental change of existing trade strategies should be difficult, and the formation of new trade strategies should proceed in a gradual and piecemeal manner. Moreover, this institutional paralysis is more likely to provoke politicians’ intervention in trade strategies. By contrast, a highly unified policymaking structure where policymaking authority is centralized helps establish profoundly different new trade strategies.52 Under this institutional structure, relevant actors coordinate conflicting interests and dissenting views with relative ease so that the government can formulate coherent trade strategies and carry out trade negotiations with foreign countries without serious impediment.

51

If players have same policy preferences, the number of veto players is reduced. The absorption of one veto player into another suggests that the formation of new trade strategy is more likely Tsebelis (2002). 52 Whether or not the government can create a unified structure of policymaking is also a function of existing institutions because institutional changes often require the consent of existing players.

1 The Domestic Political Economy of Preferential Trade Agreements

1.5.6

23

Dynamic Interplay Among Ideas, Interests, and Institutions

With four distinctive types of trade strategy constellations and three explanatory variables clearly defined, now we can delineate the evolutionary paths through which East Asian countries and the USA have formulated new trade policy constellations (see Fig. 1.2). The first type is likely when ideational changes do not take place, domestic-oriented groups remain strong, and/or domestic institutions are status quo oriented. Ideational changes may not take place immediately, as existing players still believe in the long-term efficacy of traditional trade strategies. Under these circumstances, because major players tend to be cautious in actively reconfiguring their interests and revamping the existing policymaking structure, the main thrust of traditional trade strategies is likely to remain intact. Thus, the first outcome derived from our framework is the continuation of the status quo. Second, modest or limited changes are expected in the following situation. Traditional players are still dominant despite ideational changes, or new players are unable to overwhelm traditional players due to status-quo oriented institutions. In order to figure out the outcome in this path, we examine the way in which new ideas affect the interaction between key players’ interests and policymaking institutions. The outbreak of external shocks spurs policymakers to re-evaluate long-held trade strategies, igniting the demand for policy shifts. How then does the ideational change originate domestically? Both the political leadership and the bureaucracy can play a pivotal role in espousing new ideas.53 Whereas the political leadership 1 No change (existing trade strategy continues)

2

External shocks

No

Traditional players still dominant

Adaptation to existing institutions

Yes

Modest Change No

3 Existing Trade strategy

Ideation Interest al reconfiguration change Yes

New players brought in

Creation of new institutions

Opposition by traditional players

Yes

No

Substantial change

4 Fundamental Changes (completely new trade strategy)

Fig. 1.2 Dynamic interplay among ideas, interests, and institutions

53

Parsons (2002).

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with a new policy idea may impose it on government ministries to implement new trade strategies, the bureaucracy may also be a source of ideational changes. But unless it secures strong support from the political leadership, the bureaucracy is likely to go through a time-consuming coordination process among relevant ministries to finally share the newly emerged idea. When ministries fail to work out the dissenting views among themselves, it will invoke intervention by the political leadership.54 As a catalyst providing key players with an opportunity to critically reexamine the efficacy of traditional trade strategies, a new policy idea generally paves the way for these players to reconfigure their interests. But if existing key players drive such ideational changes and interest reconfiguration, the magnitude of the change will still be limited. Rather than attempting to create a fundamentally new policymaking structure, they tend to favor the current policymaking structure because it provides them with highly institutionalized access to policymakers. In this case, interest reconfiguration usually takes place without bringing in new players, which will result in limited changes in the current trade strategies. In as much as key players with reconfigured interests inspired by new ideas push for profoundly different trade strategies, they may face organized groups opposing the new trade policies that are equally privileged under the existing institutional structure. This traditionally protectionist group will be able to wield substantial political influence, blocking substantially new trade strategies involving massivescale trade liberalization. Therefore, those who would benefit substantially from the new trade strategy are forced to accommodate the interests of other key players who are expected to suffer from it. A country in this path is likely to succeed in moving away from traditional multilateral and regional trade strategies to adopt new bilateral trade strategies. But it will engage in FTAs that require minimal changes in the current trade strategies. For example, it will seek FTAs with only a few countries with weak economic ties that will usher in a limited degree of trade liberalization. With these FTAs, it can manage the domestic opposition from groups that will be badly hurt by FTAs. Substantial changes are likely in the third type of trade policy constellation. In this path, the emergence of new ideas phases traditional players out of the existing policymaking structure and brings in new players. Disenchanted with the existing trade strategy, the new players will seek fundamentally new trade strategies. However, contemplating that the creation of a new institutional and policymaking structure involves high transaction costs, they may choose to take advantage of the existing policymaking structure as a means to realize their newly forged interests. Under these circumstances, traditionally politically entrenched groups favoring the status quo will 54

This difference itself causes the divergence of FTA strategies. Countries where a new idea about FTAs is picked up by the political leadership are likely to take an aggressive approach to FTAs. Countries with a bureaucracy-led policy innovation are likely to take a gradual approach to FTAs. While the political leadership played a critical role in formulating a new policy idea for FTAs in China, South Korea, and Singapore, it was the bureaucracy in Japan that took an initiative in promoting a new conception of FTAs.

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also strive to block fundamental changes to the current trade strategies. It is thus inevitable that the new players will calibrate their interests to some extent to accommodate opposing voices, because reliance on the existing institutional structure inherently limits their influence in introducing new trade strategies. In the fourth type of trade policy constellation, rather than attempting to adapt to existing institutions, new players may opt to create new ones. The new institutional structure provides greater room for maneuvering by the new players, which enhances the chances of fundamental changes in trade strategies. By contrast, politically entrenched groups who used to be powerful under the old policymaking structure are quite limited in translating their interests into policy outcomes. Therefore, a government with strong support from the new players is less likely to face organized opposition in formulating new trade strategies. Furthermore, even in the face of the opposition, it will be able to cope effectively because new players are relatively insulated from this pressure by the new institutional structure. The combination of the new players and new policymaking structure enables the government to launch FTAs that are fundamentally different from traditional trade strategies as well as to speed up FTA negotiations with as many foreign countries as possible. However, when the government fails to develop institutionalized measures to incorporate opposing voices into the new policymaking process in the long run, it eventually causes serious politicization in formulating new trade strategies.55 Adroitly adapting to the new policymaking structure, traditionally powerful players will attempt to prevent the new players from seeking drastic policy changes. If this scenario plays out, the nature of policy change will look similar to the third outcome. To summarize, the analytical framework distilled from interaction among ideas, interests, and institutions examines the logical and theoretical paths that East Asian countries may take in carrying out trade policy changes. It also attempts to provide a dynamic explanation of why East Asian countries vary in their specific choices of trade strategies. The case study chapters provide an in-depth analysis of how these changes have taken place in East Asian countries.

References Aggarwal, Vinod K. (2001) “Economics: international trade.” In P. J. Simmons and Chantal de Jonge Oudraat (ed) Managing a Globalizing World: Lessons Learned Across Sectors. Washington, DC: Carnegie Endowment for International Peace. Aggarwal, Vinod K. (2006) “Shifting Ground: Is It Finally Time for Economic and Security Regionalism?” Global Asia, 1(1), pp. 28–41. 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), pp. 189–216. Aggarwal, Vinod K. and Min Gyo Koo (2007) “The Evolution of Regionalism in East Asia.” Journal of East Asian Studies, (7)3, pp. 360–369, Fall. 55

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Lee, Seungjoo (2007) “The Evolution of South Korea’s Trade Policy and FTA.” Journal of Korean Political and Diplomatic History, 29(1), pp. 103–134 (in Korean). Lee, Seungjoo and Chung-in Moon (2008) “South Korea’s regional economic cooperation policy: The Evolution of Adaptive Strategy.” In Vinod K. Aggarwal (ed.) Northeast Asian Regionalism: Ripe for Integration? Berlin, Heidelberg: Springer Verlag. Lee, Seungjoo and Min Gyo Koo (2006) “South Korea’s Multi-Track FTA Strategy: Moving from Reactive to Proactive.” Paper presented at the 2006 Annual Conference of American Political Science Association, August 31–September 1, 2006, Philadelphia, PA, USA. Low, Linda (2004) “A Comparative Evaluation and Prognosis of Asia Pacific Bilateral and Regional Trade Arrangements.” Asian-Pacific Economic Literature, 18(1), pp. 1–11. Milner, Helen V. (1997) “Industries, governments and the creation of regional trade blocs.” In Edward D. Mansfield and Helen V. Milner (eds) The Political Economy of Regionalism. New York: Columbia University Press, pp. 77–106. Nam, Young-Sook et al. (2004) “Economic Effects of Korea-China FTA and the Main Issues.” KIEP Policy Analysis 04–03. Seoul: KIEP. Parsons, Craig (2002) “Showing Ideas as Causes: The Origins of the European Union.” International Organization, 56(1), pp. 47–84. Pempel, T.J. (2006) “A decade of political torpor: when political logic trumps economic rationality.” In Peter J. Katzenstein and Takashi Shiraishi (eds) Beyond Japan: The Dynamics of East Asian Regionalism. Ithaca, NY: Cornell University, pp. 37–62. Pempel, T.J. and Shujiro Urata (2005) “Japan: a new move toward bilateral trade agreement.” In Vinod K. Aggarwal and Shujiro Urata (eds) Bilateral Trade Agreements in the Asia-Pacific: Origins, Evolution, and Implications. London: Routledge. Ravenhill, John (2005) “Regionalism.” In John Ravenhill (ed), Global Political Economy. New York: Oxford University Press, pp. 116–150. Ravenhill, John (2008) “Asia’s New Economic Institutions.” In Aggarwal, Vinod K., Koo, Min Gyo, Lee, Seungjoo and Moon, Chung-in (eds). Northeast Asian Regionalism: Ripe for Integration? Berlin: Springer. Rogowski, Ronald (1987) “Political Cleavages and Changing Exposure to Trade.” American Political Science Review, 81(4) (December), pp. 1121–113. Schott, Jeffrey J. and Inbom Choi (2001) “Free Trade between Korea and the United States?” Policy Analyses in International Economics 62, Washington, DC: Institute for International Economics. Sohn, Chan-hyun and Jinna Yoon (2001) “Does the Gravity Model Fit Korea’s Trade Patterns?” KIEP Working Paper 01–01, Seoul: Korea Institute for International Economic Policy (KIEP). Solingen, Etel (1998) Regional Orders at Century’s Dawn. Princeton, NJ: Princeton University Press. Solingen, Etel (2005) “East Asian regional institutions: characteristics, sources, distinctiveness.” In T.J. Pempel (ed) Remapping East Asia: The Construction of a Region. Ithaca, NY: Cornell University Press. Solingen, Etel (2006) “Domestic politics and regional cooperation in southeast and northeast asia.” In E. Friedman and S. C. Kim (eds) Regional Cooperation and its Enemies in Northeast Asia. Abingdon, UK: Routledge. Solis, Mireya (2003) “Japan’s New Regionalism: The Politics of Free Trade Talks with Mexico.” Journal of East Asian Studies, 3(3), pp. 377–404. Streeck, Wolfgang and Kozo Yamamura (2003) “Introduction: convergence or diversity? stability and change in German and Japanese capitalism.” In Kozo Yamamura and Wolfgang Streeck (eds) The End of Diversity? Prospects for German and Japanese Capitalism. Ithaca, NY: Cornell University Press, pp. 1–50. Tsebelis, George (2002) Veto Players: How Political Institutions Work. Princeton, N.J.: Princeton University Press. Tyson, Laura D’Andrea. “What Really Sabotaged the. Seattle Trade Talks” Business Week, February 7, 2000.

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Urata, Shujiro (2002) Nihon no FTA Senryaku: Aratana Kaikokuga Gyosoryokuwo Umu [Japan’s FTA Strategy], Tokyo: Nihon Keizai Shimbunsha. Vogel, Steven K. (1999) “When Interests Are Not Preferences: The Cautionary Tale of Japanese Consumers.” Comparative Politics, 31(2), pp. 187–207. Whalley, John & White, Philip M (1985) “A Decomposition Algorithm for General Equilibrium Computation with Application to International Trade Models: A Correction.” Econometrica, 53(3) (May), pp. 679. Wong, John and Chan, Sarah (2003) “China-Asean Free Trade Agreement: Shaping Future Economic Relations.” Asian Survey 43(3), pp. 507–526. Yang, Jian (2009) “China’s Competitive FTA Strategy: Realism on a Liberal Slide.” In Mireya Solis, Barbara Stallings and Saori N. Katada (eds). Competitive Regionalism: FTA Diffusion in the Pacific Rim. Palgrave: 216–235.

Chapter 2

The Domestic Political Economy of China’s Preferential Trade Agreements Ming Wan

2.1

Introduction

What role does China’s domestic politics play in its approach toward preferential trade agreements (PTAs)? What stands out immediately is an apparent absence of domestic politics from public eyes or in academic analysis in China and elsewhere. Does this mean that domestic politics does not matter in this case? If so, while a chapter on China might still be of some value as a stark contrast to domestic politics-rich cases such as Japan and the Republic of Korea discussed in the book, by itself it would be much ado about nothing. To state what is obvious, China has a different political system from Japan and South Korea. In a democracy, citizens defend their interests openly and through political participation, thus revealing where people stand on a country’s foreign economic policy and how they organize and compete with rival groups to influence that policy. But domestic politics matters in China’s PTA policy, just not expressed in a good fight this time around. Domestic politics matters in nondemocracies like China although it plays out differently from democracies and there have been epic political fights in China such as the Cultural Revolution and the Tiananmen Incident. Domestic politics has always been important for Chinese foreign policy, foreign economic policy included, whether the public is aware of it or not. And we know more as the country opens up. As a case in point, we know the high political tensions prior to China’s entry into the World Trade Organization (WTO). Analysts in China are often far more accurate and insightful in discussing domestic politics of other countries than China’s own, but one hears about Chinese domestic issues in interviews and reads increasingly candid discussion in writing as well.

M. Wan (*) Department of Public and International Affairs, George Mason University, Fairfax, Virginia, 22030 USA e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_2, # Springer Science+Business Media, LLC 2011

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My argument in this chapter is that the impact of domestic politics has not been felt strongly in China’s turn to PTAs because Chinese political economy is transitioning, and because those who would lose from regionalism are not represented in the Chinese political system and they face bigger challenges such as land seizure and local cadre corruption in any case. Put simply, how would Chinese or anyone for that matter calculate gains and losses with so much going on? Even if you can, what are you going to do about it? And is PTAs the most pressing issue for you at this time? I will make the following specific points. First, China’s turn to PTAs in the past decade has not generated a major domestic fight. Second, China appears strategic and decisive in its PTA policy because the advocates who think they represent China’s national interests have prevailed. Those within the government and among policy advisors who are sympathetic to the plight of “losers” like farmers talk gently, with no meaningful political pressure. Third, those particularly vulnerable to regional free trade agreements such as farmers are not organized or represented in the political system. In fact, sectoral interests are not well articulated and aggregated in China partly because of other more prominent tensions such as bureaucratic turf fights, and central-local government relationships have fragmented societal interests. Chinese farmers fight in thousands of protests, which generate pressure on the Central Government to rein in local governments and alleviate their misery for its own political survival. In such an environment, policy entrepreneurs from the ranks of farmers generally view Beijing as their protector and utilize the laws and regulations of the Central Government as weapons against local officials, often borrowing ideas from intellectuals sympathetic to their plight. China’s growing economy also mitigates potential challenges to some extent. Fourth, China’s turn to PTAs happened shortly after China joined the WTO, which means a compounded impact of global and regional integration on Chinese economy. This timing factor makes it easier for people to take grand positions on free trade versus protection than fine-grained positions on regionalism. Also, so many regional projects are being attempted, which makes cost–benefit calculations that much harder. In addition, many Chinese proponents for Asian PTAs base their arguments on a shared Asian identity. Asian regionalism does not raise a red flag for nationalists and conservatives who are often critical of the Westernizing implications of global free trade agreements. Last, this unique moment for the Chinese government offers a window of opportunities for bold strategic initiatives. As time goes by, China might play the game of regionalism in the domestic context more like Japan and South Korea. One scenario for change is a combination of a slow-down economy, sourness on the regional free trade agreements, and emergence of policy entrepreneurs who seize upon the issue of regionalism (fairly or unfairly). If a PTA becomes a high-profile domestic issue receiving criticism at a level approximating that before China’s accession to the WTO, I expect the Chinese government to find it easier to shift policy on regionalism than on global free trade agreements because it has a bigger stake in the global regime.

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31

China’s Turn to PTAs

China made a decisive turn to PTAs in 2000. It signed the Bangkok Agreement in 2000 (accession April 2001), its very first regional agreement that involves tariff reduction, and more importantly initiated a free trade agreement (FTA) with Association of Southeast Asian Nations (ASEAN) in the fourth China-ASEAN summit. China started relatively late in PTAs but has moved faster than some early starters, particularly Japan. In all, China has signed nine PTAs and is in negotiations over another seven, equaling the total for Japan and South Korea but trailing Singapore. China started with a regional minilateral FTA with ASEAN, with three stages of negotiations. In November 2001, China and ASEAN reached an agreement to implement an FTA within 10 years. In July 2005, a China-ASEAN FTA in goods went into effect, with China and the six early ASEAN members beginning to reduce tariffs. In January 2007, the two sides signed an FTA in services. The ChinaASEAN FTA entered into effect on January 1, 2010. While pursuing an FTA with ASEAN, China has also signed eight bilateral FTAs so far, four within the Asian region (Macau in 2003, Hong Kong in 2003, Thailand in 2005, and Singapore in 2008) and four outside the region (Chile in 2005, Pakistan in 2006, New Zealand and Peru in 2008). The nine FTAs signed by China appear to reveal a balanced approach by Beijing. In fact, one may argue that China is now tilting toward trans-regional PTAs. China has been negotiating with Iceland, Australia, Costa Rica, and Norway bilaterally and launched a joint study with Switzerland in February 2010. Beijing has also been negotiating with the Gulf Cooperation Council (GCC) and the Southern African Customs Union (SACU). By contrast, Beijing has only one negotiation going in the Asia-Pacific, namely with Taipei starting in January 2010. However, the breakdown between China’s regional and trans-regional FTAs should not be viewed as Beijing not focusing on Asia. If you look at sequencing, China moved first with regional minilateral and bilateral FTAs. ASEAN of course has ten member countries. From Chinese perspective, China certainly concentrates in its region. China has engaged in an FTA or similar arrangements in studies or negotiations with all the 15 countries directly bordering China on land except Mongolia, North Korea, Bhutan, Nepal, and Afghanistan. China is also talking about or doing FTAs with its 14 neighbors broadly defined such as South Korea, Japan, ASEAN, Sri Lanka, and Bangladesh.1 China is also active in loosely structured regional integration projects such as ASEAN + 3, the East Asian Summit, and the Shanghai Cooperation Organization that is expanding in the economic cooperation arena. Moreover, China has participated in subregional projects such as the Greater Mekong River and the Tumen River project, which promote mainly cooperation and investment in infrastructure.

1

Zhou and Li (2005).

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We will see more trans‐regional FTAs for China mainly because China has not been able to persuade Japan to move forward with a China-Japan-South Korea FTA. As late as 2009, the Japanese trade officials focused on concluding an investment agreement rather than moving to the negotiation stage.2 Despite Prime Minister Hatoyama’s emphasis on the East Asian Community, the three Northeast Asian countries are only moving from private studies to a joint study stage involving officials, business communities and scholars. Actual negotiations are not in sight. While China has moved fast in numbers, questions about the quality of its FTAs loom large. To start with, as Vice Commerce Minister Yi Xiaozhun recognized, China has not concluded many FTAs, particularly with major economic powers in the world.3 ASEAN is the largest FTA partner for China, and New Zealand the only advanced economy signed so far. Moreover, in degree of integration China lags behind Japan, South Korea, Singapore, and Thailand. China has focused mainly on “shallow” integration, namely goods, country of origin, and services, not investment, competition, government procurement, intellectual property, the environment, and labor standards. The Chinese thinkers have realized the global and regional trend toward deeper integration and generally urge the government to move cautiously in that direction as well. The 2008 China-New Zealand FTA is the strongest for China so far, covering virtually everything except government procurement and competition policy, which constitute stronger commitments than those to the WTO.4 Consistent with the book, this chapter focuses on China’s PTAs. But in the rest of the chapter, I will use regionalism from time to time because the Chinese officials and analysts often use the term when discussing Chinese strategic thinking. Regionalism is broader than free trade agreements as it also includes economic regional cooperation in finance or monetary affairs. Financial and monetary regional cooperation is important for East Asia. In fact, it has often been argued that financial regional cooperation is taking a lead in East Asia. After all, it was a financial crisis in 1997
1998 that gave much momentum to a more exclusive and institutionalized form of regionalism in East Asia.

2.3

Where Is the Fight?

With all these activities, it is surprising that we do not hear that much about the domestic politics of China’s policy toward PTAs when we read Chinese narratives and analyses. Regionalism appears like a nonissue in the Chinese domestic context.

2

Interviews with two senior officials at the Ministry of Economy, Trade, and Industry, Tokyo, July 2009. 3 Yi (2007). 4 Dong (2009).

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Some Chinese analysts from the research wing of the Ministry of Commerce, for instance, comment that regionalism has received little criticism at home.5 A former official who accompanied Premier Zhu Rongji to Southeast Asia for an FTA discussion also recalls that there was no domestic criticism of the Chinese government initiative.6 When one considers the powerful resistance of the agricultural sector in countries like Japan and the Republic of Korea, the silence of domestic protest in China is deafening. Domestic politics of course matters for China’s foreign policy, like for any other country’s foreign policy. In fact, a majority of students of Chinese foreign policy emphasize domestic factors, not just preferences, institutions, and ideas, but also traditions, cultures, identities, and leadership styles.7 One actually sometimes hears complaints that students of Chinese foreign policy do not recognize enough the importance of the impact of international forces on China. To be precise, what we observe in the case of China’s turn to regionalism is not an absence of domestic politics but an absence of an attention-grabbing political fight. Students of international political economy instinctively look for conflicts that are predicted from a shift in foreign economic policy. We fundamentally assume that such a shift creates winners and losers. We have established some theoretical understanding of why different groups want to fight (sectoral or class interests based on relative endowment) and how they will fight (interest groups and coalition politics). The Chinese are as capable of domestic fights as any other peoples. In fact, China has seen domestic turmoil and unrest on a scale unrivaled by most other countries in the past century. If one adopts a domestic misery index, whatever indicators one may choose, China would rank high in the world. Moreover, the Chinese fight over foreign economic policy. Since China’s reform and opening in 1978, there have been ideological fights over foreign economic policy. The Chinese are capable of domestic fights over free trade agreements as well. Criticism of the WTO follows from the nationalist discourse, which intensified after the NATO bombing of the Chinese embassy in Belgrade on May 8, 1999. Chinese critics wanted to say no to the United States and the West, which colored their view of China’s WTO membership. They were also concerned that globalization dominated by the United States would hinder China’s development, even though some recognized that China had to adapt to it.8 Premier Zhu Rongji was severely criticized as a traitor to the Chinese nation when he was viewed as making significant concessions during his April 1999 trip to the United States but still failing to conclude a deal with the Clinton administration. Like previous rounds of ideological fights over economic policy, the WTO fight pitched factions within the government, but the debate over WTO accession

5

Zhou and Li (2005). Conversation with the official, July 2008. 7 Kim (1998), pp. 11–16. 8 Fang et al. (1999). 6

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reflected sectoral divides as international political economy scholars studying trade issues would predict. In fact, bureaucratic fights over WTO membership reflect sectoral interests and some class interests they represent. We can calculate who would benefit or lose from a free trade deal in China, just like any other country. Chinese officials and analysts themselves calculated carefully for a WTO membership. For example, the Chinese knew that free trade deals would have a short-term negative impact on Chinese agriculture, based on a simulation model developed by researchers at the China Agricultural Academy called China’s Agricultural Policy Analysis and Simulation Model (CAPSiM).9 We also saw detailed analysis of the impact of WTO accession on China’s telecommunications, automobile, and financial sectors. A high-profile case is the telecommunications.10 According to one study by the Development Research Center under the State Council, unemployment would increase in the short term after China joined the WTO. First, a dozen sectors such as automobile, machinery, metallurgy, petroleum, chemical, food and oil processing, and telecommunications were expected to see increases in layoffs because they needed to restructure their industries to be competitive. Second, the price of wheat, rice, and cotton in China was about 20–70% higher than the international market. Although the import quota was only about 4–5% of the country’s total demand for cereal, private enterprises were allowed to have the same quota for their operations, which would affect 10–13 million jobs.11 For an earlier example of domestic politics, China did not want to see APEC adopt market opening measures too quickly to the outside world because of its low per capita income and because of its difficult transition to a market economy.12 On the other hand, there were sectors interested in regional integration. When the Chinese government was to select a few high-tech industrial parks for opening to APEC in 1996, all 52 state-level high-tech industrial parks came to the central government to lobby intensely. In the end, the government selected four in 1997 and added one in 1998.13 In the case of FTAs, should people fight? Of course, no one fights all the time or over all issues. I am not arguing that FTAs are necessarily a top issue that should invite strong protests in China. But FTAs should cause a domestic fight because they do have a negative impact on some sectors, as will be discussed in the next section. As comparison, we see how agriculture affects Japanese and South Korean policy toward FTAs.

9

Huang (2000). Fewsmith (1999). 11 Mo (2002), pp. 50–52. 12 Zhang (1998). 13 Wang (2000), pp. 121–3. 10

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35

Whose Voices?

As Peter Gourevitch pointed out, those who emphasize domestic sources of international cooperation tend to adopt either “preference-driven” models or “institution-driven” models. Preference-driven models suggest that policy outcomes result from what society wants. Preferences refer to one’s ordering of the desirable outcomes, which allows a strategic analysis of interactions between players. Put simply, it is not enough to know that an actor has certain interests. We need to know how strongly one interest is relative to others. By contrast, institution-driven models show how similar sets of preferences end up with different policy outcomes due to different institutional settings.14 This section discusses the preferences being expressed over China’s FTA policy. The section title uses the word “voices” rather than “preferences” to indicate who has louder and more clearly expressed preferences. Chinese analysts and observers often use the word “voice” for precisely such a purpose. My discussion of the Chinese voices relates to the next section about China’s political system because the distribution of voices has much to do with the political setup. When it comes to foreign economic policy, the voices that have been most dominant are between various schools of reformers and conservatives although bureaucratic agencies (bumen) and sectoral interests have gained importance over time. In the case of the WTO, the central leadership wanted to join the WTO. For them, joining the WTO is a strategic decision to join the trend of economic globalization despite some serious challenges involved. The Chinese government made great efforts to prepare for China’s eventual membership.15 Chinese bookstores had shelves of WTO-related books displayed prominently for the public and officials.16 More than publicizing the WTO, the government needed to change laws and administrative regulations to be compatible with WTO rules. In Fall 2001 the State Council began reviewing and revising 756 administrative regulations, an unprecedented move.17 China’s adoption of regionalism would not involve such extensive publicity and adaptation. The domestic politics question about China’s policy choice for regionalism is really, “Who wants that policy choice and who does not?” The fact that we do not talk about domestic politics that much is because government views apparently prevail in this case. It is well understood that China had a strategic calculation. That is directly related to Chinese elite politics. Immediately one should ask who has that strategic vision and whether that is contested among China’s elites or challenged by the public. The Chinese discussion of Asian regionalism has been strongly state-centric, emphasizing national interests while acknowledging perceived collective interests 14

Gourevitch (1996). See chapters by senior Chinese government officials in Wang (2001). 16 See for example Liang and Lu (2002). 17 Lu Jianhua (2002), p. 6. 15

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for East Asia. Strictly speaking, what one hears amounts to benefit–benefit analysis rather than cost–benefit analysis. Even rare discussion of potential costs is immediately softened by stronger counterarguments. FTAs have a long list of commercial and strategic benefits in Chinese eyes. The Chinese view FTAs as a must because other leading countries have already done so; China would suffer from the discrimination of FTAs in which it is not a member. Chinese elites see an opportunity and complementarity in China’s integration with East Asia. For one thing, this is a fast growing region that is viewed as becoming the third pole of the world economy. China already has significant trade with ASEAN and an FTA would bring greater economic benefits. In addition, it would be easier for China to resolve trade disputes within an FTA framework than within the WTO. And most countries now have a good neighborly relationship with China. Although China is still a developing country, its economic capability has strengthened due to reform and opening, and Chinese firms now have the ability to invest abroad and need to take advantage of overseas market. Given cultural affinity and geographical proximity, China should focus its investment in East Asia. The Chinese certainly see strategic interest in regional cooperation. They view American regionalism initiatives as tying political conditions and making partners more dependent on the United States. China wants to increase its own political influence with developing nations, some of which are considered its traditional friends. China also wants to deny Taiwan the opportunity to expand its international space. And China wants to be a rule maker in the international system dominated by the West. This is consistent with China’s enlightened view that to gain influence, China needs to open its market more to developing countries through regional cooperation.18 The Chinese thinking cited above is voiced by a list of heavyweights in the Chinese government, including Ma Hong, the former Development Research Center (DRC) Director and a leading reform strategist; Yi Xiaozhun, the vice commerce minister; and senior researchers from Academy of Macroeconomic Research of the State Development and Reform Commission; DRC; Commerce Ministry; and 18

Ma Hong (2002) “Rushihou zhongguo tong yazhou quyu jingji guanxi zhanwang [The Prospect of China’s Economic Relations with Asia after Entering WTO].” Development Research Center of the State Council, accessed on June 21, 2008, Available from ; Yi (2007); Zhou and Li (2005); Zhang Yansheng (2004) “Canyu he cujin quyu yitihua” [Participate in and Promote Regional Integration], February 10, 2004, accessed on August 1, 2008, Available from ; Zhang Yansheng (2006) “Woguo jiaru wto hou canyu fta de libi” [The Costs and Benefits of Participating in FTAs after Joining WTO], December 30, 2006, accessed on August 1, 2008, Available from ; “Zhongguo dongmeng quyu jingji hezuo jinzhan yuchengjiu [China-ASEAN Regional Economic Cooperation: Progress and Achievements],” Chinese Academy of Social Sciences News, May 27, accessed June 22, 2008, Available from ; Cheng (2001), pp. 240–63.

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the Chinese Academy of Social Sciences. Their reasoning varies at times, but reveals a strong consensus for the commercial, political, and strategic benefits for China. It is worth noting that almost all the ministries and commissions under the State Council have involved in regional economic cooperation forums or FTAs.19 What should be the cleavages over trade policies in a country? Those who study the political economy of trade tend to focus either on special interests in the economic decision making process or class conflicts among owners of land, capital, and labor whose preferences are shaped by whether they have an abundant or scarce factor.20 Another way of looking at this is to distinguish internationalists from nationalists. Etel Solingen, for example, emphasizes the internationalist versus backlash coalitions as the drivers of foreign economic policy.21 Helen Milner has also shown how the American and French firms that had growing international economic ties resisted protectionist attempts and limited protectionism in the 1970s.22 The same logic should apply to the Chinese firms that have integrated more with the global market. Pro-reform internationalists have so far prevailed in this case. China is not unique. Those who study Japan, for instance, also often frame the domestic politics in terms of internationalists and nationalists. Those who want reforms have been interested in locking in reforms through free trade agreements. We know reformers tried to use membership in the WTO as a catalyst to further reform in China and further integration with the world market. A WTO membership would also mean that China’s reform was now irreversible and further opening to the outside world was now a stimulus for domestic reform. This was such an openly and frequently cited reason for WTO membership that we really do not need extensive citations here.23 FTAs have been viewed in this light. Chinese analyses typically put China’s accession into the WTO as the context of China’s turn to FTAs and often emphasize the importance of FTAs for facilitating global trade liberalization. China’s turn to FTAs is consistent rather than contrary to China’s reform and opening. When discussing Chinese domestic political economy, one central issue is the relationship between the central government and local governments, which really defines the Chinese political system. This relationship is also important because of an enlarging gap between coastal regions and the interior.24 This fault line is within the government, thus entailing “legitimate” political tensions. Central–local government issues are publicly debated among elites of different types. While

19

Yi (2007). Hiscox (2001). For industrial group studies, see Gourevtich (1986) and for class cleavage studies see Rogowski (1989). 21 Solingen (2001). 22 Milner (1988). 23 For just an example, see He (2002). 24 There is a lot written about this. See for example Angang et al. (1995), Angang (1995); pp. 66–141. 20

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provincial governments pursue their own interests, the dominant views of the central government shift depending on what they think is the central challenge facing the country at a given time. During the Deng Xiaoping era, the Central Government focused on coastal regions. In fact, the Seventh Five Year Plan (1986–1990) stipulated explicitly that coastal regions would be preferred for investment. Although the next two 5-year plans called for increased investment in the interior, the regional gap enlarged because of a lack of a comprehensive package and the natural pull of the market to the coastal region. In June 1999, Jiang Zemin announced the “Go West” campaign. The West here includes Guangxi, Yunnan, Xinjiang, Tibet, Ningxia, Gansu, Shanxi, Guizhou, Qinghai, Sichuan, Chongqing, and Inner Mongolia. One of the strategies was to increase free trade deals with neighboring countries.25 Hu Jintao put even greater emphasis on regional balance. Chinese regional governments view opening to the outside world as in their interest. Coastal regions are interested in the global market and therefore support membership in the WTO. According to a field study by the Development Research Center of the State Council in four coastal developed cities in Guangdong Province prior to China’s accession to the WTO, all these local governments had studied WTO rules and made policy adjustments, but they appeared overly optimistic from the perspective of the researchers that they would benefit from WTO membership. They felt they were essentially already in the WTO since they were integrated more with the global market.26 Viewing integration with the global market as a key reason for the success of the coastal regions, the interior provinces also want to have their own outlets to the global market. Inner Mongolia and Jilin Province are enthusiastic about the Tumen River project that connects China, Russia, and North Korea, involving also Japan. Shandong, the Liaodong peninsula, and coastal cities are interested in the Yellow River zone, connecting South Korea.27 Yunnan and Guangxi are the main participants in the Greater Mekong River Subregion economic cooperation program (established in 1992) that includes Cambodia, Laos, Burma, Thailand, Vietnam, and China. Guangxi sees itself as the bridgehead and a pilot in China’s FTA with ASEAN. The province is also the permanent host of the China-ASEAN Expo. Xinjiang participates in the Central Asia Regional Economic Cooperation started in 1996. Xinjiang is also interested in the expansion of the Shanghai Cooperation Organization into the economic realm. The collective interests of the country have prevailed over the sectoral interests. In his memoir, former Chinese Ambassador Wang Yusheng to APEC in 1993–1998 wrote about the negotiations for the Bogar goals in 1994. After five senior official meetings, much consensus was achieved except the flexibility and non-discrimination principles, left for the last meeting held in Osaka. The flexibility principle had direct relevance for the Bogar timetable of achieving “free and open trade and

25

Sun (2001). Long (2002). 27 Watanabe (2004), pp. 139–40. 26

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investment in the Asia-Pacific for industrialized economies by 2010, and for developing economies by 2020.” Japan, South Korea, and Taiwan were described as wanting flexibility in meeting the timetables because of agriculture. Japanese and South Korean officials lobbied the Chinese representative for support. Wang recognized that China shared concern over agriculture as well as telecommunications and automobile. So China sided with Japan, South Korea, and Taiwan. But there was no indication that the Chinese government was under the same degree of sectoral pressure as the other Northeast Asian economies. Rather, the Chinese delegation focused on the nondiscrimination principle, which meant unconditional most-favored-nation status, which the United States reviewed annually when it came to China. So this was an issue between China and the United States.28 Where are the voices of those who might lose from FTAs? Farmers and other sectors are being affected negatively on balance in the short run at least. But their voice is barely audible. If one reads selectively about what the Chinese say about Asian regionalism, little has been said about the “losers.” If one casts the net wider, one will hear some caution and concerns about a potential negative impact on agriculture by a few sympathetic scholars and government officials, but there has not been any political pressure in this case. One way to see how losers are being marginalized is to see what concerns Chinese officials and thinkers over FTAs. For example, two researchers from the Ministry of Commerce believe that the government should be concerned mainly about what China can expect to gain from regional economic cooperation and who China should partner with.29 A government in a democracy would have to consider potential domestic opposition as a high priority. Chinese officials and analysts did not calculate that much when the government decided to promote FTAs. Better analysis came only starting around 2003, after the threshold decision was made. This should be surprising because the Chinese had calculated carefully over China’s entry into the WTO. Moreover, there was much calculation by “outsiders,” which the Chinese were familiar with. Should there be some social groups concerned about FTAs? There is some confusion about where interests lie and how to calculate them. But the Japanese made some useful calculations, which indicated a large segment of Chinese peasants negatively impacted by regional accords. Watanabe Toshio, for instance, pointed out that the early harvest measures that allowed import of ASEAN agricultural products before schedule would have a negative impact on banana producers in Hainan and Guangdong provinces. He estimated that China-ASEAN FTA would affect negatively 15–45 categories of agricultural products and could have some impact on as many as 160 million people. Even though the Chinese government hoped to deal with the problem by strengthening the competitiveness of agriculture and moving labor from agriculture to nonagricultural sectors, he concluded that this could destabilize Chinese society and have a negative impact on political stability

28 29

Wang (2000), pp. 75–78. Zhou and Li (2005).

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because of the slow progress in improvement of agricultural competitiveness and the saturation of the abilities of cities to absorb surplus labor from the countryside.30 Needless to say, not all Chinese farmers will necessarily lose or lose big from FTAs. In some areas, Chinese farmers might enjoy comparative advantage over their counterparts in Japan and South Korea. As one Chinese estimate shows, a China-centered East Asian FTA that links the China-ASEAN FTA and a ChinaJapan-South Korea FTA would mean loss for Japanese agriculture and gain for Chinese agriculture and a reversed balance in manufacturing sector.31 But China and Japan are not going to negotiate an FTA bilaterally or minilaterally anytime soon. And on balance Chinese farmers are losers because unlike market democracies, the Chinese government has not fought to protect the agricultural sector in free trade negotiations, which puts them at a disadvantage to developed countries that protect the agricultural sector and to competition from lower-cost agricultural products from less developed countries. Rare concerns for potential losers came not from the losers themselves. As we know about the domestic politics in other countries, affected sectors would highlight or exaggerate the negative impact of a particular shift in foreign economic policy on them. The Chinese government has to play a two-level game like anybody else, but it involves different players to a different degree due to its own set of domestic institutions.32 The question is thus not whether sectors or classes are being affected by FTAs but whether and how they express their views and push for policy outcomes to their liking. There should be losers and winners in China just like in any other countries. The fact that the policy outcome does not seem to reflect the preferences of some players points to the importance of understanding the institutional arrangements in different countries. There is a greater variation in terms of institutions among East Asian countries as explored in this book.

2.5

Institutions

The distribution of preferences and the nature of political institutions mesh so well in the FTA case in China that it is easier to lump the two issues in one section. But I separate them analytically to allow easier comparison with other cases included in the book at the risk of some repetition between the two sections in this chapter. China started later than Japan but moved faster, which put pressure on the Japanese government. Why that was the case could be explained by domestic factors. It is safe to assume that the forces for such a move were better organized

30

Watanabe (2004), pp. 140–41. Li (2007). 32 For a study of how domestic politics shapes international relations using a two-level strategy game, see Milner (1997). 31

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and prevailed over the opposition. This should also mean that Chinese elites for such a move had a clearer idea of what to do and were more resolute than their Japanese counterparts. China has a top-down decision making system, which is also plagued with bureaucratic fragmentation. One should also note that this is a reform government that has faced far more difficult challenges than regionalism. Part of their political successes has been to build political momentum behind reform and opening measures.33 To understand what is happening in China, it helps to have a sociological understanding of institutions. China has a transitional society, which means that rising tide lifts all boats and that pressure on the government may be diffused because ironically rapid economic growth often makes both winners and losers discontent.34 While initially benefiting from the economic reform, Chinese peasants came to be marginalized since the mid-1980s. So what is troubling them is a long series of problems, particularly corruption by local officials and a rising gap with the cities. Thus, FTAs are not that prominent a cause of miseries for them. Where the top leadership has made up their mind, things get done. As the official who went with Zhu to Southeast Asia for FTA discussions commented, “when the head of the leader gets heated, decisions are made,” which was the case for Beijing’s decision to form China-ASEAN FTA. However, central leadership decisions do sometimes become controversial in the domestic context. Even though China has a top-down decision making system, public opinion still counts; but Chinese public opinion is not institutionalized in contrast to public opinion in democracies like the United States. Since the Chinese Communist Party does not allow formal channels of communication and political representation, Chinese masses exert influence mainly through protests and complaints and they aggregate their negative feelings mainly in long term.35 It is hard to imagine seeing a mass movement protesting over imports of certain foreign products like what South Korean President Lee Myung-bak experienced after he lifted ban on import of American beef in April 2008. Chinese public opinion matters more now, but mainly in a general sense rather than a specifically targeted area for lobbying and influence. The Chinese government is responding to public expectation and is also creating the expectation that the central government would be on the side of the disadvantaged. Public pressure particularly comes from the internet. Apparently, Chinese leaders all claim that they surf the Internet to gauge public opinion.36 But it is important to recognize that regional FTAs have rarely generated any online movement of support or opposition. The events that generate heightened cyber

33

Shirk (1994). Olson (1963). 35 Liu (1996), pp. 6–7. 36 On June 20, 2008, Hu Jintao appeared in the chat room of the “Strong Nation Forum” of the People’s Daily, a highly symbolic move. Of course, an immediate background was that Chinese Net citizens were critical of the principle consensus on the East China Sea reached 2 days earlier. 34

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nationalism in China include the 1996 Taiwan Strait crisis, the 1998 Indonesia anti-Chinese riot, the 1999 American bombing of the Chinese embassy in Belgrade, the 2000 Taiwan presidential election, the 2001 USA–China spy plane collision, the 2005 anti-Japan demonstration, and the 2008 Olympics torch relay. The only Internet controversy involving China’s foreign economic policy was Premier Zhu Rongji’s failed attempt to win American acceptance of the Chinese package of concessions for accession to the WTO during his visit to the United States in April 1999. Hardliners called him a “traitor” in the bulletin boards.37 But this clearly had much to do with China’s relations with the United States rather than China’s entry into the WTO per se. This lack of interest in regionalism reflects partly the fact that Chinese farmers are not represented that well in the internet world. In fact, how free trade might affect Chinese agriculture has not generated that much interest in the Chinese Internet forums. After the Doha round collapsed on July 29, 2008, Western and Japanese media lumped India and China together as leading a fight among developing nations to defend the interests of their poor peasants against the United States and Europe. The reality cannot be too different between India and China. Indian chief negotiator Kamal Nath, who serves as the commerce and industry minister, was truly championing the interests of poor Indian farmers. As such, he was praised back home as a hero. What he did at the negotiation table should not be surprising given the fact that he had been an elected politician from one of India’s poorest regions for 28 years. He contrasted himself from the American negotiator who is an academician and the Brazilian foreign minister who is a diplomat.38 Nath did not mention the Chinese chief negotiator Chen Deming, who serves as the commerce minister. Like other Chinese trade negotiators, Chen is a long-serving bureaucrat in the Chinese central government. Interestingly, unlike Vice Premier Wu Yi and China’s chief WTO accession negotiator Long Yongtu, who were lionized in Chinese media as tough defenders of Chinese economic interest, Chinese media did not say that much about the failure of the Doha round and certainly did not want to take credit for taking a tough position. Rather, they saw China as being reasonable and constructive and attributed the failure to the breakdown between the United States and India.39 Chen himself portrayed the negotiation as a “tragic defeat” and stated that China was disappointed that “two countries” could not come to an agreement over safeguards over agricultural imports.40 The Qiangguo luntan [Strong nation forum] of the People’s Daily had only two positive comments on July 30 about China needing to fend for the interests of the common people and about opposing U.S. hegemony.

37

Wu (2007), p. 47. Information about Kamal Nath cited in Rama Lakshimi, “Hard Line at WTO Earns Indian Praise,” Washington Post, August 1, 2008, A12. 39 People’s Daily, July 30, 2008, accessed on August 1, 2008. Available from . 40 People’s Daily, July 30, 2008, accessed on August 1, 2008. Available from . 38

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The forum normally has 3,000–4,000 comments a day at the time. The Doha Round was not on people’s minds right before the Beijing Olympics. This is not a case in which unrepresented farmers do not make their voice heard. There have been frequent and increasing peasant protests and unrest. Ironically, farmers have not protested that much about FTAs because they have far more pressing and local issues to be concerned about, particularly land seizures by government officials to sell to developers as a source of revenues or personal gains. The central government came to be viewed in this context as the ally of farmers. The central government has a strong self-interest to be viewed as protecting the peasants for its own political survival. In 2006, the Beijing government canceled crop taxes and tried to reduce local levies. Thus, not surprisingly, activists have sought to use the laws and regulations of the central government as weapons against corrupt local officials. This is the reason that increasingly central leaders like President Hu Jintao and Premier Wen Jiabao adopt populist politics, a trend that is amplified by statecontrolled media. This temporarily shifts blame on the local officials, which the public generally dislikes. But this populist tendency does not address the fundamental issue. In a way, aggrieved citizens simply resort to violent protests to get the attention of the central government. As a case in point, in Wengan County of Guizhou Province, when a teenage girl’s body was pulled from a river on June 22, 2008, 30,000 people burned the county government building a few days later, believing that the girl was raped and murdered by relatives of local police officers. When the news spread, the provincial government reopened the investigation and fired the county leaders within a week, which reversed its earlier verdict of this incident as a riot against the government. But this is a costly way to get things done. By contrast, the beneficiaries of the reform are better represented. This is not a case in which elites may form national associations to exert influence. In China, officials control policy making and intellectuals can exert some influence as advisors and would-be officials. With economic reform, private businessmen and business managers have become a third force in policymaking. Even though they are not influencing policy through political participation, they can influence government officials through personal contacts and gift giving for officials, which lead to their influence on government behavior.41 Using the veto player model, the question is then, “Who will be in a position to block FTAs?” A veto player is one situated in a position to formally block a policy change.42 Ultimately, China’s political system has a strong collective veto player, the Chinese Communist Party that decides policy change and makes it into law if necessary. This is similar to but stronger than Malaysia’s United Malays National Organization.43 It can be difficult to formulate economic policy because of the presence of many potential minority veto players in the Chinese system. At the

41

Qin (1999), pp. 142–3. See Tsebelis (1995); MacIntyre (2001). 43 For an assessment of United Malays National Organization, see MacIntyre (2001), p. 93. 42

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same time, these players will be hesitant to exercise their veto power if the top leadership is unified and has clarified its policy preference.44 This is clearly the case in China’s FTA policy. Once the top leadership decided it was a great idea to move in that direction, there was little resistance from within the bureaucracy. Before one can jump and conclude that this is simply a story of a one-party state using its monopoly of political power to carry out what it desires in virtual disregard of societal opposition, we should consider some intervening variables that condition the policy outcome we see today and indicate the possible change to come.

2.6

Knowledge, Ideas, and Identities

The complexity and variance of regional cooperation projects are too well known to need any citations in this chapter. Like most other nations, China is entering or negotiating a wide range of FTAs; not just within East Asia, but also with countries outside Asia; not just trade, but also competition policy, the environment, and the labor standards. Researchers from the Development Research Center (DRC) of the State Council, which is a principal government think tank focused on reform and opening, admitted around the time of China’s turn to FTAs that, like the WTO, China lacked practical experience in regionalism. Moreover, Chinese researchers did not have any quantitative analysis of which country would be a desirable FTA partner. So China should move one step at a time, starting probably with the ASEAN Plus China and Bangkok Agreement.45 DRC, which is currently tasked as the institution representing China for studying a possible China-Japan-South Korea FTA, conducted a quantitative analysis of the impact of various East Asian regional integration projects. Their conclusion was that all participants would benefit, although the degree of benefits vary based on their competitiveness. For example, for China-ASEAN FTA (CAFTA), China would benefit greatly and all would benefit although the arrangement would have a negative impact on nonmembers. The study also concluded that China and ASEAN mainly complement each other. Because of different climates, Chinese and ASEAN agricultural products do not compete directly in most categories. While the two sides seem to compete in the textile sector, their mutual trade volume is small because they compete mainly in third parties. So CAFTA would not increase competition in each other’s markets. In the IT sector, CAFTA would not change how international investors treat the Chinese versus ASEAN markets. In the steel and consumer electronics sectors, China is expected to benefit from CAFTA because of stronger position against Japanese and South Korean competitors.46

44

Shirk (1993), p. 118, p. 127. Lu (2002), p. 477. 46 Long (2005). 45

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China’s turn to FTAs revealed the power of ideas, which may be defined as including world views, principled beliefs, and causal beliefs.47 The fact that China moved before it calculated means that they did so because they thought regionalism is a good idea. China’s embrace of FTAs did not represent a dramatic shift in its foreign economic policy of integrating with the world economy, which would generate domestic policy debates. It followed from China’s 15-year negotiation to join GATT/WTO. Chinese analysts of regionalism mostly consider regionalism a good idea. First, most Chinese elites believe that trade liberalization is essential for China’s economic reform, which in turn is central for the country’s prosperity and greatness. FTAs continue China’s pursuit of GATT/WTO. Second, they believe that trade liberalization will deliver tangible results like China’s WTO membership.48 Chinese also believe that China could handle FTAs. When Vice Commerce Minister Yi Xiaozhun was asked about the challenges from regionalism to some domestic sectors, he replied that China also considered similar questions when applying for WTO membership. The reality was that China seized the opportunity and became more competitive internationally and the fear by most did not occur. Now that China is more competitive, it should have more courage and confidence in building regionalism.49 Long Guoqiang, a senior DRC official, made similar comments, particularly pointing out the drastic increase in China’s exports since joining the WTO as the reason that liberalization had become the mainstream consensus and weakened the resistance to further opening.50 Identity is important particularly if one views the not-so-subtle difference in public attitudes toward China’s WTO membership and Asian integration. There was strong conservative criticism of China’s application and perceived kowtowing to the West. By contrast, we do not hear much about China’s early harvest arrangements with Southeast Asian countries. Chinese national identity is inseparable from a strong sense of victimization in the hand of the West. By contrast, one may see a faint revival of the Middle Kingdom identity when it comes to Southeast Asia, some of which were viewed as Chinese tributary states. The Chinese view Asian regionalism as related to but different from globalization. East Asians are fellow Asians although there is some confusion here for the Chinese as well. One often hears Chinese analysts describing China’s relations with fellow Asian countries as those of good neighbors and they emphasize the long history of interaction, cultural affinity, and shared destinies.51 Like non-Chinese analysts, the Chinese also view ASEAN as being weakened or even “marginalized” after the Asian Financial Crisis and as needing outside great powers like the United States, Japan, and China.52 The Chinese sense of Asian solidarity is partly

47

Goldstein and Keohane (1993), pp. 7–8. Zhou and Li (2005). 49 Yi (2007). 50 Long (2005). 51 Liu (2001); Wang and Wang (1998), p. 359. 52 See for example Dao (2002), pp. 137–41; Chen (2001), p. 51. 48

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instrumental: The Chinese view their neighbors differently when things turn ugly. But when the Chinese government or public want to have a good relationship, they have a ready traditional script to work with. The presence of ethnic Chinese in Southeast Asia also has an increasing influence in mainland China, given their importance in their home countries and investments in China. Put simply, Chinese nationalism does not conflict with regionalism at this point while conflicting with globalization. A popular book that predicted China as the future world leader reasoned that China should achieve unification as the first step and then economic alliance with Southeast Asia before moving step by step to be the dominant power in the world.53 The author’s fantasy aside, the point here is that Chinese nationalists and free traders could be strange bedfellows dreaming different dreams about regionalism.

2.7

Looking into the Future

China’s current political arrangements provide the country with a window of opportunities for taking bold initiatives for regionalist projects. However, China’s future is conflicted. On the one hand, strategic leadership by the central government may get the country going and “growing out of” the problems. On the other hand, while China’s tight political control avoids a grueling battle over FTAs now, it adds to the cumulative tensions, which may build a bigger crisis in a delayed reaction when it does come. In the end, state-centric governance may prove efficient in isolated cases, but aggravates broad problems, which require societal stakeholders to participate and build interest in.

References Cai Xianwei (1996) Zhongguo dazhanlue lingdao shijie de lantu [China’s Grand Strategy: the Blueprint for Leading the World]. Haikou: Hainan Chubanshe. Chen Qiaozhi et al. (2001) Lengzhanhou dongmeng guojia duihua zhengce yanjiu [Post-Cold War ASEAN Policy toward China]. Beijing: Zhongguo Shehui Kexue Chubanshe. Cheng Siwei (ed) (2001) Zhongguo jingwai touzi de zhanlue yu guanli [The Strategy and Management of China’s Overseas Investments]. Beijing: Minzhu yu Jianshe Chubanshe. Dao Shulin (2002) Dongmeng de fazhan jiqi zai yatai de jiaose dingwei [The development of ASEAN and its role in the Asia Pacific]. In Fu Mengzi (ed) Yatai zhanluechang [Asia-Pacific Strategic Arena]. Beijing: Shishi chubanshe, pp. 109–41. Dong Yan (2009) Zhongguo canyu quyu jingji yitihua de xintedian shendu yitihua yu nanbei yitihua [The New Features in China’s Participation in Regional Integration: Deep Integration and South-North Integration]. Institute of World Economics and Politics of the Chinese

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Academy of Social Sciences, the Chinese Academy of Social Sciences, International Trade and Investment series, Working Paper No. 09005, September 24. Fang Ning et al. (1999) Quanqiuhua yinying xia de zhongguo zhilu [China’s Path in the Shadow of Globalization]. Beijing: Zhongguo Shehui Kexue Chubanshe. Fewsmith, Joseph (1999) China and the WTO: The Politics behind the Agreement. NBR Analysis, 10(5) (December). Goldstein, Judith and Robert O. Keohane (1993) Ideas and foreign policy: an analytical framework. In Judith Goldstein and Robert O. Keohane (eds) Ideas and Foreign Policy: Beliefs, Institutions, and Political Change. Ithaca, NY: Cornell University Press, pp. 3–30. Gourevtich, Peter A. (1986) Politics in Hard Times: Comparative Responses to International Economic Crises. Ithaca, NY: Cornell University Press. Gourevtich, Peter A. (1996) Squaring the Circle: The Domestic Sources of International Cooperation. International Organization, 50(2), pp. 349–73. He Xiaoming (2002) “Jiaru WTO yu zhongguo jingji tizhi gaige jincheng [Accession to WTO and China’s economic system reform].” In Shehui Lanpishu 2002 [Bluebook of the Chinese Society 2002]. Beijing: Shehui Kexue Wenxian Chubanshe, pp. 51–56. Hiscox, Michael J. (2001) Class versus Industry Cleavages: Inter-Industry Factor Mobility and the Politics of Trade. International Organization, 55(1), pp. 1–46. Hu Angang (1995) Zhongguo xiayibu [China’s Next Step]. Chengdu: Sichuan Renmin Chubanshe. Hu Angang, Wang Shaoguang and Kang Xiaoguang (1995) Zhongguo diqu chaju baogao [Disparities in China]. Shenyang: Liaoning Renmin Chubanshe. Huang Jikun (2000) “Maoyi ziyouhua dui woguo zongye de yingxiang yu duice [The impact of trade liberalization on China’s agriculture and policy proposals].” In Hu Angang (ed) Zhongguo zouxiang [Prospects of China]. Hangzhou: Zhejiang Renmin Chubanshe, pp. 333–42. Kim, Samuel S. (1998) Chinese foreign policy in theory and practice. In Samuel S. Kim (ed) China and the World: Chinese Foreign Policy Faces the New Millennium. Boulder, CO: Westview Press, pp. 3–33. Li Zhongmin (2007) Dongya diqu maoyi ziyouhua de fuli yingxiang ji qianjing zhanwang [The Welfare Impact and Future of East Asian Regional Free Trade]. Shijie jingji yu zhengzhi [World Economics and International Politics], 1, pp. 75–80. Liang Yanfen and Lu Bo (2002) WTO dangzheng ganbu jianming duben [WTO: Concise Reader for Party and Government Cadres]. Beijing: Shehui Kexue Wenxian Chubanshe. Liu, Alan P.L. (1996) Mass Politics in the People’s Republic: State and Society in Contemporary China. Boulder,CO: Westview Press. Liu Hongxuan (ed) (2001) Zhongguo lulinshi zhongguo yu zhoubian guojia guanxi [China’s History of Good Neighborliness: China’s Relations with Surrounding Countries]. Beijing: Shijie Zhishi Chubanshe. Long Guoqiang (2002) Difang zhengfu yingdui jiaru WTO de zhunbei gongzuo jinzhan wenti yu jianyi [Local governments’ preparations for China’s accession to WTO: development, problems, and suggestions]. In Ma Hong and Wang Mengkui (eds) Zhongguo fazhan yanjiu guowuyuan fazhan yanjiuzhongxin yanjiu baogao xuan [China Development Studies: Selected Research Reports of Development Research Center of the State Council]. Beijing: Zhongguo Fazhan Chubanshe, pp. 465–70. Long Guoqiang (2005) Zhongguo de quyu jingji hezuo zhengce [china’s regional economic cooperation policy]. Development research center of the state council, July 22, 2005 accessed on June 21, 2008. Avaliable at . Lu Gang (2002) Quyu jingji yitihua de xinfazhan he zhongguo de duice [Current development and China’s response to integrated regional economy]. In Ma Hong and Wang Mengkui (eds) Zhongguo fazhan yanjiu guowuyuan fazhan yanjiuzhongxin yanjiu baogao xuan [China Development Studies: Selected Research Reports of Development Research Center of the State Council]. Beijing: Zhongguo Fazhan Chubanshe, pp. 471–80.

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Lu Jianhua (2002) Shehui fazhan jincheng buru quanxin de kaifang jieduan [The Brand-New Stage of Opening of Social Progress]. In Lu Xin, Lu Xueyi and Li Peilin (eds) 2002 nian zhongguo shehui xingshi fenxi yu yuce [2002: Analysis and Forecast of China’s Social Situation]. Beijing: Shehui Kexue Wenxian Chubanshe, pp. 1–16. MacIntyre, Andrew (2001) Institutions and Investors: The Politics of the Economic Crisis in Southeast Asia. International Organization, 55(1), pp. 81–122. Milner, Helen V. (1988) Resisting Protectionism: Global Industries and the Politics of International Trade. Princeton, NJ: Princeton University Press. Milner, Helen V. (1997) Interests, Institutions, and Information: Domestic Politics and International Relations. Princeton, NJ: Princeton University Press. Mo Rong (2002) Zhongguo laodongli shichang fazhan yu yuce [Development and forecast of China’s labor market]. In Ma Hong (ed) Zhongguo shichang fazhan baogao [China Market Development Report]. Beijing: Zhongguo Fazhan Chubanshe. Olson, Mancur Jr. (1963) Rapid Growth as a Destabilizing Force. Journal of Economic History, 23, pp. 529–52. Qin Yan (1999) Zhongguo zhongchan jieji [China’s Middle Class], Beijing: Zhongguo Jihua Chubanshe. Rogowski, Ronald (1989) Commerce and Coalitions: How Trade Affects Domestic Political Alignments. Princeton, NJ: Princeton University Press. Shirk, Susan L. (1993) The Political Logic of Economic Reform in China. Berkeley: University of California Press. Shirk, Susan L. (1994) How China Opened its Door: The Political Success of the PRC’s Foreign Trade and Investment Reforms. Washington, DC: The Brookings Institution. Solingen, Etel (2001) Mapping Internationalization: Domestic and Regional Impact. International Studies Quarterly, 45(4) (December), pp. 517–55. Sun Xuegong (2001) Zhongguo diqu fazhan bupingheng yu shehui jingji anquan [China: regional development imbalance and social and economic security]. In Zhang Yunling (ed) Dongya jingji shehui fazhan de wending yu anquan [Stability and Security of East Asian Economic and Social Development]. Beijing: Zhongguo Shehui Kexue Chubanshe, pp. 257–92. Tsebelis, George (1995) Decision Making in Political Systems: Veto Players in Presidentialism, Parliamentalrism, Multicameralism, and Multipartyism. British Journal of Political Science, 25(3), pp. 289–325. Wang Mengkui (ed) (2001) Jingji Quanqiuhua yu zhengfu de zuoyong [Economic Globalization and the Role of Government]. Beijing: Renmin Chubanshe. Wang Shilu and Wang Guoping (1998) Cong dongmeng dao dadongmeng [From ASEAN to Big ASEAN]. Beijing: Shijie Zhishi Chubanshe. Wang Yusheng (2000) Qili APEC yige zhongguo gaoguan de ticha [Personal Experience with APEC: Observation of a Chinese senior official]. Beijing: Shijie Zhishi Chubanshe. Watanabe, Toshio (2004) To¯ajia keizairenkei no jidai [Partnerships for Economic Development in East Asia]. Tokyo: To¯yo¯keizaishinbo¯sha. Wu Xu (2007) Chinese Cyber Nationalism: Evolution, Characteristics, and Implication. Lanham: Lexington Books. Yi Xiaozhun (2007) Chat Room Discussion, Ministry of Commerce site, May 15, 2007, accessed on June 21, 2008, Available from . Zhang Yunling (1998) China and APEC. In Vinod K. Aggarwal and Charles E. Morrison (eds) Asia-Pacific Crossroads: Regime Creation and the Future of APEC. New York: St. Martin’s Press, pp. 213–32. Zhou Qiang and Li Wei (2005) Zhiding zhongguo quyu jingji hezuo zongti zhanlue de sikao [The Overall Development of China’s Regional Economic Cooperation Strategy], accessed on June 21, 2008. Available from .

Chapter 3

The Domestic Politics of Japan’s Regional Foreign Economic Policies Ellis S. Krauss and Megumi Naoi

3.1

Introduction

Japan has been a prime mover of East Asian economic regionalism ever since the late 1980s, albeit not without often fierce domestic resistance at various key junctures.1 Indeed, Japan’s often resistant role in Pacific and Asian regionalism has been bound up with its domestic politics, both intrabureaucratic and intercoalitional politics. In order to fully understand Japan’s changing policies toward regionalism, we need to identify domestic obstacles for further liberalization and how they interact with regional and international environments.2 This chapter has two aims. First, we discuss various domestic actors’ preferences toward regionalism and regionalization, how they changed over time, and the sources of the preference change. Although understanding actors’ preferences is an important first step, it remains insufficient to understand policy outcomes. Thus, we will proceed to discuss shifting domestic coalitions to support versus oppose regionalism and how electoral institutions that aggregate diverse actors’ preferences have shaped the pattern of domestic coalitions for regionalism. Until 2009 when the Democratic Party of Japan took over the majority status, the major actors in these games have been the Liberal Democratic Party and its politicians, the bureaucracy represented especially by the Ministry of Economics, Trade, and

1 2

Noble (forthcoming). Evans et al. (1993).

E.S. Krauss (*) Graduate School of International Relations and Pacific Studies, University of California, San Diego, La Jolla, CA, USA e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_3, # Springer Science+Business Media, LLC 2011

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Industry (METI);3 the Ministry of Foreign Affairs (MOFA); the Ministry of Agriculture, Forestry, and Fisheries (MAFF), and interest groups. This chapter explores Japan’s growing involvement in economic regionalization in the Asia-Pacific and demonstrates that domestic politics was a key determinant of the scope and speed of this regionalization process. We also discuss how the domestic political coalitions that have supported and opposed regionalism have shown substantial shifts due to globalization of production activities and the electoral reform of 1994. For the sake of analysis, we adopt T.J. Pempel’s distinction between “regionalization” and “regionalism.” Regionalization is “the bottom-up process of cross-border cooperation driven primarily by nongovernmental actors . . .” and regionalism is “the top-down process of government-to-government formation of institutions.”4

3.2

Traditional Approaches to East Asian Regionalism

Japanese firms were primary actors in the regionalization of the Asia-Pacific from the earlier postwar period. As early as the 1960s, Japan’s trade with Southeast Asia was equal to that of its trade with the US.5 Trade with and investment in Northeast Asia was far behind, primarily because of the Cold War, and China had a nonmarket economy at that time. Japan’s presence in the region, however, was confined primarily to nongovernmental actors such as firms for two reasons. One was its dependence on the USA for security cooperation and for an export market. The importance of the USA to Japan in both areas meant that both its Foreign Ministry (gaimusho¯) and its trade ministry (MITI; tsu¯sansho¯) placed the highest priority on the “hub and spoke” bilateral security and trade relations with the USA. The second reason was the lingering fear and resentment of Japan in North and Southeast Asia due to its behaviors in World War II and its increasing economic dominance during the postwar recovery. Despite hoping to expand multilateral relationships, Japan’s regionalism was primarily confined prior to the late 1980s to bilateral trade relationships and a few nongovernmental forums and networks. Various bilateral efforts were made to promote, for example, resource-based investment and imports from Southeast Asia to promote heavy industrialization at home.6 Thus, this period witnessed the

3 Prior to 2001, known as the Ministry of International Trade and Industry or MITI; we will refer to the ministry by the name it had at the time the events we describe occurred, thus “MITI” prior to 2001 and “METI” subsequently. 4 Pempel (2005). 5 Pempel (1998). 6 Phongpaichit (1990), Yasutomo (1983), Weinstein (1976).

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coalition between the conservative LDP and big capitalists (“zaikai”) to promote regionalization, but not regionalism. Then Prime Minister Miki proposed a Pacific Free Trade Area (PAFTA), but this was rejected too. In its place the less ambitious and less governmentally-involved PBEC (Pacific Basin Economic Council) of senior business leaders in the Pacific was established in 1967 to reduce trade barriers and encourage the expansion of business relationships, trade, and investment. In 1980, under an initiative of Prime Minister Ohira and Australian Prime Minister Fraser, PECC (Pacific Economic Cooperation Council) was established. Primarily a network of study groups, it has worked to support open regionalization consistent with global trading rules.7 Although these earlier efforts were a distinctly minor counterpoint to the otherwise dominance of bilateral US economic relations, they were not inconsequential, as they paved the way for the more important regional initiatives that were to come after the late 1980s.

3.3

New Regional Strategy in the Post-Cold War Era

In the late 1980s, Japan’s almost exclusive commitment to the bilateral relationship with the USA had gradually changed, and Japan was to lead, along with Australia, in the formation of the new multilateral regionalism that today characterizes the Asia-Pacific (APEC).

3.3.1

The Rise of APEC

By 1988, MITI was searching desperately for a new approach to trade. It had suffered a half-decade of bitter trade friction with the USA and pressure to open its markets. The USA was in what seemed to be a permanent manufacturing structural decline and the Cold War was beginning to wind down. The rise of American economic protectionism and military withdrawal from Asia seemed a possibility for the first time in decades. MITI was initially stuck with the idea of continuing a bilateral approach with the USA and explored the idea of a US-Japan FTA. But the MITI turned down the idea in its fear that the Japan-US FTA could make the US trade imbalance and pressure on Japan worse.8 Instead they began exploring multilateral “burden sharing” arrangements to reduce the Asia-Pacific’s heavy reliance on US markets and security blankets.

7 8

Katzenstein and Shirashi (1997). Krauss (2000).

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As a result, the MITI recommended multilateral cooperation to shift from development based on the US economy to “contribution sharing. . .commensurate with each country’s economic strength.” The approach to implement this should be “multi-level gradually advancing cooperation on a consensus basis,” but avoiding becoming a closed bloc. MITI recommended that this multilateral cooperation should take the form of open and non-legally binding regionalism fostered by a “soft cooperation network through the provision of international symposia and a variety of other forums” with possible cabinet-level participation.9 In short, MITI endorsed multilateral regional cooperation that resembled APEC as it would eventually develop. Proposals for multilateral economic forums in the Asia-Pacific were already being discussed in other capitals as well, such as in Canberra and in Washington. Sandy Kristoff, a State Department and then White House aide was known to be thinking about the possibility of an Asia-Pacific OECD. Thus MITI’s proposal was a seed that was not falling on barren ground. Indeed, Australia and Japan began to implement some form of regional multilateral economic cooperation in the Asia-Pacific.10 Because the Foreign Ministry was sending out less positive signals about such a forum than MITI, confusing Australia, Australia’s Prime Minister Hawke decided to move alone to make the idea public. In January of 1989 in a speech in Seoul, he proposed a multilateral meeting to discuss regional trade issues. The new US Secretary of State and former Treasury Secretary under Reagan, James Baker, in a June 1989 speech in New York publicly supported the idea and thanked both Japan and Australia for their initiative. And thus, in June 1989 in Canberra, the gathering of what was to become the founding meeting of APEC, the first formal regional multilateral institution with full governmental participation ever in the region, was held.11 Japan would take a similar initiative again in the early 1990s to also propose the formation of a regional multilateral security forum in conjunction with the ASEAN +3 meetings. Although ASEAN rejected that proposal, the following year it proposed a similar forum except independent of ASEAN + 3 meetings and this turned into the ASEAN Regional Forum (ARF), the only multilateral regional security consultative organization in the Asia-Pacific.12 Japan also played a significant role in the later development of APEC. For example, in 1995 as host of the Osaka APEC summit meetings it had to come up with a way to concretely implement the previous year’s “Bogor Declaration” that committed developed countries by 2010, and developing countries by 2020, to complete trade liberalization of tariffs and nontariff measures. The freetrader nations led by the USA, however, were pushing for prior commitments that were

9

Krauss (2000). Australia moved more overtly while Japan was behind the scenes to avoid reaction against the proposal because of it being a Japanese initiative. 11 Krauss (2000), Funabashi (1995), Ashizawa (2004), Kikuchi (1997), Ravenhill (2001). 12 Ashizawa (2004). 10

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transparent, enforceable, measurable, and binding to implement Bogor, but the other economies, including Japan, resisted these and were pushing for more voluntary, self-defined, and vaguer measures more in the spirit of APEC’s “voluntarism” and “consensual” founding principles. Japan came up with the Solomon-like solution to “split the baby:” “concerted unilateral action.” “Concerted” to pacify the USA and other “free-traders” with collective action, but “unilateral” to pacify the other nations that wanted to define for themselves, voluntarily, in what sequences, and in line with their own political and economic conditions, how to achieve the Bogor long-range goals. Concretely, this formula was manifested by every country being required to share annually with the others (“concerted”), their own self-generated measures about their objectives for the year, and also report on progress they had made toward achieving their last previously defined aims (“unilateral”). Thus each was subjected to “peer pressure” and feedback to stimulate progress but no hard, enforceable targets or means defined by others. In a less conceptual and more political way, Japan also helped the USA to bring about the Information Technology Agreement (ITA) pushed by the USA at the 1996 APEC meetings in Manila for complete liberalization of all information technology (hardware and software) in the region. When the Ministers’ meeting that preceded the Leader’s meeting came up with a less strong declaration than the USA wanted, President Clinton and Prime Minister Hashimoto together lobbied for a stronger Leader’s Declaration at their meeting which was achieved.13

3.3.2

The “Fall” of APEC

The ITA, however, proved to be the height of Japanese and American cooperation in Asia-Pacific regionalism. American and Japanese conceptions of the purpose of regional institutions were to clash dramatically in two separate seminal events that shaped the future of regionalism in the region. The first was the Early Voluntary Sector Liberalization (EVSL) negotiations. The USA and other “free trader” nations were dissatisfied with the vagueness of both the long-term nature of the Bogor Declaration and the ambiguous “concerted unilateral action” formula for achieving the. So they pushed for a set of sectors to be chosen and liberalized even in advance of the Bogor meeting. This EVSL program was initiated in 1996 but was the centerpiece of 1997 negotiations, with the target for concluding negotiations in Malaysia’s November 1998 Kuala Lumpur meeting. To achieve the aims of this initiative, APEC countries nominated over 60 sectors to be liberalized even before the Bogor target dates, and from these an initial nine were chosen.14 It should be noted that one of Japan’s most preferred nominations, 13 14

Rapkin (2001). Fifteen others were scheduled for a second round later.

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the automobile sector, was not chosen for the first round. However, two sectors that Japan opposed, forestry and fisheries products, were included in the initial nine. This set the stage for an unusually conflictual and dramatic confrontation between Japan and other nations in APEC, particularly the USA.15 The USA saw EVSL as a “balanced” total package in which the participation of larger countries such as Japan in total liberalization in both tariffs and nontariff measures of all the nine sectors was crucial to the success of the venture. It relied on the APEC norm of “peer pressure” of the members to gain the concessions from each necessary, and no more so than in the case of Japan, whose compromise in the primary sectors was needed to allow timber and fisheries-product exporting countries like Thailand and Indonesia to make concessions in some of the other sectors. Japan, on the other hand, relied on the APEC norm of “volunteerism” and thought that it could opt out of these sectors since concessions on them would be anathema to the powerful domestic agricultural interest groups and their specialized influential groups of politicians (zoku) within the ruling Liberal Democratic Party (LDP). Mobilizing fiercely, these agricultural groups, their politician allies, and the MAFF adamantly opposed MITI and the MOFA’s willingness to compromise at least somewhat in one sector. These interests’ fear that any concessions related to the primary sector would only be a prelude to forcing further concessions on the sacrosanct rice sector in the next round of WTO negotiations, combined with the US refusal to compromise on the need for Japan to totally liberalize in all sectors, led the Prime Minister to reject full concessions. No agreement was reached on the EVSL package at the Kuala Lumpur summit and the USA and Japan engaged in an unusual and highly acrimonious public exchange over its failure.16 The USA and Japan were to clash again in the same period over how to respond to the East Asian Financial Crisis. Japan, under pressure from other East Asian countries suffering from the crisis to undertake a leadership role separate and different from the U.S. and IMF’s perceived inflexible and tough conditions for receiving IMF aid, publicly suggested at the September 1997 G7 Finance Minister’s meeting in Hong Kong the establishment of an “Asian Monetary Fund” (AMF) with mostly Japanese funds, to make emergency aid. This proposal, however, made apparently without prior consultations with the USA or IMF, triggered an immediate negative reaction from both, fearful that such an alternative funding agency would undermine the IMF (and obviously, the USA leadership role in it) as well as create “moral hazard” because the conditions for lending would be less severe than the IMF’s. Facing these criticisms and negative reactions, Japan quickly scaled down the initiative and made it a clear and less grandiose supplement to the IMF, with IMF conditionality.17

15

Krauss and Pempel (2004), Rapkin (2001). Krauss and Pempel (2004). 17 Rapkin (2001), Hughes (2000), Altbach (1997). 16

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Its clash with the USA and its scaling back its AMF proposal led to the Chieng Mai initiative and eventually to the establishment of ASEAN + 3, the first East Asian, as opposed to Asia-Pacific, regional forum. The resentment against the USA and IMF over its response to the crisis led other Asian states to want to establish a forum among themselves, excluding the USA and non-Asian participants.18 The consequence of EVSL was to almost undermine APEC’s great original momentum in the area of trade liberalization. After the debacle of EVSL and the clear manifestation of domestic politics in Japan preventing agreement on any major trade liberalization involving agriculture below the WTO level, and the consequent loss of interest in APEC by the USA, APEC has become a backwater in regional trade negotiations. For years thereafter, no major initiative on trade emanated from APEC after EVSL and it concentrated primarily on its other two “pillars:” economic and technical development and trade facilitation. The inadvertent consequences of the AMF proposal and EVSL were thus quite different from Japan’s original orientation toward an Asia-Pacific, rather than an Asian, regionalism.

3.3.3

The Turn Toward FTAs

With the apparent failure of EVSL and also of the WTO Doha round to break through the stalemates of global trade liberalization, the door was now open for a new stage of regional trade agreements, this time not at the regional level but rather through bilateral Free Trade Agreements (FTAs). Here too, Japan was to play a role, if not a leadership one, and shift its emphasis in its regional policies. And once again METI was to be the driving force in this shift, and have to overcome both MOFA’s initial skepticism and the agricultural sector’s resistance. Dissatisfied after EVSL and Doha with the pace of trade liberalization, Singapore took the lead in trying to forge bilateral FTAs and approached Japan. At first METI was reluctant to revert back to bilateralism in its trade policies after its push for regional multilateralism through APEC. But eventually Singapore convinced Japan that if a network of bilateral FTAs could be established in the region, this would facilitate rather than hinder further stages of regional agreements. METI was convinced, but also had to once again overcome MOFA’s reluctance.19 Having finally in the mid-1990s become a fan of regional multilateralism, MOFA too had to overcome its fear of bilateral FTAs’ potential damage to regionalism. When it too came on board and METI entered into negotiations with Singapore over a bilateral FTA, METI’s strategy was to first get an agreement with Singapore for three reasons. First, being an urban city-state, the beˆte noire of agriculture should not be a problem. Second, because Japan was one of only five countries at that time among the top 30 18 19

Webber (2001). Aggarwal and Urata (2006).

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economies in the world that had no bilateral FTA, it needed to quickly negotiate one to set a precedent if other such agreements were to follow. Third, because of the decade-long recession in Japan, METI was eager to stimulate domestic industry to greater competitiveness, particularly in high-tech and finance areas. Lowering trade and human exchange barriers with Singapore, a major hub of high-tech trade in the region in information technology and finance, might accomplish this. Almost unbelievably, METI soon found that agriculture, even with Singapore, could still be an obstacle. In one region of Japan, represented by an influential LDP agricultural policy politician, there were apparently 100 farmers who raised goldfish, and orchids were raised in other parts of Japan. Both these “crops” were export products of Singapore. METI did eventually successfully overcome this problem and in January 2002, Prime Ministers Koizumi of Japan and Goh Chok Tong of Singapore signed the “Japan-Singapore Economic Agreement for a New Age Partnership.” Singapore eliminated all tariffs on Japanese goods, Japan increased its zero tariff items from Singapore from 84% of total value, and in order to conform to the WTO FTA rule that no full sectors could be excluded from an FTA, even a few agricultural and fishing products were included. Overall tariffs on 98% of trade volume would now be eliminated, and access of business personnel would be facilitated to each country. More importantly, Japan and METI now had their precedent for moving forward on other FTAs.20 The same month the Singapore FTA went into effect, Japan entered into negotiations with Mexico for an FTA. Mexico posed a much greater challenge than Singapore because many of its chief export products were agricultural, especially orange juice and citrus fruits, and pork, both of which were major domestic agricultural products in Japan. METI, however, was under great pressure to conclude an FTA with Mexico because Japanese big business, led by the peak association Keidanren (Federation of Economic Organizations), was very concerned about the major problems Japanese manufacturing transplants in Mexico were facing in competing with American manufacturers for the North American market after NAFTA had been implemented, and with European manufacturers after Mexico and the EU signed an FTA. Japanese auto makers were at a particular disadvantage. After hard negotiations, and concessions on agriculture on both sides, but particularly by Mexico, the FTA was concluded. Japan eliminated tariffs on quotas for oranges, chicken and beef, and froze current tariff rates on pork and orange juice; Mexico would eliminate its tariffs on autos in 7 years, steel in 10 years, and give equal treatment with EU companies in government procurement and investment.21 Japan as of 2007 also now has FTAs with Malaysia, the Philippines, Chile, Indonesia, Brunei, and Thailand. It is also currently still in negotiation with, or there have been calls for, FTAs with South Korea, Australia, ASEAN, Northeast Asia,

20 21

Munakata (2001),(2002). Solis (2003).

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and even the USA, among other countries. Indeed, Japan and China are showing signs of “competitive regionalism” in attempts to secure FTAs with ASEAN and Australia. Again, the key to Japan’s successful conclusion of these pending talks will be how Japan handles the question of agricultural trade.

3.3.4

External Sources of Change and Resistance

As we have seen, domestic politics and external change have been woven together to affect Japan’s policy preferences and actions concerning East Asian regionalism. The US trade deficit, apparent structural stagnation, and trade pressures in the 1980s were important stimuli to Japan’s turning toward regional multilateralism and its initiative to found APEC. Fears of US military withdrawal from Asia as a consequence of the end of the Cold War helped to lead to the founding of ARF, again initially on a Japanese initiative. American initiatives in APEC that led to Japanese resistance in the EVSL disaster, along with the East Asian financial crisis, helped create ASEAN + 3, the decline of APEC in Japanese and American trade policy, and the move toward FTAs. The rise of China is helping to promote Japan engaging in FTA competition. None of these external sources of change, however, would have had the effects (positive and negative) that they had were it not for the way they played out in, and interacted with, Japanese domestic politics.

3.4

The Formation of New Regional Strategies: Ideas, Interests, and Domestic Institutions in the Twentieth Century

Several important domestic factors stand out in all this. The first is the leadership role of MITI/METI an the intermediary of new ideas about regionalism in Japan. The second is the importance of intrabureaucratic conflict, at times between MITI/ METI and MOFA, at times between these two more “international” ministries and the MAFF over agricultural concessions. The third is the overwhelming importance of the agriculture issue in shaping Japan’s stance on trade issues, and the conflict between the pro-agriculture coalition and the “international” coalition in shaping its outcomes (The EVSL fiasco the Japan-Singapore and Japan-Mexico FTAs, the difficulties or impossibility of negotiating FTAs with other countries). Nevertheless, there are signs, analyzed as follows, of major changes in domestic politics that may presage a fundamental transformation of these past tendencies.

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3.4.1

E.S. Krauss and M. Naoi

Ideas

The Japanese bureaucracy played a crucial, indeed the major role, in pushing Japan’s initial foray into regionalism, and has continued to perform a key role ever since. Most especially, the METI/MITI has been the driving force at most, and a significant actor and implementer of other actors’ desires at least, for regionalism. From the very beginning, intrabureaucratic resistance from, and conflict with, other ministries, however, has been a continual theme in Japan’s domestic politics of regionalism. Which ministry lined up with or against METI, or how fierce their resistance, has varied across time and depending on the issue. In the most important shifts in Japan’s regional policies, MITI/METI responded to important external changes in the international environment with new ideas and initiatives based on those ideas. The first was in the late 1980s, when in response to perceived US decline and trying to avoid both continued and expanded US trade friction and US potential protectionism, MITI rejected the US-Japan FTA idea in favor of a multilateral forum that eventually led to the establishment of APEC. The second, the shift from regional multilateralism to bilateral FTAs also was led by METI, this time in response to the economic stagnation of Japan, regional and global trade liberalization, and in the case of Mexico, the US FTA with Canada and Mexico (NAFTA). It should be noted that these important shifts in foreign economic policy were shifts in means, not a change in the fundamental goals of Japanese foreign policy.22

3.4.2

Players and Their Interests

Bureaucracy: Each of these shifts that followed new ideas on regionalism led to bureaucratic conflict between METI and MOFA to get these ideas translated into action, and enforced in implementation (EVSL, FTAs), between these ministries and MAFF. The METI-MOFA conflicts were over differences in ideas: METI understanding the changed external circumstances better than MOFA, who in the founding of APEC clung to its disposition toward bilateral US relations and in the shift to FTAs to its recent adherence to regional multilateralism. But they were also differences in interest. MOFA’s jurisdiction and leadership in overall foreign policy led it to perceive METI’s new initiatives, deriving from its jurisdiction over trade, as being both potentially damaging to Japanese foreign policy and also to its own self-interested leadership mission. METI, on the other hand, had an interest in pushing its views and more innovative ideas on trade which was within its purview.

22

Krauss (2003).

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3.4.3

59

Coalitions and Regionalism

As seen above, the main coalitions involved in regionalism and trade policy were the more “international” coalition of METI (after the founding of APEC often joined sometimes belatedly by MOFA), big business, and sometimes the supporting LDP politicians in the “Commerce and Industry” policy tribe versus MAFF, No¯kyo¯ and its mobilized farm groups, and the agricultural policy tribe of the LDP.

3.5

3.5.1

Domestic Change and Regional Strategies: Ideas, Interests, and Domestic Institutions in the Twenty-First Century The Changed Institutional Setting

All the above institutional context factors that structure the domestic politics of regionalism have changed and are continuing to change. In 1994 an electoral reform bill was passed that changed Japan’s Single Non Transferable Vote (SNTV) electoral system to a Mixed Member Majoritarian (MMM) system, a hybrid of 300 Single Member District (SMD) seats and 180 Proportional Representation (PR) seats. Although the reform did not completely eliminate the personal vote,23 it has fundamentally changed the political institutional context in which domestic politics takes place. First, because of incentives in the SMD system for smaller parties to merge, it has given rise to one major opposition party, the Democratic Party of Japan (DPJ), which is a moderate center to center-left party that can be competitive with the LDP, the first time the LDP has faced this kind of opposition challenge since its formation in 1955. In 2009, the DPJ finally took power for the first time. Second, because of the single representative per district, representatives have to respond to a wider diversity of constituents and interest groups than previously.24 And collective interest should also therefore get greater attention than the parochial interests of parts of districts as under the SNTV system. Indeed, a recent analysis has demonstrated that the electoral reform changed the dynamics of interest group lobbying, with interest groups more likely after reform to go to more centralized than local avenues to try to influence the ruling party and government.25 The reform also reduced malapportionment to approximately a 2:1 rural advantage, down from the prereform by about a third. This should have reduced the overwhelming advantage of the rural and farm lobbies within the party and government. 23

Krauss and Pekkanen (2008). Krauss and Pekkanen (2004). 25 Naoi and Krauss (2009). 24

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Changing the electoral system also raised the salience of policy issues in elections. Whereas previously candidates could easily win election by their mobilized networks and delivering pork barrel to their key constituencies, since the reform there has been an increase in the salience of policy issues in elections. Indeed, in the 2005 general election for the Lower House Prime Minister Koizumi used the issue of postal savings and services privatization to score an overwhelming victory for the LDP in that election, especially by appealing to the urban “floating voters” who previously tended to vote for the DPJ.26 This victory also changed the composition of the LDP from a party with more representatives from rural than urban districts to one more balanced. Two years later, however, in the Upper House election, the normally urbanbased DPJ used other kinds of policy issues – the farm subsidies program that the government was implementing to replace price supports in order to rationalize agriculture, the growing income disparity between urban and rural areas, and a string of scandals involving cabinet ministers – to score a major victory based in gains in the rural districts and to allow the opposition parties to gain a majority in the Upper House. Both parties now seem to be achieving a closer balance between urban and rural constituency bases. The second major institutional change occurring is in the role and influence of the prime minister. The advent of television, the new electoral reform whose SMD districts made representatives more depending on the party and party leader’s image to win re-election, and a 2001 administration reform which explicitly increased the policymaking resources available to the prime minister and cabinet at the expense of the bureaucracy and the LDP policy tribes, have all made the prime minister a much more influential actor in Japanese politics. This too has partially made the policymaking process more “top down” than it used to be and also increased the ability of the prime minister, should he so choose, to coordinate bureaucratic and policy tribe conflicts.

3.5.2

Public’s Attitudes Toward Trade

The existing literature has tended to study how bureaucracy, politicians, and organized interests interact to shape trade policy in Japan and the United States.27 As a result, the role of voters (i.e., public) is generally missing from the literature. This section will discuss what determines voters’ attitudes toward free trade using International Social Survey Program’s public opinion survey conducted in 2003 when Prime Minister Koizumi’s initiatives for FTA negotiations were at peak. We use the following two questionnaires to get at voters’ attitudes toward free trade.

26 27

Krauss and Pekkanen (2008). Bauer et al. (1963), Johnson (1982), Uriu (1996), Pekkanen (2001), Naoi (2009).

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Table 3.1 Japan should limit the import of foreign products in order to protect its national economy (A survey done by ISSP, 2003) Freq. Percent Cum. Agree strongly 196 19.14 19.14 Agree 222 21.68 40.82 Neither agree nor disagree 315 30.76 71.58 Disagree 114 11.13 82.71 Disagree strongly 177 17.29 100.00 Total 1,024 100.00

Table 3.2 Free trade leads to better products becoming available in Japan (A survey done by ISSP, 2003) Freq. Percent Cum. Agree strongly 344 34.61 34.61 Agree 405 40.74 75.35 Neither agree nor disagree 171 17.20 92.56 Disagree 41 4.12 96.68 Disagree strongly 33 3.32 100.00 Total 994 100.00

Q1: Japan should limit the import of foreign products in order to protect its national economy. 1. Agree strongly, 2. Agree, 3. Neither agree nor disagree, 4. Disagree, 5. Disagree strongly, 8. Can’t choose, 9. No answer, refused Q2: Free trade leads to better products becoming available in Japan. 1. Agree strongly, 2. Agree, 3. Neither agree nor disagree, 4. Disagree, 5. Disagree strongly, 8. Can’t choose, 9. No answer, refused Tables 3.1 and 3.2 show distribution of responses across the five-scale responses. Together, they show how ambivalent respondents are regarding their attitudes toward free trade. For the first questionnaire regarding their attitudes toward limiting foreign imports to “protect national economy,” around 60% of respondents agree with the statement, while for the second questionnaire, 75% of respondents agree that free trade increases availability of better products in the Japanese market. This suggests the ambivalence that voters have regarding how they should assess their attitudes toward trade as producers (i.e., their job security – how they earn money) or as consumers (i.e., how they spend money).28 The ordered logit analysis finds the major shift in who support and oppose free trade since the previous survey done in 1995. First, whether a respondent lives in urban or rural areas does not have systematic effects on their attitudes toward free trade. The results are robust even after controlling for demographic and occupational 28

Naoi (20).

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characteristics of respondents and to using different coding of “urban versus ruralness.” This contradicts the belief that urban consumers are free traders and rural residents are protectionist. We find the lack of urban–rural cleavage in the public’s attitudes toward trade even when we examine the second questionnaire, which asks explicitly about their opinion about the effect of trade on their consumption. We find that the LDP supporters have more protectionist attitudes toward trade than non-LDP supporters, yet the DPJ support does not have any systematic effects on their attitudes toward trade. Occupations of respondents coded along ILO’s four digit occupational categories do not prove to have any systematic effects except for agriculture and fishery workers who are protectionist. Surprisingly, low-income or low-skilled workers do not differ systematically with high-income or high-skilled workers in their attitudes toward free trade, which contradicts some of the findings in the literature on the USA or Western Europe. Some of the demographic variables have the expected effects.29 Highly educated respondents are more likely to support free trade, and male respondents are more likely to support free trade than female respondents. Older citizens tend to be more protectionist than younger respondents. Next section will turn to politicians and political parties’ positions on FTAs and asks how the lack of urban-rural divide in public’s opinion maps onto party positions on trade policy.

3.5.3

Organized Interests: The Limit of Sector-Based Explanation

While the public opinion survey conducted in 2003 suggests that agricultural and fishery workers are more protectionist than others, the sector-based explanation for trade politics a la Ricardo-Viner models remains insufficient as there are emerging divides within agricultural and manufacturing sectors in their positions toward FTAs. For the agricultural sector, the cleavage has emerged between international versus domestic-oriented agricultural industry and for the manufacturing sector, the divide has emerged between large versus small and medium-size firms. Simply viewing the politics of FTAs as the battles between the manufacturing sector advocating for free trade and the agricultural sector pushing for protectionism is thus insufficient, because such divide within sectors has weakened the power of agricultural interests in blocking the government’s initiatives toward freer trade.

3.5.3.1

Divide Within Agriculture: International Versus Domestic Agricultural Politicians

Although the LDP’s agricultural politicians (nourin-zoku) have long been monolithically considered protectionist, a divide emerged between domestic versus 29

Scheve and Slaughter (2004).

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internationally-oriented politicians during the 1980s. The domestically-oriented group (kokunai nouseiha/betoconha) advocates for protection and the internationally-oriented group (kokusai nouseiha or sougou noseiha) advocates for free trade and export promotion of Japanese agricultural products. While the protectionist force was dominant during the 1980s, the 1990s witnessed that the power gradually shifted toward the international group for several reasons. First, generationally, domestically-oriented politicians were more senior than the international group and thus the retirement and death of major figures shifted the power balance toward the international group. Second, fast food and processed food industries have rapidly grown to be powerful new constituencies for some of the LDP politicians via financial contribution. Third, the changed institutional context from the multimember district to a mixed electoral system described above has also changed the balance among these politicians.

3.5.3.2

New Constituencies: The Power of Fast Food and Food Processing Industries

The total domestic sales of the fast food and food processing industries have tripled since 1975 to around 30 trillion yen in 2005. Its domestic sales values have exceeded that of the automobile industry since the early 1980s. The size of employment in the sector has grown rapidly to seven million in the early 1980s. Peak organizations such as Japan Food Service Association have actively lobbied the government for freer trade and migration of foreign-national workers.30 While the industry remains weak as a vote organizing organ due to the fact that 90% of the work force is part-time workers,31 the food industry has been a substantial source of political donations to the LDP. Responding to the growing influence of food industries, the LDP’s agricultural politicians have become advocates for food industry and freer trade. The LDP, for instance, has established MP Federation of Promotion of Food Industries (Shokuhin sangyo shinkou giin renmei). The power shift to the international group was evident when Tsutomu Hata – a LDP agricultural politician who was vocal about protecting food industry’s interests – became a Minister of Agriculture in 1988. During Japan’s negotiation with the USA to restart the beef import after the mad cow crisis, the power shift toward protecting food industries’ interests over domestic producers has become clearer. The Agricultural Minister, Yoshinobu Shimamura, who was the head of LDP’s Federation of Promotion of Food Industries, was criticized by the opposition parties in the Diet as a “sellout” to fast food chains. Japan-Mexico FTA negotiations regarding pork illustrate how this divide within the agricultural sector has led to the liberalization of pork. While domestic pork farmers organized under the Association of Pork Farmers lobbied the government 30 31

Japan Food Service Association (2007). Japan Food Service Association (2005).

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to oppose the FTA, Fast-food Chain Association lobbied for liberalization. The fast food industry’s interest in liberalizing pork was particularly strong due to the need to substitute beef with pork under the mad cow crisis. The LDP responded to the latter interests by liberalizing pork.

3.5.3.3

Divide Within Export-Oriented Manufacturing Industry: Large Versus Small-Medium Size Firms

Although the export-oriented manufacturing interests were supportive of FTAs, there were different levels of interests between large versus small-medium size firms. This is because FTAs did not simply lower the trade barriers but at the same time increased the legal and administrative costs of export. For instance, in order for exporting firms to be qualified for preferential tariff rates agreed under a FTA, firms must declare the country of origin for all the stages of production involved for a given commodity. The obligation to declare the country of origin has disproportionately burdened small-medium size firms that do not have sufficient legal staffs or knowledge to file such documentation.32 JETRO’s firm-level survey conducted in 2007 illustrates this difference. Among 900 exporting firms surveyed, only 13.3% (97 firms) are currently using or planning to use the preferential tariff rates of FTAs in Asia-Pacific region, while 42.7% of firms are not using or not planning to use the preferential tariff rates. 34.2% of the respondents do not know the answer to this question. The larger the firm sizes are, the stronger interests firms have in using preferential tariff rates. Among 97 firms that are currently using or planning to use the preferential tariff rates of FTAs, 27.8% say the administrative procedure to declare a country of origin is cumbersome and have increased the administrative costs for the firm.33 Indeed, among 3,000 Japanese firms that operate in Singapore, only six firms use preferential tariff rates agreed under the Japan-Singapore FTAs.

3.5.3.4

Political Parties and Politicians

How do diverging voters’ and economic interests toward free trade map onto political parties’ and politicians’ positions toward regionalization? The survey of MP candidates done by Mainichi Daily before the 2003 Lower House election suggests that 22% of the candidates agreed with the statement that the Japanese government should aggressively promote FTAs between Japan and Southeast Asian states, while 70% agreed that the government should pursue FTAs as long as then do not harm the agricultural sector; 31% of candidates who ran from large

32 33

JETRO (2007). JETRO (2007).

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metropolitan areas took a position to “aggressively promote FTAs,” while only 14% of candidates who ran from rural areas did so. Yet, a close examination of parties’ and politicians’ behaviors observed via policy outcomes and committee affiliations reveals a sea change in the relationship among political parties, agricultural interest groups, and voters since then. The emergence of the LDP versus DPJ’s two-party competition in Japan has contributed to this sea change as we discuss in detail below.

3.5.3.5

2007 Upper House Election: Free Trade LDP Versus Protectionist DPJ

While the LDP has been depicted as protectionist, pro-rural party for decades, this view has been constructed by scholars and media who paid attention to what the LDP stood for and how it behaved, not by systematically examining whether the LDP’s positions and behaviors were more protectionist compared to its opposition parties. The emergence of two-party competition in Japan under the new electoral system and the public and media’s attention to Party Manifestos allows us to investigate exactly that: whether the LDP or DPJ is more protectionist regarding its trade and agricultural policy. In 2007, the LDP shifted its rice policy from protecting all the rice farmers to protecting and growing only large-size rice farms, consequently leaving the smallsize farmers behind the reform. The policy was aimed to ensure the economy of scale and increased efficiency for rice production. The LDP also organized the Diet Member Association for Export Promotion of Agricultural Products, which counted 106 LDP Diet members among its members in 2007. The change illustrates the shifting balance within the LDP to represent larger farmers and more internationalized agribusiness sectors (kokusai nousei ha) rather than domestic producers. Yet, the timing of introducing this policy coincided with the Upper House election in July 2007. The DPJ, the major opposition party, announced in the party manifesto prepared for this election to (1) stop the production adjustment for rice farmers;34 (2) distribute income compensation package for all the farmers, including the small-size famers; (3) ensure fully self-sufficient food production in Japan; and (4) all the food produce to state the product of origin.35 The DPJ, who

34

Production adjustment system (seisan chosei) was a policy that instituted in 1970 by the LDP government to deal with over-production and declining price of rice. With government’s subsidies, the policy incentivized rice farmers to switch from producing rice to something else such as soy beans and animal feed. 35 Asahi Shimbun, June 27, 2007; Masayuki, Naoshima (2008) “On the rejection of Agricultural Household Income Compensation Legislation,” Available from: (last accessed March 2, 2010). Democratic Party of Japan (DPJ) (2007) “Party Manifesto,” Available from: (last accessed March 1, 2010).

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generally thrived on support from urban voters, has won an unprecedented proportion of rural votes partly due to their new agricultural policy favoring small farmers. In such an electoral environment with two-party competition, the LDP, who still kept the majority status in the Lower House, faced the need to converge toward the DPJ’s protectionist agricultural policy. Between October to December of 2007, the LDP initiated a series of “emergency” protectionist legislations (kinkyu taisaku) in the Lower House in its effort to win back agricultural votes: (1) the government’s purchase of surplus rice from farmers, (2) expansion of the scope of rice production adjustment with supplementary budget, and (3) more aggressive involvement of national and local governments to the production adjustment process. These policies were a more protectionist set-back from the LDP’s agricultural policy announced before the Upper House election of 2007 that aimed to increase efficiency and scale economy. In sum, contrary to the popular view that the two-party system is desirable for more policy debates and increased accountability, the pattern of two-party competition observed in the 2007 UH election has thus far appeared to generate more protectionist and populist policy competition to mobilize votes from inefficient sectors. The 2007 election also begs another question, which is whether the DPJ would continue to advocate for protectionist policy for farmers even after it wins a majority status in the Lower House. The 2009 election provides an opportunity to explore this question. 3.5.3.6

2009 Lower House Election: Japan-US FTA and Manifesto “Back and Forth”

Since the 2007 Upper House election has proved that farmers are highly-organized swing voters for the LDP and the DPJ, agricultural protection continued to be one of the key policy issues during the 2009 Lower House election. This time, the DPJ proposed two agricultural policies in the initial Party Menifesto released on July 27, 2009: direct income compensation for agricultural household and promotion of Japan-USA Free Trade Agreement. The two policies appear to be at odds with one another because the former will benefit farm interests (direct income compensation) and the latter will harm them (Japan-US FTA). The idea, however, is to package the two policies to promote tariff reduction of agricultural commodities with safety-net subsidies for farmers. Political economists have indeed shown that direct income compensation is a more efficient policy instrument than tariff protection for importinjured industries.36 Yet, the DPJ faced strong opposition from farmers and the Agricultural Cooperative (Nokyo) and needed to modify the wording in the Manifesto from “concluding” (‘teiketsu’) to “promote negotiation” (‘koushou wo sokushin’) of a Japan-US FTA once it achieves ruling party status.37 36

Bhagwati (2004), Baldwin (1969), Dixit and Londregan (1995), Naoi (2009). Nikkei Shimbun, August 8, 2009; Nikkei Shimbun, August 12, 2009; Nikkei Shimbun, August 25, 2009. 37

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The 2009 Lower House election also saw unprecedented rural support for the DPJ. The LDP had never won much less than 80% of seats in the 100 (out of 300) most rural Single-Member districts even under the electoral reform of 1994, and the DPJ won no more than 20%. Yet in the 2009 election, the DPJ obtained more than 70% of these rural seats, and the LDP won less than 30%. These shifts are surprising given our conventional understanding of Japanese agricultural politics that link LDP politicians with rural voters.

3.6

Conclusion

Japan’s shift toward regionalism, based on its prior trade and FDI regionalization, began in the late 1980s and continued into the 1990s as a bureaucracy-led (i.e., METI) attempt to solve the problems of Japan’s international position at that time – high dependence on the US market, which made Japan vulnerable to trade pressures for liberalization, a lack of political legitimation toward playing a leadership role in Asia because of Japan’s wartime behavior, and its own huge economic investment in the region and in free trade that made fears of US protectionism and withdrawal from Asia extremely salient. With the changing international context in the 1990s – the rise of China, the East Asian financial crisis, the EVSL conflict with the USA that helped undermine APEC, a stagnant global and regional free trade regime – Japan once again shifted its regional policies, this time toward FTAs. All of these changes in policy, however, were based upon, made possible, and contextualized by a particular set of domestic institutions and political coalitions and patterns of influence: an influential bureaucracy particularly in the trade area, METI, pushing for new more regionally based policies that had to limit these or attempt to overcome the power of agricultural interests originally predicated on their political power and networks based on the SNTV electoral system. The late 1990s and the early 2000s, as we’ve demonstrated, are a major transition time for the domestic politics of regionalism. Institutional changes, and divides within and between the interest groups and political parties that made up formally solid coalitions on one side or the other of regionalization, particularly in agriculture, promise a much more complicated domestic politics in the future. Both major political parties now contain some of these urban-rural, international-domestic industry divides within themselves rather than between them. The agricultural lobby is divided between international exporting and domestic protectionism, as industry is divided between the interests of small and medium enterprise versus big multinational business. The DPJ’s agricultural policy thus far seems more oriented toward treating all farmers equally and gaining rural votes rather than rationalizing agriculture. This is a policy that will not only prove exceptionally expensive to continue to implement but also make it difficult to promote efficiency and rationalize agriculture. If the DPJ’s agricultural policies in the future becomes more sophisticated and willing to place greater emphasis on rationalization even if it means losing some of the rural

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vote, Japan may be more able to make the kind of concessions in regional and global trade talks necessary for it once more to become a major player in regionalism and regionalization. The very predictable patterns of the domestic politics of regionalism in Japan are giving way to more unpredictable vagaries with less clear and structured coalitions. On balance, however, these changes hold out at least the promise of a Japan more able to make concessions in agriculture in order to advance regionalism in the future.

References Aggarwal, Vinod K. and Shujiro Urata (eds) (2006) Bilateral Trade Agreements in the AsiaPacific. London: Routledge. Altbach, Eric (1997) “The Asian Monetary Fund Proposal: A Case Study of Japanese Regional Leadership.” JEI Report, 47a (December), pp. 1–20. Ashizawa, Kuniko (2004) “Japan, the U.S. and multilateral institution-building in the Asia-Pacific: APEC and ARF.” In Krauss Ellis S. and T.J. Pempel (eds) Beyond Bilateralism: U.S.-Japan Relations in the New Asia-Pacific. Stanford: Stanford University Press. Baldwin, Robert E. (1969) “The Case Against Infant-Industry Tariff Protection.” Journal of Political Economy, 77, pp. 295–305. Bauer, R. I. de Sola Pool, and L. Anthony Dexter (1963) American Business and Public Policy. Chicago: Aldine. Bhagwati, Jagdish (2004) In Defense of Globalization. New York: Oxford University Press. Dixit, Avinash and John Londregan (1995) “Redistributive Politics and Economic Efficiency.” American Political Science Review, 89(4), pp. 856–866. Evans, Peter et al. (ed) (1993) Double-Edged Diplomacy: International Bargaining and Domestic Politics. Berkeley, CA: University of California Press. Funabashi, Yoichi (1995) Asia Pacific Fusion: Japan’s Role in APEC. Washington, DC: Institute of International Economics. Hughes, Christopher W. (2000) “Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet Victory?” Review of International Political Economy, 7(2), pp. 219–53. Johnson, Chalmer (1982) MITI and the Japanese Model. Stanford, CA: Stanford University Press. Katzenstein, P.J. and T. Shirashi (eds) (1997) Network Power: Japan and Asia. Ithaca, NY: Cornell University Press. Kikuchi, T. (1997) “Ajia Taiheiyo¯ Chiikushugi no Mekanizumu to Procesu-APEC/ARF o Chu¯shin Ni.” Kikan Kokusai Seiji 114, pp. 178–182. Krauss, E.S. (2000) “Japan, the U.S. and the Emergence of Multilateralism in Asia.” The Pacific Review, 13(3), pp. 473–494. Krauss, E.S. (2003) “The U.S., Japan, and Trade Policy: From Bilateralism to Regional Multilateralism Regionalism.” The Pacific Review, 16(3), pp. 309–31. Krauss, Ellis S. and Megumi Naoi (2007) “Who Lobbies Whom; Electral Systems and Organized Interests’ Choice of Bureaucrats Vs. Politicians in Japan.” In Paper Prepared for Delivery at the conference on “Modeling Power Relationships in Japanese Democracy.” University of British Columbia. Krauss, E.S. and R. Pekkanen (2004) “Explaining Party Adaptation to Electoral Reform: The Discreet Charm of the LDP?” Journal of Japanese Studies, 30(1), p. 25. Krauss, E.S. and R. Pekkanen (2008) “Reforming the LDP.” In Sherry L. Martin and Gill Steel (ed) Assessing the Impact of Reform in Japan. Boulder, CO: Lynne Reiner Publishers, pp. 19–33. Krauss, E.S. and T.J. Pempel (eds) (2004) Beyond Bilateralism: U.S.-Japan Relations in the New Asia-Pacific. Stanford, CA: Stanford University Press.

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Munakata, N. (2001) “Evolution of Japan’s Policy Toward Economic Integration.” Washington, DC: The Brookings Institution. Munakata, N. (2002) “Whither East Asian Economic Integration.” Research Institute for Economics Trade and Industry Discussion Paper Series 02-E-007 (June). Naoi, M. (2010) Why low Income citizens are protectionist consumers: A Research Note on JGSS2008 survey, march 2010, JGSS Research series, No. 7. Naoi, M. (2009) “Shopping for Protection: The Politics of Choosing Trade Instruments in a Partially Legalized World.” International Studies Quarterly, 53(2), pp. 421–444. Noble, G.W. (2008) “Review Essay: Japanese and American perspectives on Regionalism in East Asia.” International Relations of the Asia-Pacific 8:2, pp. 247–262. Pekkanen, R. (2001) “Japan’s New Politics: the Case of the NPO Law.” Journal of Japanese Studies, 26(1), pp. 126–127. Pempel, T.J. (1998) Regime Shift: Comparative Dynamics of the Japanese Political Economy. Ithaca, NY: Cornell University Press. Pempel, T.J. (ed) (2005) Remapping East Asia: The Construction of a Region. Ithaca, NY: Cornell University Press. Phongpaichit, P. (1990) The New Wave of Japanese Investment in ASEAN. Singapore: ASEAN Economic Research Unit, Institute of Southeast Asian Studies, pp. 30. Rapkin, D.P. (2001) “The United States, Japan, and the Power to Block: The APEC and AMF Cases.” Pacific Review, 14(3), pp. 382–402. Ravenhill, J. (2001) Asia Pacific Economic Cooperation: The Construction of Pacific Rim Regionalism. New York: Cambridge University Press. Scheve, K.F. and M.J. Slaughter (2004) “Public Opinion, International Economic Integration, and the Welfare State.” In Pranab Bardhan (ed) Globalization and Egalitarian Redistribution. Princeton, NJ: Princeton University Press. Solis, M. (2003) “Japan’s New Regionalism: The Politics of Free Trade Talks with Mexico.” Journal of East Asian Studies, 3, pp. 377–404. Uriu, R. (1996) Troubled Industries: Confronting Economic Challenge in Japan. Ithaca, NY: Cornell University Press. Webber, D.T. (2001) “Two Funerals and a Wedding? The Ups and Downs of Regionalism in East Asia and the Asia-Pacific after the Asian Crisis.” Pacific Review, 14(3), pp. 356–359. Weinstein, F.B. (1976) “Multinational Corporations and the Third World: the Case of Japan and Southeast Asia.” International Organization, 30, pp. 373–404. Yasutomo, D.T. (1983) Japan and the Asian Development Bank. New York: Columbia University Press.

Chapter 4

South Korea’s Political Dynamics of Regionalism: A Comparative Study of Korea-Japan FTA and Korea-U.S. FTA Sang-young Rhyu

4.1

Introduction

South Korea has recently attracted wide attention from the world since it attempted to generate a new regional scheme after the Asian crisis. South Korea (although in vain) started the negotiation of a free trade agreement with Japan in 1998 and nearly concluded its negotiation of an FTA with the USA very rapidly and abruptly in 2007. This new regional strategy of Korea ignited the bandwagon trend of regionalism, giving birth to a new regional security and economy order in East Asia. It invited various studies and much debate about the causes, processes, and consequences of East Asian regionalism, which can be categorized as regional or transregional, bilateral or minilateral, and geographically concentrated or dispersed. Despite the visibility of the South Korea case, in-depth analysis is about to begin of the many issues pertaining to the political economy of South Korean regionalism. More ink has been poured into answering the question of why regionalism in East Asia is weak and less institutionalized, sharply comparable to that of Europe and America. What makes East Asian regionalism inclusive and under-institutionalized? Numerous works emphasize the following diverse backgrounds. The U.S. has built bilateral alliances in Asia using a hub-and-spokes system. It is characterized by the predominant power of an informal network and Asian cultural distinctiveness relying upon informality, lack of East Asian identity, and a weak shared vision of a community among Asians themselves. Divergences of political regimes also play a role: from capitalism to communism, and abuses of nationalism by relating political regimes among Japan, China, and South Korea. There is a lack of a security community and its trade externality, a lack of regional leadership or a rivalry for regional leadership between disputed leaders like Japan and China. Some states’

S.-y. Rhyu Yonsei University, Seoul, South Korea e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_4, # Springer Science+Business Media, LLC 2011

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obsession with forming a one-set economy by a regional industrial hegemon (Japan) from the flying geese model also acts as a hinderence. Finally, the fear of small states (ASEAN countries) against regional institutionalization, and divergent interests of ruling groups among related nations is another road block. In sum, some analysts highlight international factors, while others focus on the effects of domestic political and economic factors.1 What factors have shaped and defined the regional strategy of South Korea? What facilitates and hampers the policy trend toward regionalism in Korea? The influences of domestic politics and its institutions on foreign policy and regionalism have been widely argued in many case studies.2 Along with the above factors examined in East Asian regionalism, many factors or actors have been highlighted as determining variables, especially on the political economic processes of the FTA that Korea has pursued. External pressure, and economic and political imperatives in the wake of an economic crisis made the political leadership of South Korea choose regionalism as a strategic political policy as well as a strategic trade policy. The Kim Dae-jung government used the Asian crisis, and the emerging idea of East Asian regionalism, to implement a extensive economic reform project very effectively, through which President Kim Dae-jung, from the minority coalition, built and strengthened its new ruling coalition.3 In every negotiation over FTAs with Korea, veto groups such as farmers, laborers, and Chaebols (large conglomerates in Korea) have emerged as major targets to be analyzed. Nationalism firmly stands as the toughest obstacle to overcome in order to finalize the currently staggering Korea-Japan FTA negotiation.4 The industrial structure or industrial division of labor between the concerned nations, whether it is complementary or competitive, will significantly influence the outcome of FTA negotiations.5 However, many issues remain untouched in the case of South Korea. This study addresses various domestic political factors in explaining the process and shape of South Korea’s regional and transregional agreements. What factors are driving a punctuated trend of bilateral and minilateral regionalism in Korea since the Asian crisis? What facilitates regionalism and resists regionalism pressure in Korea? How and through what decision-making process has Korean regional strategy been formulated in the domestic arena? This chapter aims to shed new light on the dynamic relations between external pressures and domestic politics. Existing studies tend to emphasize specifically either the external or internal factors. External pressure takes different form and substance depending on the hegemon’s interests in the area in both security and trade. Domestic politics can be reduced into the real political desire to build a ruling coalition and affect policy through economic institutions. How a (would-be) hegemon can influence domestic politics

1

Hammer and Katzenstein (2002), p. 577; Moon and Suh (2007); Ravenhill (2007); Grieco (1997). Mansfield and Milner (1997), p. 603. 3 Moravcsik (1998). 4 Moon and Suh (2007). 5 Lee (2006). 2

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such that its policy ideas and its domestic institutions succesfully merge needs to be identified. This chapter addresses these themes with specific reference to two negotiations, the Korea-Japan FTA and Korea-U.S. FTA. Why has the Korea-Japan FTA been protracted for so long? And why has the Korea-U.S. FTA proceeded so rapidly? What factors make the difference? The study also examines the competitive policy ideas between multilateralism and regionalism (bilateral or minilateral) in South Korea. The different processes and outcomes of the two FTA negotiations will be unraveled by focusing on the shifting mix of policy ideas and domestic institutions after the economic crisis in South Korea.

4.2

U.S.-Centered Transregional Multilateralism Before the Asian Crisis

Since the Cold War, Korea’s foreign policy has continued to depend on multilateralism centered on the U.S. This tradition has started to change since the end of the Asian financial crisis. The post-Cold War phenomenon, which began in the European Continent in the late 1990s, has not brought about as much change to Korea. The Korean Peninsula remains the last vestige of the Cold War, and multilateralism centered on the U.S. is the biggest factor that determines Korea’s foreign policy in security and trade. Since the conclusion of the San Francisco Peace Treaty in 1951, the U.S. has provided market access to Northeast Asian countries and included them in its market networks. On the other hand, it has built a security order through the “hub-and-spokes bilateral security strategy” and maintained the status as a hegemon. As argued by realist scholars, “the main U.S. interests were served well by forming a set of bilateral alliance in Asia.”6 As a result, however, this has prevented the possibility of the creation of a formal institution for regionalism within Northeast Asia.7 The U.S. has applied the equivalent strategy to Korea. South Korea has maintained a security strategy based on the transregional bilateralism with the U.S. During the Cold War period, the KOREA-U.S. alliance, along with the Japan-U.S alliance, had been a bilateral institution to establish an anti-communist bulwark against the communist alliance between the former U.S.S. R-China-North Korea.8 The circumstances changed a bit after the establishment of diplomatic ties between Korea and the U.S.S.R. in 1990 and between Korea and China. However, the basic strategy has remained intact. Following its security bilateralism with the U.S., South Korea has participated in multilateral institutions that have developed in Asia, such as APEC (Asia Pacific Economic Cooperation) 6

Hammer and Katzenstein (2002), p. 577. Aggarwal and Koo (2007), p. 360. 8 Cumings (1987). 7

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and the ARF (ASEAN Regional Forum). ASEM (Asia-Europe Meeting) is the sole case where South Korea has joined without the U.S. However, given that ASEM is a multilateral organization that is exclusive by continent from the beginning, South Korea’s individual participation in that body does not bear any special significance. South Korea and the U.S. participated in the establishment process of the ARF, which was established in 1994, as ASEAN Dialogue Partners.9 For APEC, established in 1989, South Korea and the U.S. are the main member countries. With China becoming a member country in 1991, APEC changed from a multilateral organization that dealt with issues of the Cold War era, to a consultation body that simultaneously covered economic and military issues of the region. During the Cold War period, South Korea adopted foreign economic policies within the transregional multilateral framework—IMF, IBRD, GATT-WTO—that was led by the U.S. KOREA-U.S. trade relations were the basic foundation that strengthened the security of South Korea and Northeast Asia. It was also supplemented by close economic relations between the U.S. and Japan. Both South Korea and Japan could accomplish foreign economic goals by establishing bilateral relations with the U.S. and participating in multilateral organizations under the influence of the U.S. In addition, an apparent technological gap and vertical division of labor between South Korea and Japan played a complementary role between the two countries, rather than instituting competition and substitution.10 As a result, a market network without a formal institution could be maintained for a long time. Under these circumstances, South Korea and Japan were able to maintain the friendly competition that was mutually beneficial, without the need for the creation of an official economic regionalism or institution. In other words, South Korea did not feel any difficulty or restraints due to the absence of a formal institution in the region. Neither South Korea nor Japan felt the need for a trade-creating institution or a trade-diverting institution during the Cold War period.11 Even today, South Korea has sided with APEC, which has strengthened the multilateral trade system, and maintained its preference for the multilateralist tradition of the WTO’s new rounds. This indicates the existence of a stable convergence between security interests and economy interests of South Korea under the mixed environment of U.S. bilateralism and multilateralism during the Cold War period. In conclusion, the U.S. played the role of the provider of last resort in the areas of security and the economy. The U.S. hegemony is the reason behind the absence of NATO and the EU in East Asia and South Korea.12

9

Kwon (2002). Rhyu and Lee (2006). 11 Mansfield and Milner (1999), p. 600. 12 Acharya (2007), p. 375. 10

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4.3

75

A New Wave Toward East Asian Regionalism After the Asian Crisis

The Asian financial crisis put decisive momentum behind the emergence of regionalism-based policy ideas and the establishment of economic institutions. Widely spread among policymakers in South Korea was the idea that South Korea could overcome the crisis soon and prevent the recurrence of a similar economic crisis, as well as the idea that the sustainable development of the economy could only be activated through minilateral and bilateral regionalism in Northeast Asia, rather than depending solely on the multilateralism led by the U.S. Accordingly, institutional changes were implemented to carry out these policy ideas. Above all, enormous changes were made to the military and trade environment surrounding South Korea in the few years after the economic crisis.13 As seen in Table 4.1, Japan became South Korea’s largest trade partner in 2001. In 2004, China became Korea’s biggest trade partner. In 2006, when it comes to trade volume, the E.U. was the second largest trade partner and the U.S. descended into fourth place after Japan. This demonstrates that a trade structure led by the U.S. before the Asian financial crisis has evolved and shifted to a structure led by China and Japan, the two powers in Asia. In the meantime, there were considerable changes to the security order that the U.S. had maintained on the Korean Peninsula and in Northeast Asia since the Cold War as a result of the inter-Korean summit in 2000. Debates on the transfer of wartime operational control of Korean troops, advancement of democratization in Korea, and the range of South Korean voices which expressed anti-American sentiment emerged. In short, the role of the U.S. hegemon has started to wane in the region. However, such changes and a waning U.S. hegemon will not necessarily lead to the strengthening of regionalism in South Korea. Policy ideas that pursue regionalism are spreading quickly throughout South Korea and Northeast Asia following the analysis that the Asian financial economic crisis is a result of Asia’s heavy dependence on the U.S. dollar. Also due to the U.S. frequently adopting the Super 301 article, there was an added concern that the multilateralism of the WTO is no longer effective. This is not irrelevant to the argument that a hegemon starts to act like a predator as its power declines in the region, which in turn leads to the emergence of regionalism.14 Of course, the U.S. did not support the creation of formal regional institutions such as the AMF, as proposed by Japan. U.S. foreign policy has begun to focus on the economy in East Asia since the economic crisis. It was also in the best interest of the U.S. to think of measures to promote open regionalism in East Asia, in an effort to reduce its share of the military burden in the region.

13 14

Rozman (2006). Mansfield and Milner (1997), p. 609.

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Table 4.1 Trade relations of South Korea with major economies (1997–2008) unit: US$1,000 U.S. China Japan ASEAN EU Ex. Im. Total Ex. Im. Total Ex. Im. Total Ex. Im. Total Ex. Im. Total 1997 216 301 517 135 101 236 147 279 426 203 125 328 – – – 1998 228 204 432 119 64 183 122 168 290 153 91 244 – – – 1999 295 249 544 137 89 226 159 241 400 177 122 299 202 126 328 2000 376 292 668 185 128 313 205 318 523 201 182 383 234 158 392 2001 129 182 311 145 104 249 136 216 355 134 129 263 196 149 345 2002 328 230 558 238 174 412 151 299 450 173 363 536 217 171 388 2003 342 248 590 351 219 570 173 363 536 203 185 388 249 194 443 2004 428 288 716 498 296 794 217 461 678 240 224 464 378 242 620 2005 413 306 719 619 386 1005 240 484 724 274 261 535 437 273 710 2006 432 337 769 695 486 1181 265 519 784 321 297 618 485 301 786 2007 458 372 830 820 630 1450 264 563 827 387 331 718 560 368 928 2008 394 334 728 814 673 1487 242 532 774 430 359 789 508 348 856 (1 ~ 10) Korea International Trade Association at http://stat.kita.net/; Korea Trade-Investment Promotion Agency at http://stat.kotra.or.kr/

What changes were made in South Korea? Having to face the financial crisis from the outset, the Kim Dae-jung administration adopted regionalism as a strategic means to overcome the crisis and press for economic reform. This is similar to the welfare countries in Europe that considered adopting the EU in order to weaken the internal distribution alliance and reform their economies.15 Policy ideas based on regionalism were considerably effective in weakening traditional veto groups like the Chaebol, and labor as well as accelerating reformist policies, since they raised great objection to the neoliberal economic reform characterized by the IMF Conditionality. Meanwhile, the Kim administration reorganized the existing Ministry of Foreign Affairs to create the Ministry of Foreign Affairs and Trade in March 1998, in order to implement and realize strengthened policy ideas for regionalism. It also established the Office of the Minister for Trade in order to comprehensively establish and conduct foreign trade, trade negotiations, and foreign economic affairs according to Presidential Decree. By gathering and focusing on the roles that were scattered throughout a variety of bureaus in the Ministry, the government could strengthen the status and capability of the Office of the Minister for Trade. The emergence of regionalism and institutional transformation has brought about considerable changes to the formation of the ruling coalition in South Korea. The traditional ruling coalition that were created by a U.S.-led multilateralism (e.g., WTO) and bilateralism led by the Korea-U.S. alliance before the financial crisis have been weakened due to the rise of the new ruling group which was characterized by President Kim and the IMF coalition, who stressed the importance of regionalism.16 Korean chaebols adapted to the newly established policy coalition and institutional

15 16

Moravcsik (1998). Hammer and Katzenstein (2002), p. 576.

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arrangement. By agreeing with the efforts economic reforms. Ironically, although the IMF is a traditional multilateral institution, its pressures promote regionalism. The Kim administration suggested a variety of initiatives on Northeast Asian regionalism and laid the foundation under which the Korean government could advance FTAs with several countries at the same time. Quite effectively, President Kim Dae-jung has proposed institutionalized regionalism in Northeast Asia since 1998. At the second ASEAN + 3 summit in 1998, he proposed the creation of the East Asia Vision Group, which eventually led to the East Asia Forum (2003) and the East Asia Summit (2005). At the meeting of the second ASEAN + 3 Summit in December 1998, Kim argued for the necessity of a Northeast Asian community and said, “Northeast Asia has no economic community and is, therefore, vulnerable to financial crises whenever one occurs within the region. Countries in the region need to cooperate in order to survive the global competition.”17 His remarks clearly stated his position on the regionalism of East Asia. Of course, there are varying opinions over whether such ideas have been realized and institutionalized in an effective way. In effect, Southeast Asian countries are known to have great wariness and fear about the ASEAN + 3 meeting.18 Much of the attention during negotiations for regionalism is also focused on trade, rather than investment or exchange currency rates. However, the ASEAN has recently emerged as one of the regional centers of Northeast Asia. It completed an FTA with South Korea in August 2006 and seriously progressed toward an FTA with Japan and China. In the meantime, the Korean government had begun negotiations for an FTA with Chile in September 1999 and completed negotiations with Singapore, EFTA, ASEAN, and the U.S. as of late 2007. In addition, the government has planned or begun FTA meetings with nine other countries. This is a very clear indication of the Korean government’s adjustment in strategy toward adopting multilateralism and Table 4.2 List of FTAs in process by South Korea Stage Country Completed Korea-U.S.

Date (initial decision—conclusion) Feb. 2006–Apr. 2007 (Currently submitted to Congress for ratification) Korea-ASEAN Nov. 2004–Aug. 2006 Korea-EFTA Dec. 2004–Dec. 2005 Korea-Chile Sept. 1999–Feb. 2003 Korea-Singapore Oct. 2003–Aug. 2005 In process Korea-EU May 2007 Korea-Mexico Sept. 2005 Korea-India Jan. 2006 Korea-Canada June 2005 Korea-Japan Oct. 2003 In consideration Korea-GCC, Korea-Australia, Korea-China, Korea-MERCOSUR Ministry of Foreign Affairs and Trade: http://www.fta.go.kr/

17 18

Office of the President (1999). Kim (2006).

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strengthening bilateral or minilateral regionalism and transregionalism simultaneously (Table 4.2).

4.4

Strong Ideas, Weak Institutions, and Non-Hegemon for Regionalism: Korea-Japan FTA

In November 1998 South Korea and Japan recognized the need to begin minister-level negotiations for an FTA and to carry out joint research on the issue. Amidst the difficulties of the Asian financial crisis, the two countries were able to reach an agreement quickly because they strongly shared the policy idea that regionalism was essential in enhancing international competitiveness, promote economic development, and reform their economies. Unfortunately, it has already been more than 10 years and a KOREA-Japan FTA still has not been reached. Why has the KOREA-Japan FTA been delayed for the past 10 years? South Korean President Kim Dae-jung and Japanese Prime Minister Keizo Obuchi held a summit meeting in Tokyo in October 1998 and announced a declaration for “A New KOREA-Japan Partnership for the twenty-first Century.” It included specific agreement to enhance bilateral economic cooperation, for example, in investment and finance. Joint research activities between various institutions for a KOREA-Japan FTA was one of the first actions planned in the declaration.19 In addition, the Korean cultural market that had been partially open to Japan since October 1998 was fully openned in 2003. This has paved the way for a new relationship between South Korea and Japan and has facilitated efforts for an FTA between the two countries. For its part, Japan was also active in adopting regionalism since it had already declared in the early 2000s that it would implement multilayered trade policies. The Asian crisis was a momentous event, which sparked the realization of the need for regionalism and an FTA with South Korea. In fact, it was during the speech by Okura Kazuo, the Japanese Ambassador to Korea, at the Federation of Korean Industries (Jeongyonryun) in September 1998, that the FTA emerged as a plausible policy option for the first time.20 Meanwhile, Japan succeeded in abolishing South Korea’s “import diversification system” making trade with South Korea more plausible. Both South Korea and Japan recognized the need of an FTA. Jetro chairman Noboru Hatakeyama said, “Japan and South Korea can no longer rely solely on multilateral frameworks like the World Trade Organization,” proposing an early adoption of a KOREA-Japan FTA.21 He also proposed that the businessmen of the two countries establish a Japan-Korea FTA Business Forum and added that a KOREA-Japan FTA should not only mean an abolition of tariffs between Korea 19

Cheong (2007). Seoul Daily, September 17, 1998. 21 Japan Times, May 24, 2000. 20

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and Japan, but should also act as a tool to bring about comprehensive economic integration.22 In other words, the emergence of regionalism as a result of the economic crisis instigated the debates on whether to conclude an FTA between South Korea and Japan. Kim Hyun-chong, South Korea’s Trade Minister, in charge of FTA negotiations with Japan, said in a press conference on November 8, 2004, “Negotiations with Japan have progressed a little and both sides are writing down an agreement.”23 President Roh Moo-hyun also announced the official deadline of negotiations to conclude by 2005. Then, why have the negotiations not developed further? Experts argue that despite strong economic objectives and the establishment of policy ideas, domestic institutions in Korea were too weak in implementing them. When it came time to conclude the FTA with the U.S., the situation within the Office of the Minister for Trade were similar, and the Minister of Trade was the same person, Kim Hyun-chong. In addition, Kim had established close relations with the President, and presumably had the top executive leadership on his side. Then why were domestic institutions weak in playing their part? And what was the reason behind the discord between strong policy ideas and weak internal institutions? A variety of factors can be discussed. Objection by laborers and farmers on market opening could be anticipated in advance. Businessmen agreed to an FTA with Japan in general. However, due to an overlap in the industrial structure of the two countries, each industry had differing positions, which was also indicated in a report of the Federation of Korean Industries.24 In particular, there was a silent objection from big automobile and electronic conglomerates. As seen in the Table 4.3, throughout the negotiation period, nationalistic conflicts also emerged, such as Japanese Prime Minister visiting the Yasukuni Shrine, conflicting materials in history textbooks, and the issue of to whom Dokdo Island really belongs. This resulted in an increased political burden and thereby delayed the negotiations for an FTA between South Korea and Japan.25 The Roh government would not and could not take the risk. However, this chapter is focused on the role of a hegemon—a factor that weakens policy ideas seeking regionalism and related institutions. Currently, there are no other hegemonies in the region that surpass the KOREA-Japan relationship. Japan has not played the role of a U.S.-like hegemon and faces its own limitations in establishing itself as hegemon or undisputed regional leader in the region. It has faced heavy competition from China, and has seldom attempted to play the role of regional hegemon.26 Even the so-called trade externality of security does not exist between South Korea and Japan. Even worse, the two governments have used the issue of history and nationalism to strengthen their domestic ruling

22

Japan Times, January 26, 2002. Edaily, November 8, 2004. 24 FKI (2004). 25 Roh (2007). 26 Choi (2000), p. 69. 23

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Table 4.3 Chronology of major processes for a Korea-Japan FTA Date Nov. 1998 Dec. 1998–April 2000 Sept. 2000 Sept. 2000 March 2002 June 2003 Oct. 2003 Oct. 2003 Dec. 2003 Jan. 2004 Jan. 2004 June 2004 Nov. 2004 Feb. 2005 April 2005 July 2005 June 2008

Nov. 2008

Process and events Korean and Japanese Ministers of Trade agree to start joint research among civic research organizations. Korea Institute for International Economic Policy (KIEP) and Japanese Institute of Developing Economies (IDE) start joint research. Leaders of South Korea and Japan agree to have “Korea-Japan FTA Business Forum” to converge economists’ opinions. Korea-Japan FTA Symposium (Tokyo)—Civic research organizations present the results of joint research. Leaders of South Korea and Japan agree to establish a Korea-Japan FTA joint research committee among industry, government, and academic circles. President Roh visits Japan and agrees to quickly start FTA negotiations. Official agreement to negotiate declared after a summit meeting in Bangkok. Tokyo’s provincial governor, Isihara, claims “Koreans chose Japan-Korea annexation.” First round of negotiations (Seoul) Koizumi claims that Dokdo is Japan’s territory. LDP’s Secretary General Abe claims Japan has the right to defense within its current Constitution. Fourth round of negotiations (Tokyo)—Disagreement on agriculture market opening Sixth round of negotiations (Tokyo)—Disagreement on agriculture tariff Local Diet of Shimane Prefecture passes the legislature on deciding February 22 as the Takeshima (Dokdo) Day Announcement by the Japanese education minister to use new history book with Dokdo as their territory The Korean government asks to exclude automobiles in the tariff elimination. Working-level consultations to consider and to create a favorable environment for the resumption of the Japan-ROK economic partnership agreement negotiations South Korea and Japan have reportedly agreed to resume december negotiations on the adoption of an FTA.

Ministry of Foreign Affairs and Trade: http://www.fta.go.kr/user/index.asp; http://english.kbs. co.kr/news/newsview_sub.php?menu ¼ 1&key ¼ 2008112111

coalitions and have thus aggravated the political environment. On the top of that, strong tension between two leaders toward the “history” problem also suspended the decision-making process in the two countries. Furthermore, the Japanese government stuck to its traditional position to exclude its agricultural sector from FTA negotiations. In conclusion, the FTA between South Korea and Japan cannot develop further in the current climate. As summarized in Fig. 4.1, the FTA negotiation between South Korea and Japan, despite strong policy ideas, have been delayed for a long time due to the weak linking of Korean domestic politics into the external non-hegemon and the operational failure of the related internal institutions. Nationalistic conflicts that were raised throughout the negotiation period also added to the problem. The fundamental reason behind the weakening of ideas and the ineffective domestic institutions

4 South Korea’s Political Dynamics of Regionalism

Korea

• Strong Idea

81

Japan Protracted and passive process

• Weak Institution

•Strong veto groups (Agricultural sector • Non-Hegemon embedded in Japanese politics)

Nationalism

Fig. 4.1 The political economy of Korea-Japan FTA: weak embeddedness of Korean domestic politics in external hegemon

were Japan’s failure or lack of will to act as a proper hegemon and weak embeddedness between the two countries.

4.5

Strong Ideas, Strong Institutions, and a Re-Empowering Hegemon for Regionalism: The Korea-U.S. FTA

In contrast to Korea-Japan FTA, the Korea-U.S. FTA was concluded 10 months after the beginning of full-fledged negotiations. What brought about such a result, and how should it be interpreted? The negotiations for an FTA between South Korea and the U.S. first started in 2003 by South Korea’s suggestion and progressed as Korea’s Trade Ministry completed a roadmap for the FTA. As a result of the Korean government’s persuasion of the U.S. administration, Congress, and industries, the U. S. chose South Korea as their first negotiation partner among the 25 countries that wanted to conclude an FTA with the U.S.27 President Roh also stated at an economic ministers’ conference in the Blue House on July 21, 2006, “The FTA with the U.S. began as a result of South Korean necessity and thereby took the initiative to propose it to the U.S.”28 Economic benefits from an FTA with the U.S. are big enough for South Korea and the U.S. to acknowledge. However, there are strategic benefits in addition to the economic ones that brought the two countries together.29 South Korea assumed that its position would have weakened if Japan or China concluded an FTA with the U.S. first.30 Due to the initial failure of Korea’s strategy to become East Asia’s economic hub, it seems as though the Roh administration attempted to bring back 27

Korea-U.S. FTA Supporting Committee. Available from http://fta.korea.kr/. Korean Office of the President. Available from http://www.president.go.kr. 29 Kiyota and Stern (2007). 30 Korea-U.S. FTA Supporting Committee (2007). Available from http://fta.korea.kr/. 28

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this plan through the FTA with the U.S.31 Trade Minister Kim Hyun-chong commented on Korea’s position over an FTA with the U.S.: “People talk of a ‘sandwiched Korea.’ The Korea-U.S. FTA is not a defensive game but an offensive game. An FTA is the key to South Korea’s survival in East Asia. The FTA with the U.S. will provide a momentum for South Korea to develop as a hub for FTAs in the region.”32 In order to fully realize such strong policy ideas, strong domestic institutions are essential. The top decision makers gave a strong mandate to those in charge of trade with other countries, which was very decisive in running institutions effectively. In effect, Kim Hyun-chong reported a successful case to President Roh whenever he had a chance, and Roh was committed to protecting him by replying, “I will take the political burden myself and you sit at the negotiation table like a deal-maker.”33 Accordingly, conflicts and competition among departments could be easily controlled. In this regard, the FTA between South Korea and the U.S. was the result of intentional choices and negotiations, not a natural product of increased economic interdependence (Table 4.4).34 However, behind the effective decision-making process lay the split between veto groups and changes to formation of the ruling coalition. Domestic political viability of bilateral institutional arrangements like an FTA depend on the preferences of and the influence wielded by key sectors in each country.35 A series of organizations for workers, farmers, and civic groups formed veto groups and staged massive anti-FTA demonstrations.36 In contrast to an FTA with Japan, however, Korean chaebols and industries became strong supporting blocs, not veto groups, toward an FTA with the U. S. Since the Asian financial crisis, the Korean chaebols had consistently reformed themselves and secured considerable competitiveness in the global market. Accordingly, they believed that more opportunities and benefits would arise as a result of free access to the U.S. market. For example, major Korean companies, such as Hyundai Motor and Samsung Electronics, who had their factories in the U.S., found no reason to protest the FTA with the U.S. After the chaebols became active supporters of the FTA with the U.S., veto groups lost much of their political influence, thereby making possible the prompt conclusion of an FTA with the U.S. Monumental changes were made to the structure of domestic politics and the ruling coalition in South Korea as a result of President Roh’s commitment to and achievement of an FTA with the U.S., despite the initial opposition from his supporters during his presidential election. Compared to the protectionist coalition against an FTA with the U.S., those who argued for an open economy increased in political power. This should not be interpreted as the loss of Korean sovereignty, as seen by a few member countries

31

Choi (2006). “The U.S. Aggressively Demands Rice Market Opening in the Last Week.” Joongang Daily, April 6, 2007. 33 Joongang Daily, April 6, 2007. 34 Choi (2000), p. 60. 35 Mansfield and Milner (1999), p. 603. 36 Cho (2006). 32

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Table 4.4 Chronology of major processes for Korea-U.S. FTA Date Process and events Aug. 2003 FTA roadmap confirmed by the Office of the Minister for Trade (Korea), planned to proceed to negotiate with 50 countries for FTA by 2008 Nov. 2004 Korea- U.S. Ministers of Trade meeting, agreed to examine Korea-U.S. FTA Feb.–Apr. Three rounds of Korea-U.S.FTA preliminary examination meetings 2005 Feb. 2006 Official announcement to negotiate on Korea-U.S. FTA June 2006 First round of negotiations (Washington, DC) Dec. 2006 Fifth round of negotiations (Montana)—Korea suspended the negotiation on medicine and automobiles on Dec. 6. Jan. 2007 Sixth round of negotiations (Seoul)—Disagreements on automobile, medicine, agriculture, service, investment, and textiles Feb. 2007 Seventh round of negotiations (Washington, DC)—Disagreements on customs relief and safeguards to certain agricultural products (especially beef with bones) and import quotas Mar. 2007 Eighth round of negotiations (Seoul)—Textile, automobile, agriculture still remain to be further negotiated. Agreement reached on finance and service sectors. Apr. 2007 Korea-U.S. FTA reached—Resolution on beef (beef tariff relief within 15 years, beef with bones still to be negotiated). Gaeseong products further to be negotiated. Nov. 2008 Bush in a statement to President Lee Myung Bak ratification of Korea-U.S. stalled because of a “backlash against free trade” as opposed to a “negative feelings towards the South Koreans.” Dec. 2008 President-elect Barack Obama states that he would not support the Korea-U.S. FTA “as it is” and is “badly flawed.” USA imports annually about 70,000 Korean vehicles, while Korea imports around 5,000 U.S. cars. Ministry of Foreign Affairs and Trade: http://www.fta.go.kr/user/index.asp; http://english.chosun. com/w21data/html/news/200811/200811240011.html; http://www.koreatimes.co.kr/www/news/ nation/2008/12/113_35666.html

within the European Union.37 But in the eyes of the anti-FTA coalition, the Korea-U.S. FTA signified an abandonment or delegation of Korean sovereignty to supranational institutions. In order to promote a quick ratification by the National Assembly and minimize political objection, President Roh established a large-scale compensation plan for the losers. In particular, the Korean government decided to provide fiscal loans and investments to the agriculture and livestock raising industry by a total of 20.4 KW trillion by 2017.38 Such plans are seemingly designed pacify oppositional groups and to facilitate a smooth operation of domestic institutions. Despite the fact that negotiations for FTA with the U.S. consisted of the same institutions and actors as the FTA negotiations with Japan, negotiations with the U.S. progressed much faster as a result of the domestic political circles within the U.S. who felt amicable to the FTA with South Korea. Though the agricultural sector and farmers were not completely satisfied with it, they basically stood for an FTA with South Korea and put pressure on the U.S. government to ask the Korean government

37 38

Tallberg (2002). Ministry of Agriculture and Forestry (2007).

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to open its market further for imported beef. U.S. food and agriculture groups were getting actively involved in supporting a Korea-U.S. FTA, arguing that the “U.S.Korea FTA will provide large dividends to America’s farmers, ranchers and agribusiness for decades to come.”39 The automobile industry voiced their disagreement for ratification in the Congress, but they were not an influential veto group. While Chrysler Group and Ford showed their opposition to the U.S.-Korea FTA saying the accord fell short of motivating the Asian nation enough to open its market to American-made cars, General Motors remained neutral.40 The U.S. Chamber of Commerce and the U.S.-Korea FTA Business Coalition expressed their agreement with the FTA and asked the Congress to promptly ratify the agreement.41 The Democratic runner for the 2008 Presidential election, Hillary Clinton adopted a more skeptical tone. President-elect Barack Obama stated that he would not support the Korea-U.S. FTA “as it is” and called it “badly flawed” in November 2008. However, much of the U.S. government’s argument was reflected in the suggestion, that led the U.S. to conclude the FTA with South Korea quickly. On the other hand, reaffirming the role of the U.S. as a hegemon in the East Asia region was another incentive for the U.S., and the Korean government used this to press for ratification. Although U.S. status has waned in East Asia since the end of the Cold War and the financial crisis, it still remains a military hegemon. Moreover, the reemergence of North Korea’s nuclear belligerence resulted in a re-empowered role for the U.S. in South Korea. South Korea needed the existence of the U.S. to restore the Korea-U.S. alliance and solidify security in the region. For South Korea, economic benefits were important, but political and military imperatives were strong factors as well in concluding an FTA with the U.S. In addition, this provided the U.S. with a new opportunity to reinforce its strategic position, which was being weakened in Asia. They were concerned that “Asia is not waiting for the U.S.”42 Recently, the Center for American Progress Action Fund, an Obama-affiliated think tank, proposed a proactive action plan for the KORUS FTA to the new President, saying that “The United States cannot simply stand by and allow its competitiveness to erode if our competitors prove more adept at negotiating and implementing FTAs than we are.”43 The U.S. also had a strategic interest in taking back the economic initiative in Asia, amidst the struggle over leadership between China and Japan. The Center for American Progress Action Fund also stated that the goal of the FTA policy of the U.S. in the East Asian region is to make the U.S. more firmly anchored in Asia.44 By concluding an FTA with South Korea, the U.S. could secure an economic outpost to intervene in Asia’s regional institutional architecture.

39

Korea Herald, July 11, 2007. Korea Herald, May 31, 2007. 41 U.S Chamber of Commerce (2007). 42 AMCHAM Korea (2007) Doorknock 2007. Available from http://www.amchamkorea.org. 43 Shapiro and Samans (2008), p. 154. 44 Shapiro and Samans (2008), p. 155. 40

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Korea

• Strong Idea • Strong Institution

The U. S. Rapid and proactive process

•Re-empowering •Weak veto groups hegemon (Spilt among major automobile makers)

Political and military imperatives

Fig. 4.2 The political economy of Korea-U.S. FTA: strong embeddedness of Korean domestic politics in external hegemon

As seen in Fig. 4.2, the possibility of a rapid conclusion for the Korea-U.S. FTA was a result in the combination of Korea’s strong policy ideas and strong domestic institutions orchestrated by a strong embeddedness of Korean politics into the U.S. hegemon. The split between the veto groups in South Korea precipitated the itinerary and the process of decision-making and the role of the U.S. as hegemon. The FTA was also possible due to the convergence of the U.S. strategic choice to reinforce its status as a hegemon in the region and Korea’s strategic choice in focusing on political and military imperatives to solidify security.

4.6

Conclusion

This chapter analyzed the dynamic relations and embeddedness between domestic politics and a external hegemon during the creation and progress of regionalism. For this purpose, FTAs between South Korea and Japan, and South Korea and the U.S. were analyzed to review how policy ideas and internal institutions were combined and how different mixes could affect domestic politics and change the ruling coalition. We can conclude that the strengths and weaknesses of domestic institutions are determined by the influences of a hegemon, which will define the process and structure of bilateral regionalism like an FTA. Even though the new Prime Minister Hatoyama from the Democratic Party of Japan championed the idea of an Asian common currency or Asian currency unit very strongly, the Korea-Japan FTA negotiation has not found any new significant momentum to get itself back on the right track in both countries.45 On the other hand, the Lee Myung-bak government of South Korea has been supporting the continuation of American-led status quo of multilateral agreements, while passively 45

“My Political Philosophy.” The Japan Times, September 9, 2009.

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seeking financial and monetary regionalism in East Asia, not only because of its emphasis on the ROK-U.S. alliance to cope with North Korea’s threat, but also because of domestic political calculus on the part of Lee to differentiate himself from previous progressive governments. The Lee government has been consistently taking the side of the U.S. on important issues since his inauguration in February 2008, while shying away from radically reforming the existing regional and transregional security and trade architecture surrounding South Korea. The Lee government, in its first summit meeting with President Bush on April 19, 2008, completely opened the beef market of Korea for the U.S. beef industry in expectation of early radification by the U.S. Congress of the Korea-U.S. FTA. Recently, the Obama government of the U.S. is persuading and waiting for an “appropriate time” to get radification from Congress. Obama’s following remarks on the Korea-U.S. FTA at a House Republican Retreat in Baltimore on January 29, 2010, herald the approaching final conclusion of the Korea-U.S. FTA negotiation. . . .What is also true is that the European Union is about to sign a trade agreement with South Korea. Which means right at the moment when they start opening up their markets, the Europeans might get in there before we do. . .. And my hope is, that we can move forward with some of these trade agreements, having built some confidence, not just among particular constituency groups but among the American people that trade is going to be reciprocal, that it’s not just going to be a one-way street.46

References Acharya, Amitav (2007) Made in America? Agency and Power in Asian Regionalism. Journal of East Asian Studies, 7(3), pp. 371–378. Aggarwal, Vinod and Min Gyo Koo (2007) The Evalution of Regionalism in East Asia. Journal of East Asian studies, 17(3), pp. 360–369. AMCHAM Korea (2009) Doorknock 2009. Available from http://www.amchamkorea.org./. Cheong, Inkyo (2007) Korea’s approaches to regionalism. In M.A.B. Siddique (ed) Regionalism, Trade and Economic Development in the Asia-Pacific Region. Cheltenham and Morthampton: Edward Elgar, pp. 117–127. Cho, Hee-yeon (2006) Korea-US FTA and Rush-To Neoliberalism. NO FTA, Sept 4, 2006. Choi, Young-chong (2000) Comparative Regional Integration Research and East Asia’s Regional Cooperation. The Korean Journal of International Relations, 40(1), pp. 57–75. Choi, Myong-joo (2006) Building a Banking and Financial Hub in Korea. Building a Northeast Asian Community 3, Jeju Development Institute East Asia Foundation. Yonsei University Press, pp. 238–252. 46 Obama, 2010, “Video of President Obamas Remarks to the House Republican Retreat in Baltimore on Friday, Jan. 29, 2010 and Q and A with GOP Lawmakers.” Available from http:// www.huffingtonpost.com/2010/01/29/transcript-of-president-o_n_442423.html

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Cumings, Bruce (1987) The origins and development of the new Northeast Asian political economy: industrial sector, product cycles, and political consequences. In Frederic Deyo (ed) The Political Economy of the New Asian Industrialism. Ithaca, NY: Cornell University Press, pp. 44–83. Federation of Korean Industry (2004) Sectoral strategy toward Korea-Japan Free Trade Agreement in Korea. Hammer, 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), pp. 575–607. Kim Dae-jung (2006) Regionalism in the Age of Asia. Global Asia, 1(1), pp. 10–12. Kiyota, Koza and Robert M. Stern (2007) Economic Effects of a Korea-U.S. Free Trade Agreement. Korea Economic Institute Special Studies Series 4: Washington, DC: Korea Economic Institute of America. Kwon, Youngmin (2002) Regional Community-Building in East Asia. Seoul: Yonsei University Press. Lee, Seungjoo (2006) The Political Economy of the Korea-U.S. FTA: The Korean Government’s FTA Strategy Revisited. A paper presented at a spring 2006 convention of the Association of Korean Political and Diplomatic History, April 21, Korea. Mansfield, Edward D. and Helen V. Milner (1997) The Political Economy of Regionalism. Ithaca, NY: Columbia University Press. Mansfield, Edward D. and Helen V. Milner (1999) The New Wave of Regionalism. International Organization, 53(3), pp. 589–627. Ministry of Agriculture and Foresty (2007) National Complementary Measures for the Agricultural Sectors after the Korea-U.S. FTA. November 11, 2007. Moon, Chung-in and Seung-won Suh (2007) Overcoming History: The Politics of Identity and Nationalism. Global Asia, 2(1), pp. 32–48. Moravcsik, Andrew (1998) The Choice for Europe. Ithaca, NY: Cornell University Press. Obama, Barack (2010) Video of President Obama’s Remarks to the House Republican Retreat in Baltimore on Friday Jan. 29, 2010 and Q and A with GOP Lawmakers. Huffington Post, January 29, 2010. Office of The President (1999) Government of the People: Selected Speeches of President Kim Dae-jung, 1(2). Seoul, South Korea: Office of the President of R.O.K. Rhyu, Sang-young and Seungjoo Lee (2006) Changing Dynamics in Korea-Japan Economic Relations: Policy Idea and Development Strategies. Asian Survey, 46(2), pp. 195–214. Roh, Moo-hyun (2007) History, Nationalism and Community. Global Asia, 2(1), pp. 10–13. Rozman, Gilbert (2006) Regionalism in Northeast Asia: Korea’s Return to Center Stage. In Charles L. Armstrong (ed) Korea at The Center: Dynamics of Regionalism in Northeast Asia. New York: M.E.Sharpe, pp. 151–166. Shapiro, Ira and Richard Samans (2008) “Office of the United States Trade Representative: Responding to the changing global challenge.” In Mark Green and Michele Jolin (eds) Change for America: A Progressive Blueprint for the 44th President. Center for American Progress Action Fund, pp. 148–165. Tallberg, Jonas (2002) Delegation to Supranational Institutions: Why, How and With What Consequences? West European Politics, 25(1), pp. 23–46. U.S Chamber of commerce (2009) U.S chamber welcomes announcement of U.S-Korea free trade agreement. News.

Chapter 5

The United States and Asian Regionalism: The Politics of Reactive Leadership Amy Searight

5.1

Introduction

The United States faces a central dilemma in its Asia policy. On the one hand, the U.S. has played a leading role in the region since the end of the Pacific War. It has been the “indispensable nation” for Asian security and prosperity, with extensive American security commitments promoting relative peace and stability, while the large American market, combined with U.S leadership underpinning the liberal economic order, have provided a stable basis for regional economic dynamism. The U.S has understandably grown comfortable with and supportive of its core economic and security policies in the region. And yet, regional enthusiasm for greater multilateral cooperation has begun to shift regional dynamics in ways that may begin to diminish U.S influence in Asian affairs. The rise of exclusive regional groupings like ASEAN + 3 and the East Asia Summit have led to a flurry of initiatives ranging from regional FTAs to financial integration to other areas community-building, all of which exclude the United States. The U.S. has responded to this “new regionalism” in a somewhat uneven and ad hoc fashion. American reluctance to radically alter the status quo has put the U.S. in a defensive, reactive stance. U.S policymakers have sought to devise new policy tactics to counter unfavorable trends, but they have not been interested in reformulating the strategies that underpin U.S engagement in the region. This chapter seeks to explain the politics of reactive leadership in U.S. Asia regional policy. It proceeds in three sections. Section 5.2 provides an overview of traditional American approaches to regionalism in Asia. Although U.S. postwar planners initially favored regional approaches in both security and economic relations in Asia, they were dissuaded from pursuing regional multilateralism because of the preferences of Pacific partners, who harbored deep distrust of Japan and

A. Searight (*) Center for Strategic and International Studies, Washington, DC, USA e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_5, # Springer Science+Business Media, LLC 2011

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preferred bilateral ties to the U.S. Once in place, however, the hub and spoke security system and GATT-centered trade relations became entrenched in U.S. strategic thinking, and American policymakers resisted proposals for security and economic multilateralism that began to emerge in the waning day of the Cold War. Section 5.3 examines evolving U.S. responses to Asian regionalism in the post-Cold War period. The U.S. gradually warmed up to ideas that led to the formation of APEC and ARF, and once on board it sought to play a leading role in these organizations by setting the agenda and seeking institutional improvements. However, American leadership has been episodic and reactive, rather than sustained and committed. When U.S. officials grow frustrated with their inability to achieve substantive results in APEC and ARF, they tend to lose interest and U.S. engagement drifts. The rise of new exclusive frameworks for Asia-only regionalism has redirected American attention to APEC and led to new engagement tactics. Section 5.4 examines in more detail the domestic politics that give rise to this pattern of reactive leadership. Key strategists within the executive branch formulate policy with similar broad outlooks and goals, although they often differ in tactics and institutional priorities. Asian multilateralism frustrates American officials in large part because it is process-oriented rather than driven by substantive goals and outcomes. This clashes with the American style of diplomacy and poses dilemmas for policymakers. Furthermore, the choice of some bold policy options, such as pursuing an ambitious region-wide FTA strategy, are constrained by growing resistance to trade liberalization in Congress. Policy strategists are left to devise tactical responses to the “new regionalism,” rather than formulate bold, forward-looking strategies that would redefine regionalism in a more trans-Pacific framework.

5.2

Traditional Approaches to East Asian Regionalism

In the early days of the postwar period, U.S. policy planners set about reorganizing the world by creating an institutional framework that would promote peace and prosperity and contain the growing communist threat. American planners focused their efforts on two key regions – the North Atlantic and Asia Pacific. In Europe and the North Atlantic the American approach was distinctly multilateral. The U.S. established a collective security defense under NATO, and it promoted regional economic integration by tying massive reconstruction aid under the Marshall Plan to trade and payments liberalization. Moreover, Europe was at the core, along with the U.S., Canada, Australia, and New Zealand, of the multilateral economic framework created at Bretton Woods and Geneva, which included the Bretton Woods monetary regime and the liberal trade regime under the General Agreement on Tariffs and Trade, or GATT. By contrast, in Asia the United States structured its relations through a set of bilateral security and trade strategies. Japan was the lynchpin of American strategy in the region, and the U.S. set about remaking Japan as a bulwark in the Pacific and the “workshop of Asia.” The United States negotiated a bilateral security alliance that

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provided substantial bases for U.S. forces, which would become the cornerstone for a network of bilateral alliances in the region. The U.S. tied Japan economically to the West by granting access to American markets and technology to help fuel Japan’s economic recovery, and by pressing relentlessly on reluctant Western countries for Japan’s admission into the GATT trade regime. The GATT provided a relatively open trade structure at the global level, and East Asian countries gradually joined the GATT beginning with Indonesia, Japan, and Malaysia (in the 1950s), Korea (in the 1960s), Singapore and the Philippines (1970s), and Thailand (1980s). The American approach to the region took this hybrid form of security and economic bilateralism along with global economic multilateralism. On the security side, a hub-and-spokes system of bilateral arrangements with Japan, Australia, New Zealand, the Philippines, and eventually South Korea and Taiwan anchored U.S. engagement in the region. On the economic side, trade and investment relations were structured by US-led global economic regimes in trade and finance, and supplemented by bilateral economic leverage as needed. Notably absent in this mix of policy approaches in Asia were regional multilateralism and institution-building. The U.S. preference for bilateralism in Asia in contrast to its multilateral approach in Europe has been explained by the large disparity in size and strength between the United States and its regional partners, as well as the absence of collective identity and sense of shared history and norms.1 These factors certainly contributed to the failure of regional multilateralism. But they did not rule it out. In fact, in the early postwar days American planners proposed and actively pursued a plan for a regional collective security arrangement for Asia. Initially proposed by the Philippines and South Korea, the idea for a “Pacific Pact” was picked up by George Kennan’s policy planning staff, who saw it as the effective approach to contain Soviet and Chinese communism in Asia. The plan then became closely linked to the U.S.‐Japan Peace Treaty and American efforts to persuade Japan to rearm in order to contribute to Pacific security. John Foster Dulles believed that Japan could be persuaded to rearm in the context of a regional arrangement, and that such an arrangement was necessary to assuage Southeast Asia’s concerns over future Japanese aggression.2 The Pacific Pact idea also had strong support in Congress, where members were motivated by Wilsonian multilateral idealism as well as interest in promoting greater burden sharing among allies.3 Dulles was sent to Tokyo in early 1951 with a presidential mandate to offer a Pacific Pact to Japan, Australia, New Zealand, and the Philippines. Much to the surprise of U.S. officials, however, the American proposal was met with resistance from its Pacific partners. Japan’s Prime Minister Yoshida Shigeru rejected the idea due to his unwillingness to rearm, even in the context of collective security. He

1 On power disparities, see Press-Barnathan (2003). On collective identity, see Hemmer and Katzenstein (2002), pp. 575–607. 2 Dulles (1950), p. 135. 3 Press-Barnathan (2003), pp. 49–50, 54–55, and 128. For more on the Pacific Pact, see Schaller (1997), p. 33.

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preferred an exclusively bilateral arrangement with the United States in which Japan would provide bases rather than rearm, thereby avoiding regional entanglements and preserving its constitutional constraints. Australia, New Zealand, and the Philippines still harbored intense anti-Japanese domestic sentiment, and were thus hesitant to form a collective defense arrangement with Japan. Further complicating the picture was the role of Great Britain, a world power with extensive holdings and commitments in the region. The British vehemently opposed any Pacific security arrangement in which they were not included, a position that found sympathy with Australia and New Zealand. However, the U.S. Defense Department and Joint Chiefs of Staff refused to consider British inclusion over concerns about being entangled in a conflict involving Hong Kong and Malaya.4 In the face of strong British opposition and lack of interest from its Pacific partners, American strategists gave up on forging a Pacific security pact and returned to exclusively bilateral approaches. Although John Foster Dulles somewhat revived the idea with the launch of the Southeast Asia Treaty Organization (SEATO) in 1954, this arrangement was in fact much narrower in scope. SEATO was negotiated in response to French withdrawal from Indochina in 1954, with an aim to “stem the tide of communism in Asia.” However it was designed as a collective action mechanism rather than collective defense pact, and it quickly fell apart when signatory country preferences over Vietnam diverged. On the economic side as well, the U.S. had wanted to build regional frameworks to reintegrate Japan into Southeast Asia. American strategists considered it vital to rebuild Japan’s economy to strengthen its new ally, and for this Japan needed markets for its exports.5 With mainland China made off-limits for Japan’s trade after the Communist revolution, the U.S. was left with the multilateral GATT option and a regional trade arrangement centered on Southeast Asia. Europe and other Western GATT members were strongly resisting Japan’s admission into GATT, so American policymakers worked on a regional economic integration plan that came to be known as the yen fund. In effect, the yen fund would directly tie U.S. aid to Southeast Asia to the purchase of Japanese imports.6 Although the plan had wide support within the U.S. government and in Congress, it was never implemented. As in the Pacific security pact, Japan’s Southeast Asian partners showed little interest in developing trade relations with Japan, and Britain and other European powers opposed the idea of granting Japan access into their colonial markets.7

4

United States Department of State (1976). Economic integration of Southeast Asia was also viewed as a way to balance against China, by building a strong economic bloc that would be remain “out of the communist fold.” Schaller (1985). See also Forsberg (2000). 6 The yen fund plan proposed that Japan pay for US imports in yen credits, which the US would then distribute to Southeast Asian countries that in turn would use the funds to buy Japanese goods. See Press-Barnathan (2003), pp. 116–118; Schaller (1997), pp. 228–231. 7 Press-Barnathan (2003), p. 138. 5

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The resistance of Pacific partners to regional economic integration schemes led the US back to bilateral approaches, similar to the security side.8 The U.S. eventually won admission for Japan into the GATT, but it was a limited victory because European and other countries withheld MFN status from Japan under a special provision of the GATT.9 The main engine for growth for Japan’s recovery became the U.S. market, with other industrial economies gradually reducing their discriminatory barriers against Japan over several decades. This economic bilateralism nested within the broad framework of the GATT worked extremely well for Japan’s economic recovery, and paved the way for the industrialization and economic success of other East Asian economies. However, it also led to growing trade frictions as Japanese and later other Asian goods increasingly displaced domestically produced goods in the U.S. market. Just as the U.S. relied on bilateral market access to achieve Japanese and Asian recovery, it also resorted to bilateral leverage to readjust trade outcomes through Voluntary Export Restraints (VERs), Section 301 sanctions, antidumping measures, and other policy instruments. Indeed, the growing use of bilateral pressure and unilateral sanctions by the US against Japan and East Asian industrializing countries became a major impetus for regional economic multilateralism in the 1980s. Once in place, the hub-and-spokes security system followed a path-dependent process of becoming entrenched in U.S. strategy, as well as deeply embedded in domestic systems and regional dynamics. Security assets became specialized and increasingly valuable in bilateral arrangements, and U.S. strategy was designed around these assets and options. The hub-and-spokes system was tremendously successful in providing an effective security umbrella for the region, preventing Soviet and Chinese expansion, and allaying regional fears of resurgent Japanese aggression. It provided a bedrock of stability that, along with the liberal economic order, contributed enormously to the political stability and the remarkable economic success of the non-communist states in the region. However, the U.S.-centered security and economic bilateralism also stifled the processes of regional reconciliation and cooperation. American attachment to the hub-and-spokes structure led to skepticism and outright hostility to proposals for security multilateralism. Soviet leader Mikhail Gorbachev proposed a Helsinki-like regional security conference in a speech in Vladivostok in 1986 and a region-wide consultative security body in a speech in Krasnoyarsk in 1988. South Korean President Roh Tae Woo followed with a similar proposal at the UN General

8

Bilateral trade approaches with Japan were not politically popular in the U.S. because they involved granting large market access to highly competitive Japanese goods such as textiles. This is a major reason why Congress supported regional and multilateral trade approaches. 9 Article 35 of the GATT was the “non-application clause” that allowed contracting parties to withhold MFN and other GATT trading privileges from a newly acceding member of the GATT. When Japan acceded to the GATT, 14 countries invoked Article 35, and several major trade countries invoked Article 35 on behalf of their colonial territories as well. The US also had to “pay” for Japan’s admission by compensating European governments with bilateral tariff concessions.

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Assembly in 1988. However, Gorbachev’s “peace” initiatives in Asia were resoundingly rejected by the U.S. The United States, and key allies such as Japan, viewed the proposals as designed to undermine U.S. security commitments in the region, since they included a naval freeze in the Pacific, nuclear free zones in Korea and the Indian Ocean, and an offer to withdraw Soviet forces from Vietnam in exchange for the U.S. removing bases in the Philippines.10 The strongly negative attitude toward regional security proposals would linger well into the post-Cold War period. Likewise on the economic side, the combination of global multilateralism and bilateral leverage also became entrenched in American government thinking. The U.S. tended to resist proposals for regional economic cooperation that emerged from time to time in the region out of concern that they were at best unnecessary, and at worst would potentially undermine global economic institutions. Thus American officials initially opposed Japan’s proposal for an Asian Development Bank because they did not want to undercut or dilute the influence of the World Bank.11 Three decades later, U.S. rejection of Japan’s proposal to create an Asian Monetary Fund in the midst of the Asian financial crisis was based on a similar concern, that a Japan-led AMF would undermine the influence and stronger disciplines of the IMF. It also explains the American indifference to proposals made by the Japanese and others beginning in the 1966 to create a Pacific economic consultative grouping. U.S. officials felt a regional economic grouping was unnecessary, and would potentially distract from the GATT. Moreover, the U.S. wanted to preserve room for maneuver in its bilateral dealings with Japan and other trade partners on trade disputes.

5.3

New Regional Strategy in the Post-Cold War Era

The United States was far from an active leader on Asian regionalism in the waning days of the Cold War and the early post-Cold War period. Historical precedent might suggest that a major power emerging victorious from a protracted global struggle would seek to create a new institutional order to solidify the new status quo by embedding its values and policy preferences in enduring structures. However, the Cold War was not a typical major power struggle. It ended not by military defeat, but by Soviet retrenchment, especially in Europe, and the United States’ focus was drawn to re-organizing Europe by expanding NATO and reunifying Germany.

10

Fisher (1989); Fukushima (1999), p. 139. American officials believed the World Bank was a sufficient and superior solution to regional economic development. The United States came to support the ADB by 1965, motivated in part by a desire to demonstrate commitment to peaceful economic development in the region as fighting in Vietnam escalated. Press-Barnathan (2003), p. 160. 11

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In Asia the United States had grown quite comfortable with the system in place to manage its security and economic relations. The U.S. therefore did not leap at the opportunity to “remake” the region at the end of the Cold War. Other players in the region had different ideas, however, and they began pouring forth proposals for constructing new economic and security frameworks for regional cooperation. Faced with this rising desire for regional multilateralism, U.S. policymakers at first resisted and then gradually warmed to their visions of regional multilateralism. On the economic side American participation was driven by the fear of exclusion. U.S. policymakers were keenly aware that trans-Pacific trade ties were growing rapidly in the late 1980s (Table 5.1), and they were increasingly concerned that Japan was poised to assume regional economic leadership. By the late 1980s, leading U.S. political figures such as Senators Bill Bradley and Alan Cranston began putting forth proposals for a Pacific Basin forum to enhance regional economic collaboration and build political ties.12 However, the George H.W. Bush administration remained committed to the multilateral trade regime in the GATT, as well as to using bilateral leverage in its trade negotiations with Japan and other newly industrializing countries. Consequently the U.S. showed indifference or hostility to various proposals for regional economic collaboration put forward from time to time by Japan. In early 1989, Australia began floating an idea to ASEAN and other East Asian countries for a regional economic grouping that did not include the United States.13 This provoked a sharp reaction from U.S. officials at the State Department, who were incensed that Australia had failed to consult the U.S. and had omitted the U.S. and Canada from its proposal. Secretary of State James Baker made clear that the U.S. expected to be included in any Pacific grouping. Australia and Japan took the lead in organizing the new framework,

Table 5.1 US trade with East Asia (ASEAN, Japan and China), 1984–2003

US trade with East Asia (exports + imports, in US$ millions)

East Asia as share of US total trade

1984 111,798 20.37% 1988 174,123 22.79% 1992 237,953 24.29% 1996 356,156 25.19% 2000 463,493 23.21% 2003 478,047 24.11% Source: (http://www.ita.doc.gov/td/industry/OTEA/usfth/tabcon. html)

12 Some variants had a political-security proponent. See Crone (1992), pp. 74–75; Ravenhill (2001), p. 82. 13 Japan was floating a similar idea to ASEAN countries at the same time, although Japan’s initiative sought inclusion of the United States. See Funabashi (1995), pp. 58–59.

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which was named Asia Pacific Economic Cooperation, or APEC, and launched in Canberra in late 1989, with U.S. participation. The United States stepped up its support for APEC when Malaysian Prime Minister Mahatir began pushing for an East Asian Economic Group (EAEG). Mahatir envisioned a Japan-led trade bloc that would counter emerging economic blocs in Europe and North America, and he pointedly excluded the U.S. and its North American partners, as well as Oceania. Secretary of State Baker launched a vigorous diplomatic counterattack, warning starkly of the danger of “drawing a line down the middle of the Pacific.” He strongly pressured the Japanese and Koreans to openly rebuff Mahatir’s proposal, reportedly telling the Korean Foreign Minister that “Malaysia didn’t spill blood for this country, but we did.”14 Baker began more actively promoting APEC as new regional architecture, and at the same time he signaled a new willingness on the part of the U.S. to consider security multilateralism in the region. In a Foreign Affairs article touting the significance of APEC in the winter of 1991, Secretary of State Baker praised the emerging “ad hoc, multilateral approach” to security in the region, and indicated support for creating a regional security dialogue while cautioning against “locking ourselves in to an overly structured approach. In the Asia Pacific community, form should follow function.”15 This signaled a departure from previous American opposition to a flurry of proposals for multilateral security dialogues put forth Canada, Australia, South Korea, and Japan in the early post-Cold War years. American antipathy to multilateral security proposals stemmed from the strongly negative reaction to Gorbachev’s proposals for an Asian security forum in the mid1980s, which the U.S. saw as a Soviet attempt to undermine its bilateral alliance system. However, by late 1991 U.S. officials recognized that the regional momentum for some type of security multilateralism was building, and at the same time American officials were looking for a way to reassure Southeast Asian nations whose concerns were aroused by the U.S. decision to close military facilities and withdraw forces from the Philippines. The tepid support for regional multilateralism in the first Bush administration was replaced with a much warmer embrace of multilateralism by the Clinton administration. In his April 1993 confirmation hearings as Assistant Secretary of State for East Asia and Pacific Affairs, Winston Lord identified an enhanced multilateral security dialogue as one of ten priority goals of the Clinton administration for Asia. Later that summer, President Clinton gave speeches in Tokyo and Seoul calling for a “New Pacific Community” based on new regional security dialogues as well as maintaining American security commitments through its bilateral alliances (Clinton would invoke the “Pacific Community” vision later that year at the APEC summit in Seattle). When ASEAN finally seized the initiative to propose a regional security dialogue with its major dialogue partners and the

14 15

Ravenhill (2001), p. 94. Baker (1991), pp. 1–18.

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addition of Russia and China, the United States was ready to fully endorse the idea, and the ASEAN Regional Forum (ARF) was launched in 1994. By far the most significant contribution that the Clinton administration made to regional multilateralism was creating the Leader’s Meeting at APEC. The idea for an APEC summit originated with Australian Prime Minister Paul Keating, who had proposed to President George H.W. Bush during a 1992 visit to Australia that the U.S. invite leaders to the APEC meeting that the U.S. was hosting the following year in Seattle. However, President Bush had begun to suffer from “summit fatigue” and his support for the idea was lukewarm.16 However, Clinton is credited with embracing the idea and launching the Leaders Summit successfully.17 Leaders met on Blake Island, off the coast of Seattle, in November 1993 and laid out a vision for free trade in the Asia-Pacific. The Leaders Meeting gave a tremendous boost to APEC. The involvement of leaders was critical in laying out a bold economic agenda in Seattle, and setting forth the more concrete Bogor Goals the following year in Indonesia, when leaders pledged to establish a free trade area for trade and investment with the target dates of 2010 for industrial countries and 2020 for developing countries. The U.S. also began to view APEC as valuable leverage over European regionalism and intransigence at global trade talks. In particular, after a strong show of unity by APEC leaders in support of the Uruguay Round at the Blake Island summit in 1993, American officials came to believe that European concern over the nascent regional grouping was the primary reason they returned to the GATT negotiating table to conclude the Uruguay Round, which had stalled in 1991.18 In a similar vein, the negotiation of NAFTA in 1991–1992 had played a role in motivating East Asian nations to eschew Malaysia’s proposal for an exclusive East Asian grouping and had generated early momentum in APEC. The U.S. came to embrace this “multitrack” strategy of pursuing bilateral, regional, and multilateral (GATT/WTO) trade negotiations concurrently as a way to get around recalcitrant countries to achieve progress in trade liberalization and to gain leverage by reminding others that the U.S. had alternative trade options available.19 Within weeks of the Bogor Summit pledge by APEC Leaders to establish free trade and investment in the Asia-Pacific, the US joined with 33 Western Hemisphere neighbors at the Summit of the Americas 16

See Funabashi (1995), p. 83. However, another state department official involved in APEC at the time reported in an interview that Secretary of State James Baker and his staff liked the idea of a Leaders Summit and began drawing up provisional plans. Interview with State Department official, November 14, 2007 [interview B]. 17 Ravenhill argues that Clinton sided with “pro-APEC activists in the administration” to launch the Leaders Meeting, “against the advice of the State Department.” Ravenhill (2001), p. 93; Funabashi (1995), p. 80. 18 Australian Prime Minister Keating and APEC’s EPG chair Fred Bergsten argued this point strongly; see Ravenhill (2001), pp. 93–94; Funabashi (1995), p. 107. This view was also expressed to me by American officials involved with APEC and the Uruguay Round, including a former senior level State Department official in the Clinton administration. Interview with State Department official [interview G], March 23, 2010. 19 Feketekuty (1998).

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in December 1994 to pledge to negotiate a Free Trade Area of the Americas (FTAA) by 2005. At the Miami summit, the U.S. and its NAFTA partners also announced plans to negotiate Chile’s accession into NAFTA as a first step toward a hemispherewide agreement. The Clinton administration was stymied in pursuing these regional FTA initiatives by Congress, which refused to extend fast track authority and thereby undercut the credibility of the U.S. to negotiate trade deals. Within APEC, however, the Clinton team remained optimistic about using APEC as a vehicle for trade liberalization, in ways that would ratchet up liberalization at the multilateral level in the newly created WTO. A step in this direction came with the Information Technology Agreement (ITA), which called for eliminating tariffs on information technology products within a few years. President Clinton took the ITA proposal to the APEC summit in Subic Bay in 1996, and personally lobbied other APEC leaders to collectively endorse it. APEC’s promotion of the ITA paved the way for its adoption the following month at the WTO ministerial in Singapore. The ITA was launched a plurilateral agreement within the WTO, signed by 44 countries representing 90% of trade in information technology, and widely touted as a significant step toward liberalizing trade in the fastest growing sector of the world economy.20 The U.S. viewed the ITA as a model for pursuing sectoral liberalization within APEC, which would serve as stepping stones to the Bogor Goals of APEC-wide free trade and would perhaps also lead to broader multilateral agreements for sectoral liberalization at the WTO. This gave rise to APEC’s Early Voluntary Sectoral Liberalization (EVSL) program, launched in 1997. The U.S. once again took the lead in proposing that APEC economies collectively agree to binding commitments to liberalize trade and harmonize standards in designated sectors. Fifteen sectors, including nine priority sectors, were agreed upon at the Vancouver summit in 1997. However, the EVSL negotiations collapsed the following year when several economies, led by Japan, refused to participate in all sectors. The bitter and ultimately abortive negotiations over EVSL exposed deep divisions within APEC over the desirability of pursuing trade liberalization through reciprocity-based negotiations and binding commitments. Many Asian countries made clear their preference for the Asian-style consensus-led, incrementalist and voluntary approach, characterized by Japanese Foreign Minister Hata in 1993 as “creeping incremental gradualism by consensus.”21 American hopes for APEC as a vehicle for trade liberalization were dashed, and its interest in APEC diminished accordingly. The Asian financial crisis dealt another blow to APEC. In the midst of the economic turmoil of 1997–1998, APEC provided no meaningful response, and Asian countries grew disenchanted with both APEC and perceived U.S. indifference to the region’s plight. Japan’s proposal for an Asian Monetary Fund met with 20

In Singapore 29 countries signed the ITA, and by April 1997 15 additional signatories to the ITA brought the world IT trade covered by the agreement to 90%, which was the benchmark required by the WTO adoption for the ITA to take effect. Available from . 21 Cited by Pyle (1995), p. 37.

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swift and harsh rejection by the United States, over concerns that a Japan-led regional organization would undermine the stronger discipline of the IMF regime. APEC began to look moribund, and many Asian countries channeled their desire for regional cooperation, as well as some degree of resentment against the United States, into the emerging ASEAN + 3 process. Although the early optimism of the Clinton administration had faded considerably, they continued to view APEC and the ARF as useful supplements to the traditional hub-and-spokes approach in security and to the multilateral trade system in the WTO. The Defense Department’s 1995 document on East Asia Security, issued under Joseph Nye, captured this view by describing the ARF and other multilateral arrangements as “elements in the overlapping plates of armor.”22 Although APEC’s early momentum on trade liberalization had largely dissipated, the United States continued to view APEC, and increasingly bilateral FTAs, as vehicles for incubating ideas and forging templates for cooperation that could add value to broader multilateral negotiations. The administration of George W. Bush viewed regional multilateral architecture in broadly similar terms. Although the Bush administration quickly gained a reputation for being “unilateralist” and not entirely supportive of multilateralism, in its Asian diplomacy it continued to view APEC and ARF as the “twin pillars” of American multilateral engagement in the region. As later articulated in the National Security Strategy in March 2006, APEC and ASEAN “can play a vital role” in the “spread of freedom, prosperity, and regional security.”23 In fact, Condoleezza Rice came into her position as National Security Advisor with a keen interest in Asian institutional architecture. With her background in European affairs, she shared the view of many Europeanists and political scientists that Asia was “under-institutionalized” and that robust U.S. engagement in the region would depend on improving existing institutions and perhaps building new ones. She believed that the hub-andspokes system was outmoded, and she instructed her staff to work on making transPacific institutions more effective and relevant.24 The major departure from Clinton’s APEC strategy was in the area of security. The Bush administration pushed hard to import a security agenda into APEC, which caused a lot of consternation in the region. The major initial impetus arose from the terrorist attacks on September 11, 2001. China was hosting the APEC summit in Shanghai that October, and the White House was debating whether President Bush should travel to an economic summit so soon after the attack. Eager to ensure Bush’s participation, China offered to make counter-terrorism a centerpiece of the summit, and Bush decided to attend.25 The leaders issued a strong statement on counter-terrorism in

22

United States Security Strategy for the East Asia-Pacific Region, Department of Defense, Office of International Security Affairs, February 1995, p. 14. 23 The National Security Strategy of the United States of America, March 2006, p. 40. 24 Interview with Senior NSC official [interview A], November 6, 2007. 25 Interview with Senior White House official [interview A], November 6, 2007.

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Shanghai, which laid the groundwork for similar statements with more detailed commitments on counter-terrorism in Mexico the following year. At the Los Cabos, Mexico summit in 2002, the U.S. also pushed for a package of concrete initiatives to secure the transport of cargo, an area that it had worked on in the G8 earlier that year.26 This produced the Secure Trade in the APEC Region (STAR) initiative. The U.S. also secured a Leaders’ statement calling on North Korea to give up nuclear weapons at the Mexico summit. The following year in Thailand the U.S. pushed further to place a security agenda in the center of APEC. The Leaders Summit in Bangkok in October 2003 came close on the heels of the disastrous WTO ministerial in Cancun, Mexico, which caused a major rupture in progress on the Doha Round of trade talks. Thus securing a strong statement in support of Doha to avoid collapse of the round was a top priority for the U.S. At the same time, the U.S. pressed for Leaders to agree in their statement to “dedicate” APEC to the “complementary mission of ensuring security” in addition to advancing economic prosperity. Further, the U.S. won agreement to broaden APEC security initiatives beyond initiatives like port security that were closely linked to trade, to include issues related to weapons of mass destruction, dismantling terrorist groups, and “other direct threats” to regional security.27 The U.S. emphasis on these “Bangkok commitments,” coming several months after the invasion of Iraq, reinforced a growing perception in the region that the U.S. was preoccupied with security and counter-terrorism to the detriment of economic issues. The comparable effort that the U.S. put into getting a unified APEC stance on the Doha Round to get it back on track was simply overshadowed, as were ongoing American efforts on APEC transparency commitments, IPR, and anti-corruption. The security pledges made in the “Bangkok commitments” were highly controversial in APEC. Although a few countries supported an expanded security agenda, many ASEAN countries felt highly uneasy with broadening APEC’s focus from economic issues.28 However, the biggest obstacle for the U.S. on security in APEC has been China, which has resisted discussing security issues in the APEC forum because of Taiwan’s membership. Although China acquiesced to the United States on the Leaders’ endorsement of the security commitments in Bangkok, in subsequent meetings China blocked several U.S.-initiated security proposals. The U.S. effort to develop a security agenda for APEC was motivated by several factors beyond September 11 and other immediate security concerns. The NSC staff was looking for ways to make APEC more relevant, and more sharply focused on important issues that Leaders want to discuss. With the decline of APEC’s trade liberalization agenda after the EVSL debacle, attention in APEC had shifted to 26

The transport security initiative at the G-8 in Canada, July 2002. 2003 APEC Leaders’ Declaration, “Bangkok Declaration on Partnership for the Future,” Bangkok, Thailand, October 21, 2003. Available from . 28 Australia has been the biggest supporter, along with the United States, for the security agenda in APEC. Japan, South Korea, and Singapore have also shown support. 27

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reducing business transaction costs through trade facilitation, in areas such as improving customs clearance procedures and cutting red tape. Another area of work led by the U.S. was promoting transparency in areas including services trade, investment, and government procurement. These had considerable value for the business community, but they were not the kind of big-ticket items that were deemed worthy of a summit of Asia Pacific leaders. In the words of one NSC official, “It was hard to justify sending the President to Shanghai five weeks after the 9–11 terrorist attacks to discuss something like trade facilitation.”29 Moreover, there was a growing sense of disappointment with the ASEAN Regional Forum. The ARF had not evolved, as American officials had hoped it would, beyond confidence-building to develop its potential as a mechanism for preventive diplomacy and conflict resolution. The soft dialogue and consensus norms of the ARF did not allow for dealing with pressing issues such as North Korea, Burma, Cross-Straits relations, and proliferation of WMD. The U.S. worked with the “like-minded” countries of Australia, Canada, Japan, New Zealand, and South Korea to push continuously for institutional improvements that would make the ARF more effective and substantive, but most of their proposed reforms were rebuffed by ASEAN. By comparison, APEC not only provided a more favorable institutional framework for accomplishing work in agreed areas, but the summitlevel meetings raised its profile considerably. The endorsement of Leaders at an APEC summit adds a much higher degree of credibility and commitment than anything that could be achieved at the ARF. In truth, APEC had long discussed security issues. The Leaders Meeting ensured that major political or security issues facing countries in the region would be taken up by Leaders, as they did, for example, in the East Timor crisis during the Auckland, New Zealand APEC summit in 1999.30 Moreover, American interest in using APEC for security issues was long-standing. Clinton’s Defense Secretary William Perry proposed expanding APEC to include a security agenda in 1995 (and was roundly criticized at the time for the proposal). Within a few years after Bangkok, however, Bush administration officials recognized that they had pushed the security agenda in APEC as far as it could go. In the face of growing resistance from China and the ambivalence and discomfort of other countries, the U.S. began to scale back on its ambitious security goals. Meanwhile, the economic landscape in East Asia in the early 2000s began to change markedly, as countries in the region began an almost frenzied pursuit of FTAs with regional as well as trans-Pacific trade partners. In 2000, no East Asian economy had concluded an FTA other than ASEAN’s efforts to create an ASEAN Free Trade Area (AFTA). By 2002, only Japan-Singapore and Singapore-New Zealand FTAs had been completed, but more than a dozen FTAs were under negotiation, and virtually every country in the region had jumped on the FTA

29 30

Interview with former senior NSC official [interview A], November 6, 2007. Reyes (1999).

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bandwagon. By the end of 2006, the number of East Asian FTAs in effect had jumped to 20, with dozens more in the pipeline. The U.S. was lagging behind this tidal surge of FTAs. U.S. Trade Representative Robert Zoellick had elevated the multitrack strategy to a well-articulated policy of “competitive liberalization,” in which the U.S. would launch multiple FTA negotiations to spur progress on WTO and regional initiatives like the FTAA, as well as seeking liberalization beyond multilateral commitments.31 However, Zoellick focused his efforts on Latin America and the Middle East. When the Bush Administration received Trade Promotion Authority in 2002, Zoellick launched a large number of FTAs, but he tended to focus on smaller, strategic allies of the United States rather than pursuing large commercial trade partners in Asia. By 2005 the U.S. had negotiated FTAs with only two countries in the region, Singapore and Australia. With China, Japan, and Korea all offering FTAs to ASEAN, the U.S. felt the need to signal its interest in forging closer economic ties with ASEAN countries. However, negotiating an ASEANwide FTA was not a viable option for the U.S., due to the political problem posed by Burma and the economic issues raised by the least developed ASEAN countries. Instead, at the 2002 APEC summit President Bush announced the Enterprise for ASEAN Initiative, which laid out a roadmap for individual ASEAN countries to pursue FTAs with the United States. The U.S. launched trade negotiations with Thailand (in 2005) and Malaysia (in 2006), but these negotiations both stalled. By far the most significant American trade initiative was the successful negotiation of the Korea–US FTA in 2006–2007. The KORUS FTA, if enacted, would be the largest free trade area outside of the EU and NAFTA. The U.S. hoped to transform regional FTA dynamics by erecting a strong pillar of trans-Pacific free trade involving two major economies, in a very high-standard FTA. However, KORUS faces tough scrutiny in Congress and efforts to ratify the treaty have been long delayed. The institutional landscape in East Asia was evolving rapidly in terms of its regional multilateral architecture. ASEAN + 3 was deepening and broadening, with momentum building in financial cooperation through the Chiang Mai Initiative (CMI) and Asian Bond initiatives, and meetings and initiatives spreading across a wide swath of economic and political cooperation, ranging from setting industrial standards to controlling transnational disease and environmental pollution. Regional support for ASEAN + 3 dialogues and the launch of the East Asian Summit in 2005 gave rise to a growing seriousness in proposals for launching an East Asian FTA, although preferences diverged about whether or not to include India, Australia, and New Zealand. The growing focus on East Asian economic integration, and the corresponding decline in interest in integration across the

31

“America Should Start Catching Up,” The International Herald Tribune, May 18, 2001; “Our Credo: Free Trade and Competition,” Wall Street Journal, July 10, 2003.

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Pacific Basin, began to concern many American policymakers, businessmen, and commentators. Yet the U.S. response to the rise of Asia-only multilateral forums was carefully calibrated to avoid overt criticism. Although Clinton administration officials were quick to condemn Japan’s Asia Monetary Fund proposal during the Asian Financial crisis, subsequent developments in ASEAN + 3 and the launch of the East Asian Summit were met with a muted reaction from Washington, and at times even modest support. Assistant Secretary of State James Kelly called APT “an interesting development” and “a very healthy kind of dialogue within East Asia.”32 As U.S. Trade Representative in 2002, Robert Zoellick welcomed Asian economic regional integration and said that the U.S. “is not worried about exclusion” from East Asian economic groupings.33 This policy of “benign neglect” stands in stark contrast to Secretary Baker’s strident criticism of Malaysia’s East Asia grouping proposal in 1990. One of the few officials to express concern over Asia-only regionalism during the Bush administration was outgoing Deputy Secretary of State Richard Armitage. In an interview with a Japanese journalist in late 2004, Armitage noted the importance of APEC and ARF for the United States and said “we are less happy about” ASEAN + 3 because the U.S. is not included, and “we are a Pacific power, we want to be involved in the Pacific and the life of the Pacific, and we intend to be involved.”34 These words would be echoed several years later by members of the Obama administration and by President Obama himself, signaling their intention to more actively engage Asian regional frameworks in order to fend off exclusionary trends – an approach that could be characterized as “the best defense against rising Asia-only regionalism is a good offense.” However, the Bush administration decided to maintain a more status quo approach, one that could be summarized as “the best defense is a strong defense.” In 2005, U.S. policymakers deliberated on a policy response to the impending East Asia Summit (EAS), and they agreed that the U.S. would neither oppose nor support the EAS. The U.S. would not seek inclusion to the EAS, nor would it request observer status as Russia had done; in the words of one Bush administration official, “superpowers don’t ask to be invited to observe.”35 Instead U.S. officials would ask lots of questions about the purpose and direction of the EAS, aiming to highlight redundancies with APEC and ASEAN + 3.36 The US Senior Official for 32

Transcript of Assistant Secretary of State James Kelly, speaking on “Dialogue” program on Upcoming ASEAN Regional Forum, US Embassy, Tokyo, July 18, 2001. 33 Capie (2004). 34 Richard Armitage, Deputy Secretary of State, “Interview With Takao Hishinuma of Yomiuri Shimbun,” Washington, DC, November 30, 2004. Many observers in Japan and elsewhere in the region misinterpreted Armitage’s remarks as speaking for the Bush administration, when in fact he was voicing his own personal views in the days just prior to his leaving his administration position. Interview with former senior NSC official, November 6, 2007 [interview A]. 35 Interview with State Department official, November 14, 2007 [interview B]. 36 Interview with former Senior NSC official, November 6, 2007 [interview A].

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APEC, Michael Michalak, laid out this stance in a speech in Tokyo discussing the ASEAN + 3 and the EAS: The United States does not view such meetings as inimical to U.S. interests; we do not need to be in every room and every conversation that Asians have with one another. We do, however, want to ensure the strongest possible continuing U.S. engagement in the region and continue to believe that the strategic and economic geography through which Asia can best build on its success is via trans-Pacific partnerships and institutions. . . .We believe the region and both pan-Asian and trans-Pacific fora would benefit from more emphasis on functions and less on process alone. There is no necessary benefit simply from holding more gatherings ... APEC is already the premier forum in the Asia-Pacific region for addressing economic growth, cooperation, trade, and investment. [Emphases added.]37

U.S. officials believed that an overly hostile or overly solicitous reaction to the EAS might serve to strengthen the perceived relevance of the institution, and they were hoping that it would simply “die on the vine,” leaving APEC as the once-and-future premier venue for regional cooperation. Consequently the U.S. was once again faced with the challenge of finding a way to revitalize APEC and its moribund trade agenda. The security agenda had not enhanced APEC’s relevance in the way that the Bush Administration had hoped, and institutional competition from APT and the new EAS, as well as the emerging FTA architecture, were threatening to overshadow APEC’s relevance. In response, the U.S. decided to embrace an idea it had previously rejected – an APEC-wide FTA, called the Free Trade Area of the Asia Pacific, or FTAAP. Chile had initiated the idea for an FTAAP during its year as APEC host in 2004, and it was strongly backed by the business community through the APEC Business Advisory Council (ABAC). At that time, however, U.S. Trade Representative Zoellick had rejected the idea, in large part because he wanted to focus collective energy on the new momentum in WTO negotiations that appeared to brighten prospects for a breakthrough in the Doha Round.38 The work on FTAs in APEC launched during the 2004 year was thus limited to drawing up “best practices” and “model measures” for FTAs.39 Two years later, however, the shifting institutional landscape had created a growing sense in Washington that the United States needed to recapture an agenda-setting role for regional economic integration. American officials latched onto the FTAAP proposal as the top priority for the U.S. in APEC. At the APEC summit in Hanoi, Vietnam in 2006, the U.S. secured the agreement of APEC 37

Michael Michalak, US Senior Official for APEC, “US Views on Asia Regional Integration,” Remarks given at Perspectives on Asian Economic Cooperation, Tokyo, Japan, January 25, 2006. Available from . 38 Interview with USTR official, November 15, 2007 [interview C]. 39 2004 APEC Economic Leaders’ Declaration, “One Community, Our Future” [Santiago Declaration], Santiago, Chile, November 20–21, 2004. Available from .

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Leaders that APEC would study FTAAP as a “long-term prospect.” In Sydney, Australia in 2007, Leaders agreed to continue to “examine the options and prospects” for an FTAAP through “practical and incremental steps.” Although the wording is vague and hardly serves as a clear mandate for an FTAAP, American officials were pleased that APEC Leaders had given their blessing to launch work on examining the FTAAP as a long-term goal, and they began turning their attention to evaluating various modalities to move forward on harmonizing, coordinating, or merging regional FTAs into broader frameworks.40 Skeptics have noted that the Sydney pledge to “examine” the FTAAP does not represent a significant step. Both ASEAN + 3 and the ASEAN + 6 country groupings have advanced their respective FTA proposals with the launch of detailed feasibility studies by expert groups, a step not yet agreed upon by APEC.41 In truth, however, the U.S. itself is most comfortable with a go-slow approach, since any negotiations of reciprocal trade liberalization with all APEC members are not likely to muster Congressional support in the near future. As the term long-term prospect implies, the FTAAP represents primarily a political tactic in responding to regionalism, rather than a committed strategy of action. In the final months of the Bush administration, it launched one final effort to “catch up” to the regional rush toward FTAs, by announcing that the U.S. would join negotiations with four Pacific countries – Singapore, Chile, New Zealand, and Brunei – to create a Trans Pacific Partnership agreement, or TPP. This move was intended to signal that the U.S. was still in the game of Pacific trade integration. However, negotiations did not proceed far before they were put on hold by the incoming Obama administration pending a 6-month trade policy review. In summary, the U.S. has evolved from a reluctant, reactive, and somewhat passive participant in “new multilateralism” in Asia in the early days of the postCold War period, to a much more actively engaged player seeking an agenda-setting leadership role in regional frameworks. And yet, U.S. policy remains fundamentally responsive to regional trends rather than dynamically engaged in creating a new vision for regional economic integration and security. In the words of scholar Donald Crone, describing the reluctant U.S. decision to support the formation of APEC: “That a Pacific organization had leapt from a topic to avoid to one of top priority, at least in rhetoric, demonstrates only that it could no longer be effectively avoided, not an ideological conversion but a tactical one.”42 American support for multilateral processes has grown considerably, but its larger strategic vision still remains largely

40 Remarks by Wendy Cutler, Assistant US Trade Representative for Japan, Korea, and APEC Affairs, at “New Asia-Pacific Trade Initiatives,” Joint Conference sponsored by Japan Economic Foundation and Peterson Institute for International Economics, Washington, DC, November 27, 2007. 41 Noboru Hatakeyama, Chairman and CEO of Japan Economic Foundation, “The Creation of a Free Trade Area of the Asia Pacific,” prepared remarks delivered at “New Asia-Pacific Trade Initiatives,” Joint Conference sponsored by Japan Economic Foundation and Peterson Institute for International Economics, Washington D.C. November 27, 2007. 42 Crone (1992), p. 75.

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reactive. It has been difficult to maintain a steady focus on Asia. At the end of the Cold War, its focus was on the transformation of Europe; today, attention is diverted to the Middle East and South Asia, and much of the attention in U.S. Asia policy has been focused on bilateral relations with China rather than trends in multilateralism. The Obama administration has attempted to redirect U.S. focus toward regional multilateral engagement, as discussed in the following. However, the broad structural, ideational, and political influences shaping U.S. policy will make a dramatic reorientation of U.S. policy priorities difficult.

5.4

5.4.1

The Formation of New Regional Strategies: Ideas, Interests, and Domestic Institutions International Environment

The dominant position of the U.S. in the Asia Pacific has meant that, compared to other countries, the U.S. has been less directly affected by major shifts or crises in the international environment. While the end of the Cold War certainly transformed America’s strategic thinking, the focus of this new thinking was Europe. The U.S. certainly welcomed Soviet retrenchment in Asia, but American interests remained focused on maintaining the status quo regional order, which was structured by huband-spokes security relations, a GATT-centered trade regime, and bilateral leverage to resolve trade disputes. In the Asian financial crisis, the direct effect of the crisis on the American economy was very small, and the U.S. priority was to maintain the integrity of the IMF-centered liberal financial regime. Similarly, the rise of China has directly affected the U.S. to a lesser degree than China’s Asian neighbors. American imports of Chinese goods have risen dramatically and U.S. direct investment has flown heavily into the Chinese market, while China’s military modernization poses strategic challenges to the U.S. Yet here as well, the U.S. has focused primarily on maintaining the status quo through global institutional frameworks bringing China into the WTO, and demanding that China play a “responsible stakeholder” role in support of various international regimes. What is notable about U.S. behavior in Asia, then, is that it generally does not adjust quickly or adeptly to the changing international environment. In its regional policy the U.S. has resembled an aircraft carrier that takes a relatively long time to change course, even when by the waves of a storm or changing tide. Other Asian countries are much more directly affected by the rising tide of prosperity or the rough seas of events like the Asian financial crisis, and they respond more quickly by forming new approaches to capture opportunities or reduce vulnerabilities. The U.S. has in turn reacted to their actions in its response-driven policy toward Asia regionalism. U.S. strategy has remained relatively constant in supporting, strengthening, and expanding the global liberal economic regimes and the regional hub-and-spokes security system. U.S. tactics, however, have shifted in response to changing Asian

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strategies, as American policymakers attempt to harness emerging regional dynamics in ways that will support its larger strategic goals. This explains why one year the U.S. dismisses talk of an APEC-wide FTA, yet two years later the same U.S. administration embraces FTAAP as its central APEC policy. Often these tactical shifts are driven simply by concern over being left out. This fear of exclusion, however, is always tempered by the comfortable position still enjoyed by the U.S., the sense that it remains the “indispensable nation.” To a considerable degree there is a sense of complacency, since East Asian countries continue to rely so heavily on the large American market for their export-driven growth, and on extensive American security commitments for regional stability. Two exceptions to this general pattern deserve mention. First, the September 11 terrorist attacks, which caused an immediate sharp turn in US foreign policy and strategic thinking. As described in the previous section, September 11 led the U.S. to reorient its APEC policy (as well as other regional policies) to emphasize counter-terrorism, which appeared to diverge from the regional economic zeitgeist. Second, the confrontation with North Korea over its nuclear weapons program in 2002 led the U.S. to formulate a multilateral approach through the Six Party Talks to deal with the crisis. The Six Party Talks may have a far more lasting impact on U.S. regional policy than the attempt to expand APEC’s security agenda. The Six Party Talks demonstrated the value of working closely with the major powers of Northeast Asia, and China in particular, in a multilateral approach. Whereas the U.S. quickly began backtracking on its security ambitions in APEC, there was a growing consensus in U.S. policy circles in the latter half of the Bush administration that the Six Party Talks were laying the groundwork for a future security mechanism for Northeast Asia.43 In late 2007 the U.S. State Department began working on a proposal for a “Northeast Asia Charter” that would articulate a common vision and normative framework for the region.44 However, these hopes were dashed by North Korean intransigence, which put the Six Party Talks on hiatus and called into question the near-term prospects for new security architecture in Northeast Asia.

5.4.2

Interests and Ideas

With the US relatively more insulated from the international environment, the impetus for formulating policy typically involves responding to the regional initiatives of other players. The policy choice is usually simple and sets up a straightforward debate. On the one hand are those who would prefer to do little (or nothing); to stick with the status quo, focusing on whatever arrangements are available at the 43

In fact, from the early days of the conceptualization of the Six Party Talks, U.S. officials thought they would one day turn into a security framework of the Northeast Asia regional powers. Interview with former NSC official, November 6, 2007 [interview A]. 44 Interview with State Department official, November 14, 2007 [interview B]; Interview with former NSC official, November 6, 2007 [interview A].

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time. On the other side are those who advocate that the US take a more activist stance in supporting or building new arrangements, in order to keep the U.S. centrally involved in regional dynamics, and perhaps counter regional trends that might marginalize or compete with US interests. The two sides of this debate are shaped at several levels. At the broadest level, U.S. views are shaped by American culture, by historically shaped values and preferences in foreign policy and multilateral engagement. Here, U.S. views of multilateralism pose a dilemma for American engagement in Asian-style regionalism. The key elements of the “ASEAN way” approach have been adopted by APEC as well as ASEAN-centered regional organizations, emphasizing informalism, consensus-building, extensive consultation, voluntarism, and a heavy social component of frequent meetings and summitry. As many have noted, this style of multilateral engagement contrasts sharply with the legalistic, rule-based and results-oriented multilateralism that characterizes the key global institutions and other regional arrangements that have been central to U.S. policy. The clash between the two styles has made it difficult for American officials to embrace APEC and ARF, or to consider alternative options such as joining the East Asian Summit. The American preferences for substance over process, and for ambition and results over feel-good diplomacy and patient engagement, have hampered U.S. efforts to engage consistently and constructively within these institutions. In the American view, multilateralism is not an end in itself, but a process that must be effective to have value. Results matter; “talk shops” and photo-ops do not. President George W. Bush expressed this view in late 2004: Multilateral organizations can do great good in the world. Yet, the success of multilateralism is measured not merely by following a process, but by achieving results. The objective of the UN and other institutions must be collective security, not endless debate.45

This results-oriented view of multilateralism is shared widely by U.S. government officials dealing with Asian regional institutions. American officials quickly grew frustrated with the Asian-style, process-oriented multilateralism of APEC and ARF, and they have frequently tried to find ways to convert these organizations into the kind of results-oriented, rule-based institutions that they are more comfortable dealing with. This discomfort may be partly due to culture: American pragmatism, the famous “can-do” attitude that prizes getting things done, and focus on the “bottom line.” The U.S. Government is also heavily influenced by American legal culture because many officials are trained as lawyers, and they think about results in terms of binding, legalistic commitments. Furthermore, since many key American officials rotate in and out of government in contrast to the career bureaucrats in many Asian countries, they have a shorter political time horizon. They want results now. On a more political level one might expect partisan differences or the unique characteristics of particular presidential administrations to play a large role in shaping different approaches to Asian regionalism. Indeed, the Clinton administration embraced regional multilateralism in a much more energetic and high profile way 45

George W. Bush, Halifax, Canada, December 1, 2004.

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than the George H.W. Bush administration that preceded it, or the George W. Bush administration that followed. Clinton received well-deserved credit for embracing the idea of an APEC Leaders Meeting, which dramatically boosted APEC’s prestige and profile. Whereas the first Bush administration appeared more passive and tepid in its support of multilateralism, Clinton administration officials from Winston Lord to Joseph Nye consistently touted the positive role that multilateral dialogues can play in promoting cooperation. On closer inspection, however, the differences are less than they first appear. As described, the second Bush administration has been more committed to improving regional multilateral architecture than is often realized. This is illustrated by President Bush’s perfect attendance record at all eight APEC summits during his time in office, unlike President Clinton, who missed two. Bush’s active APEC engagement was undercut by his Secretary of State Condoleezza Rice, who skipped two ARF ministerial meetings, which strongly reinforced the impression of the Bush administration’s disinterest in ASEAN-centered regional institutions. Rice’s attendance record also revealed the Bush administration’s preference for APEC. Yet the Bush team’s attempt to promote a security agenda in APEC, while heavily criticized, in fact flowed in part from their sincere and somewhat desperate attempt to recapture APEC’s relevance. In fact, the Clinton team was equally inept in many ways at Asian-style multilateral diplomacy as compared with administrations. They talked a good multilateral game, and yet they ended up being perceived to be just as bullying, self-righteous, and results-obsessed as was the George W. Bush administration. Examples abound: the tone-deafness and uncompromising posture adopted in regional discussions on the Asian financial crisis; the strong-arm tactics used in the EVSL crisis in APEC; and the human-rights lecture delivered by Vice President Gore at the APEC summit in Malaysia. The point here is that American difficulty with Asian-style multilateralism is not limited to a particular administration or to one political party, but seems to be an endemic feature of U.S. foreign policy culture. More important for shaping U.S. policy toward Asian regionalism are the distinct interests and preferences of the major players within each administration, as well as the role played by Congress and societal interests. The key players for Asia regional policy are the National Security Council (NSC), the State Department, the Office of the US Trade Representative (USTR), the Defense Department (when security issues are involved), and Treasury Department (when regional financial issues are at stake). The role of these players varies sharply across different dimensions of regional policy. Table 5.2 illustrates their roles by comparing the degree of involvement in three central areas of U.S. policy toward the “new” Asian regionalism: APEC policy, FTA policy, and the policy response to the East Asian Summit. The NSC coordinates the inter-agency process, giving it a central role to play in most areas. Although officially the role is one of coordination, in practice it often has the lead voice in policy deliberation. The State Department and USTR are also major players, with USTR taking the lead on FTA policy, as well as on trade liberalization policies at APEC. The Defense Department plays no significant role in APEC discussions, although it does participate in broader discussion on regional architecture. The Treasury Department has a formal role in the APEC process because of the

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Table 5.2 Key players on three areas of Asia regional policy

APEC NSC *** State *** USTR *** Defense Treasury * Commerce * Congress * ***Central player **Modest role *Small or nominal role

FTAs

EAS response

** * ***

*** *** **

* ***

APEC Finance Ministers meeting. However, this meeting is kept deliberately separate from the rest of the APEC process, and The Treasury Department is not greatly interested in APEC in any case.46 The Treasury Department does however play the lead role in crafting U.S. responses to financial developments such as the Asian Financial crisis, the proposed Asian Monetary Fund, and ASEAN + 3 financial initiatives. Finally, Congress is centrally important for FTA policy, since it acts as a crucial veto player. It has not to date played an important role in shaping APEC policy or the U.S. response to the East Asian summit. The major policy players in the executive branch tend to agree broadly on the policy strategy and ideas as described. When they do disagree on tactics, or on more fundamental ideas about strategy, the differences usually arise from the different institutional roles that they play, which define their interests and priorities. The NSC, for example, is primarily focused on presidential participation in the APEC Leaders Meeting, and is first to raise concerns about crowding the President’s calendar with another meeting for the East Asian Summit. USTR focuses on substantive economic outcomes, particularly in terms of negotiating binding commitments for trade liberalization. Meanwhile the State Department tends to approach APEC, FTAs, and other regional engagement from the standpoint of diplomacy. It is most closely in touch with views emanating from the region, including concerns expressed in East Asia about perceived U.S. complacency, distraction, or indifference, and State Department officials are often most concerned with countering these views by more robust engagement.

5.4.3

APEC Policy

In APEC policy, the Leaders Meeting puts the White House in the center of planning. The NSC staff focuses on generating an impressive list of “deliverables” that will reflect the President’s international agenda and vision, which serve to 46

Interview with former Treasury Official, November 19, 2007.

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demonstrate his strength and justify his lengthy overseas trip. This often leads the U.S. to arrive at APEC meetings, sometimes late in the APEC year, with a weighty agenda in hand that it is determined to push through. Rather than listen to the concerns of others, engage in compromise and coordination, and build gradual support for ideas, the U.S. is prone to foist new proposals on other APEC members late in the game and simply pressure other countries to accept them. This gives the US a lead role in shaping APEC’s agenda, but it cuts against the prevailing regional norms for multilateralism, and may at times undermine the effectiveness of APEC that the US seeks to cultivate. White House involvement is also the reason that the US decided to push for a security agenda in APEC. In particular, Gary Edson, the Deputy National Security Advisor in charge of economic affairs, played the lead role in seeking to reshape APEC. He was concerned that the agenda and format of the APEC summits were not conducive to effective Presidential participation. Rather than long formal speeches and focusing on detailed areas of “in the weeds” economic issues, Edson pushed for a more “leaderly” agenda based on counter-terrorism and security issues. His staff at the NSC also worked extremely hard to revamp the format of the summit meetings to create “frank and open exchange” among leaders in off-camera retreats. One of the more amusing efforts of the NSC staff involved their “Strategic Seating Initiative” or SSI during the Bangkok summit in 2003. Rather than maintaining the traditional alphabetical seating arrangements at each phase of the summit, which would put President Bush next to the leaders of Vietnam and Taiwan (since Thailand was pulled to the head of the table as Chair of the meetings), the NSC came up with a complicated formula of rotating seating assignments, which would assure that Bush would also be seated at various meals and meetings next to leaders from Russia, Australia, and the like.47 The idea of bringing security agenda into APEC was opposed initially by the State Department. State Department APEC officials believed that a security agenda would face too much resistance in APEC to make it worthwhile. Not only would China pose a problem, but focusing on counter-terrorism and other security cooperation was at odds with the growing regional focus on economic integration. These arguments made by the State Department were ultimately borne out, but they did not dissuade the NSC in 2002–2003. Because the NSC represents the President’s interests, it ultimately controls the major items on the APEC agenda. At the same time, the “in the weeds” issues that are covered by APEC but are not discussed much at the Leaders Meeting are entirely left to the hands of the State Department and USTR. According to one former NSC official who covered two APEC summits, “I was deeply involved in about 70% of the issues on the annual APEC agenda. Of the other 30% of issues the U.S. was dealing with in APEC, I had absolutely no idea about the issues and had no role to play.”48

47

Basically the scheme involved keeping China and Taiwan fixed, and rotating every other leader at each seating time. Interview with former NSC official [interview D], November 19, 2007. 48 Interview with former NSC official [interview E], November 29, 2007.

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FTAs, FTAAP, and TPP

Unlike APEC, FTA policy is an area in which Congress plays a central role. In recent years FTAs have become a central instrument in U.S. foreign policy, and Congress has shaped the contours of this instrument by acting as a tough veto player. In large measure, the FTA drive was spurred by US Trade Representative Robert Zoellick, who extracted trade negotiating authority from Congress in 2002 and articulated a “competitive liberalization” strategy that put FTAs at the center of U.S. trade policy. Zoellick inherited two FTA negotiations that had already been announced: Chile and Singapore. Chile had been announced at the Summit of Americas and Clinton had agreed to open FTA talks with Singapore during a late-night golf game with Singapore’s Prime Minister Goh Chok Tong at Clinton’s last APEC summit in Brunei in late 2000. With trade promotion authority in hand, Zoellick began aggressively pursuing a raft of bilateral FTAs. Zoellick had strong backing within the Bush Administration and by a relatively pro-Free Trade Republican majority in Congress, and he used his discretion to select trade partners based on his own criteria of strategic and commercial benefits. Based on geopolitical considerations, he pursued FTAs with Morocco, Bahrain, Oman, and rejected talks with New Zealand.49 He also launched FTA talks with Australia, the Central American states (CAFTA), the Andean states, and Thailand. Despite Zoellicks’s activism and his enthusiastic articulation of the trade strategy, in fact the policy was highly reactive. By touting a “gold standard” of highly legalized and comprehensive FTAs, USTR insisted that other countries demonstrate their readiness to negotiate with the United States. When countries like Singapore, Australia, or Thailand approached the U.S., Zoellick would evaluate the credibility of their commitment and readiness, as well as weigh strategic factors, and then decide whether to proceed. Other actors in the executive branch began to express concerns with this passive and heavily geopolitical approach. Within the NSC, some officials began voicing doubts that the sheer number of FTAs being announced would dilute resources, while broader commercial strategy might not be served well. “FTAs were being announced right, left, and center, often with piddling countries, and we were concerned that these FTAs were all reactive,” commented an NSC official.50 There was also a broad sense in NSC and the State Department that Asia was not being given enough weight in U.S. FTA policy. This started a process of interagency discussion that resulted in a more clearly defined set of criteria for pursuing FTAs.51 49 New Zealand was reportedly rebuffed because of its ban on nuclear ships in its ports, which led to a split in the ANZUS alliance between the U.S. and New Zealand in the mid-1980s. Moreover, the New Zealand government under Prime Minister Helen Clark was critical of U.S. unilateralism of its invasion in Iraq. The U.S. delayed signing its FTA with Chile for several months as punishment for refusing to back the U.S. in the UN Security Council vote to authorize war on Iraq. Geopolitical motivations also contributed to choosing Australia as an FTA partner, since it has been a strong U.S. ally. 50 Interview with former NSC official, November 19, 2007 [interview D]. 51 Interview with USTR official, November 15, 2007 [interview C].

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Still, FTAs did not become an important part of U.S. Asia regional policy until the announcement of the Korea–U.S. (KORUS) FTA talks. The impetus behind KORUS was largely a set of bilateral concerns. Korea was looking for a way to lock in domestic reforms, while the U.S. was eager to solidify relations with its important ally. However, U.S. officials immediately saw the significance of a KORUS trade deal in terms of changing the dynamics of the emerging FTA network in East Asia. The U.S.–Korea FTA, if enacted, would become a central pillar in the emerging trans-Pacific network of FTAs and could serve as an important building block for a broader APEC-wide trade agreement. In particular, a KORUS FTA is likely to motivate Japan to seek bilateral or perhaps a trilateral deal with the U.S. and Korea, since they represent two of Japan’s top three trade partners. This could create a “domino effect” in which other countries would seek to join, with the U.S. able to set a high bar for any emerging regional agreements. However, the role of Congress has steadily grown in shaping FTA policy, which has negative implications for this trade strategy. Congress refused to extend trade negotiating authority to President Clinton from 1997 on, and barely approved it for President Bush in 2002 (the House passed it by one vote), and then let it expire in 2007. Although traditional protectionism remains very low, new resistance to FTAs has emerged out of concerns over the social costs of trade, with Democrats in particular concerned about labor rights and environmental protection in partner countries.52 This helps explain the recent pattern of voting for approval of FTAs (Table 5.3). Australia, a highly advanced industrial country with a skilled labor force, strong unions, and environmental protections, passed with an overwhelming margin, while CAFTA, involving the developing economies of Central America and the Dominican Republic, barely squeaked by on a 217–215 vote in Congress. Given these trends, many predicted that the new Democratic control of Congress in 2006 would lead to the complete unraveling of the free trade coalition that has characterized American economic policy for most of the last half century. To the surprise of Table 5.3 Congressional votes on FTAs Votes in House of Rep. FTA partner(s)

Year

NAFTA 1993 Singapore May 2003 Chile July 2003 Morocco July 2004 Australia July 2004 CAFTA July 2005 Bahrain Dec. 2005 Oman Sept. 2006 Peru Nov. 2007 Source: (http:www.GovTrak.us)

52

Destler (2003), p. 310.

YES votes by party

Y

N

Republican

Democrat

234 272 270 323 314 217 327 221 285

200 155 156 99 109 215 95 205 132

132 198 196 203 198 202 212 199 176

102 74 74 120 116 15 115 22 109

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many, the Peru FTA received an unusually large vote in support of its passage in November 2007. Yet KORUS, which was signed on July 1, 2007, has run into tough opposition in Congress, with many key legislators taking a stand against the agreement in deference to the strong opposition from labor unions and the automotive industry. Given its current difficulties and the fact that 2010 is an election year, KORUS is not likely to be put up to a vote until the very end of 2010 at the earliest. Nevertheless, the U.S. government continues to avidly pursue the FTAAP in its APEC policy, and has launched a new initiative for a Trans-Pacific Trade agreement. As described in the previous section, the FTAAP was embraced by U.S. officials in the NSC and USTR as the best available means to recapture an agenda-setting role in the region and revitalize the economic agenda of APEC. U.S. officials hope to use the FTAAP proposal as a way to reframe the discussion and reorient the expectations of regional players by advertising the prospect of a region-wide FTA that would include the United States. The U.S. after all, remains by far the largest export market for East Asian economies, and thus continues to wield significant economic clout in the region. The FTAAP, like other aspects of American regional policy, was purely reactive. American officials were seeking a way to counter the growing talk of East Asian FTAs that would exclude the United States. Although most U.S. officials did not find the prospect of a serious, comprehensive FTA likely to emerge in East Asia any time soon, they were concerned about two dangers: (1) that a low-quality, exemption-ridden “soft” East Asian FTA would emerge that would simply add to a spaghetti bowl of trade regulations and transaction costs; and (2) that an East Asian FTA would not be achieved, but the very process of discussing FTAs in an Asian-only framework would lead to progressive marginalization of the United States.53 American officials in the NSC and USTR thus decided that it would be better to seize the initiative rather than continue to downplay such regional schemes. In the words of a former NSC official, “We felt that if other countries were getting credit for offering their ‘pie-in-the-sky’ FTAs, we should try to score points for our own ‘pie-in-the-sky’ FTA proposal.”54 This reveals why Congress has not been involved and will not constrain the current FTAAP strategy – it is not yet a serious FTA policy. U.S. officials are not committed to actually negotiate any reciprocal trade liberalization. By naming it the “Free Trade Area of Asia-Pacific,” rather than a Free Trade Agreement, USTR does not need to notify Congress, and it has been careful to stress to Congress members the long-term nature of the project. While some American officials believe that an FTAAP is simply a “pie in the sky” kind of political gesture, others are more optimistic about concrete outcomes emerging in the long term, but they recognize that the long term will be a far horizon indeed. The more optimistic American policymakers were interested in setting up a process that might lead to a pathway to broader APEC-based FTAs, which could take a variety of forms – including merging existing FTAs into a broader agreement; taking a building block approach by harmonizing particular chapters; creating docking

53

In the process of discussing and negotiating an FTA, East Asian countries could begin to harmonize domestic standards and regulations, and build closer political ties. 54 Interview with former NSC official, November 29, 2007 [interview E].

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provisions or open accession clauses to existing FTAs; or negotiating an APEC-wide FTA from scratch (the least likely option). The hope is that initiating the process itself will shape regional dynamics in a more U.S.-inclusive manner along the way. The Bush administration launched one final initiative intended to drive and shape expectations surrounding region-wide FTAs, and to bolster the credibility of an FTAAP in APEC. Based on concerns that the US was “falling behind” on regional trade initiatives, USTR and the NSC undertook an internal study to consider options for an Asia-Pacific trade agenda, and they began focusing on the “Pacific Four” agreement of Singapore, Chile, New Zealand, and Brunei.55 The “P4” free trade agreement in goods was completed in 2005, and the four countries were set to begin negotiations on two remaining chapters, investment and financial services, in March 2008. USTR officials announced in early February 2008 that the U.S. would join these negotiations, and several months later, in the final months of the Bush administration, they announced that the United States would launch negotiations with the P4 countries to create a Trans-Pacific Strategic Economic Partnership, which became known as the TPP. TPP is very much a child of APEC. Three APEC economies – Singapore, New Zealand, and Chile – launched negotiations for a trilateral FTA on the sidelines of the APEC summit in Los Cabos, Mexico in 2002, and were subsequently joined by Brunei to form the “Pacific Four,” or P4, that was signed on the sidelines of an APEC trade ministers meeting in June 2005. Shortly after the U.S. announced its intention to join these countries in seeking a Trans-Pacific Partnership or TPP, U.S. officials met with their APEC counterparts on the sidelines of the APEC summit in Lima, Peru in November 2008, and announced an agreement with three additional countries – Australia, Peru, and Vietnam – to join the TPP. Negotiations among the seven TPP countries were set to commence in March 2009, but were delayed by the new Obama administration as they undertook a 6-month review of US trade policy. The initial choice of the P4 countries as partners for a trans-Pacific FTA was based on consideration of several advantages. The existing P4 FTA in place is of relatively high quality, and the countries involved seemed to be committed to negotiating high-standard provisions in other areas.56 The United States already had FTAs with two of the original P4 countries – Singapore and Chile – and it also has FTAs with two of the added countries, Australia and Peru. Despite the relatively small commercial size of the TPP countries, the membership is diverse, including both developed and developing countries; it spans the Pacific and all are APEC members. This makes TPP symbolically important as a coalition of likeminded, APEC-based, free-trade-oriented trade partners. Consequently, the U.S. viewed TPP as a potential pathway toward reinvigorating a trade agenda in APEC, and perhaps as a vehicle that would give credibility to the idea of moving toward an 55

This account is based primarily on an interview with a USTR official directly involved in the decision to seek to join the P4 and launch the TPP. Interview with USTR official, January 30, 2009 [interview F]. 56 USTR officials emphasized this point. Interview with USTR official, January 30, 2009 [interview F].

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FTAAP in APEC. Individual chapters of a TPP trade agreement could be broadened to include interested APEC economies in an APEC-based “pathfinder’s initiative,” or other APEC economies could join TPP one by one, in an additive process that could eventually be broadened to encompass all of APEC. However, congressional approval looms large as a potential obstacle for pursuing TPP as a pathway to an APEC-wide agreement. Proponents such as Fred Bergsten argue that the existing FTAs that the U.S. holds with several of its TPP partners could simply be knit together and thereby pass Congress with relative ease. Bergsten and other free-trade advocates further argue for broadening the roster of TPP countries to include countries like Japan, Malaysia, and Canada, in order to build up more U.S. business support for the deal, which could aid its passage.57 However, this ignores the widespread resistance to trade liberalization agreements that has taken hold among the American public and their Congressional representatives. Recent battles between Congress and the two previous administrations over Trade Promotion Authority suggest that it will be very difficult to secure negotiating authority from Congress, which may complicate USTR’s ability to forge a deal being touted as a “21st Century Agreement.” Difficult and complex issues that go beyond the scope of some existing U.S. FTAs will have to be tackled, in areas such as labor, environment, investment, services, technology standards, and IPR protection. Moreover, Vietnam’s inclusion in the grouping will raise labor and human rights concerns for both Democrats and Republicans in Congress. Finally, this analysis would be incomplete without acknowledging the role of “policy entrepreneurs” in shaping U.S. debate and creating policy options for U.S. policymakers. The FTAAP was strongly advocated earlier in the decade by several key players, including the Chair of ABAC and Chilean APEC officials in 2004. Interestingly, although business groups have been broadly supportive of FTAAP as well as TPP, they have not engaged in vigorous advocacy of these initiatives, and had very limited impact on the thinking of government officials.58 By contrast, perhaps the most active voice in the discussion has been C. Fred Bergsten, an economist who directs the Peterson Institute for International Economics, a highly regarded think

57 Dr. Bergsten has made this argument in multiple conference venues. See, e.g., C. Fred Bergsten, “Asia-Pacific Regional Economic Integration and Architecture,” speech delivered via video at the conference on Asia-Pacific Regional Economic Integration and Architecture at Auckland University, New Zealand, March 25, 2010. Available from . See also Barfield and Levy (2010). 58 In my interviews with a range of officials directly involved in U.S. policy decisions on APEC, FTAAP, and TPP, each one said that they held discussions with business representatives about these issues on occasion, but they also emphasized that business interests played at most a peripheral role in shaping policy. Business interests were sometimes focused on a specific, detailed problem that they wanted addressed, but rarely did they actively press for broad policies like FTAAP or other APEC initiatives. Interview with former senior NSC official, November 6, 2007 [interview A]; interview with USTR official, November 15, 2007 [interview C]; interview with former NSC official, November 19, 2007 [interview D]; interview with former NSC official, November 29, 2007 [interview E]; interview with USTR official, January 30, 2009 [interview F].

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tank in Washington, DC. Bergsten was also the Chair of the Eminent Persons Group for APEC in its early years, and played the major role in pushing APEC Leaders to adopt the Bogor Goals for free trade in 1994. More recently, as the Doha round began to falter, Bergsten began warning about the drift toward regionalism and advocating an APEC-wide FTA as a means to counter pan-Asian regionalism. More recently, he has seized on the TPP initiative as the best vehicle for achieving an FTAAP. In op-eds, speeches, policy briefs, and frequent discussions with U.S. and foreign policymakers, Bergsten has been making the case for an FTAAP and for TPP, repeatedly invoking James Baker’s warning against “drawing a line down the Pacific.” His tireless advocacy has probably had an effect in shaping the ideas of U.S. policymakers about available options at a time that they were searching for new policy tactics. On the other hand, if U.S. officials had not been seeking a tactical shift, the FTAAP idea would probably have continued to be ignored.

5.5

Conclusions and Looking Forward: The Obama Administration

This chapter has sought to explain the structural, ideational, and institutional underpinnings of U.S. policy toward Asian regionalism. U.S. interest and ambition in promoting Asian regionalism reached its peak in the early days of the postwar period, when various plans for multilateral frameworks were drawn up and pursued. However, the political dynamics in the region at the time were not favorable to regional multilateralism, leading the U.S. to instead embrace a combination of global economic multilateralism and security bilateralism. These strategies became institutionalized and entrenched over time, and were only partially eroded in the face of rising regional aspirations for multilateral cooperation that arose at the end of the Cold War and intensified in the wake of the Asian Financial Crisis in the late 1990s. The United States has been trying to play “catch up” to the regional activism of its Asian partners and rivals ever since. U.S. regional policy has been hamstrung by growing domestic political constraints on trade policy, which is a central focus of East Asian regional integration efforts. More broadly, U.S. policy over the past two decades has been shaped by the tension between the complacency that comes with being an “indispensable nation” in economic and security relations with East Asia, and the fear of exclusion or marginalization that arises when regional players signal their readiness to move forward in building cooperative frameworks without the United States. The Obama administration came into office determined to send a message that it was shifting away from complacency and toward a more active and constructive engagement with regional multilateralism. Its regional diplomacy was active from the start. Hillary Clinton took her inaugural trip abroad as Secretary of State to East Asia, including a visit to ASEAN headquarters in Jakarta, where she announced that the U.S. was planning to accede to the Treaty of Amity and Cooperation (TAC). In July 2009 during her first ASEAN ministerial meeting, she signed the TAC and declared that the “United States is back” in Asia. This became the recurring theme of speeches and remarks made by Obama administration officials in the first year.

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President Obama himself delivered this message during his visit to Asia for the APEC summit in November 2009. In a speech in Tokyo, he stressed the importance of multilateral organizations in the region, saying, “I know that the United States has been disengaged from these organizations in recent years. So let me be clear: those days have passed.” Calling the U.S. an “Asia Pacific nation” and declaring himself “America’s first Pacific President,” Obama said that the U.S. “expects to be involved in the discussions that shape the future of this region,” and he pledged to “participate fully” in regional organizations. He added that United States is looking to engage with the East Asian Summit “more formally,” suggesting that it might seek membership in the grouping. Rhetorically therefore the Obama administration appears much more committed to regional multilateral engagement than the George W. Bush administration, much like the Clinton team seemed to depart from the more tepid approach of the first Bush administration. And yet long-standing patterns remain evident. Tellingly, much of the Obama administration’s expressed interest in joining new regional frameworks came in direct response to the initiatives of other regional players, notably the East Asian Community proposal put forth by Japan’s new prime minister Yukio Hatoyama that appeared to exclude the United States. Assistant Secretary of State Kurt Campbell responded sharply to Hatoyama’s proposal during an October visit to Beijing by telling reporters “I just want to assure you that. . .the United States is going to be part of this party. We are an active player and we’re going to want an invitation” to any regional grouping.59 Moreover, the Obama administration remains committed to “effective” and “results-oriented” institutions. In her widely praised speech on U.S. Asia policy delivered in Hawaii in January 2010, Secretary of State Clinton listed this as a top priority, saying that forming regional groupings “should be motivated by concrete, pragmatic considerations. It’s more important to have organizations that produce results, rather than simply producing new organizations.”60 She went on to say that while “dialogue is critical. . .we must focus increasingly on action.” This formulation of U.S. principles and priorities is strikingly similar to James Baker’s insistence that “form should follow function,” or President Bush’s call for the “success of multilateralism” to be measured by “achieving results. . . not endless debate.”61

59 Kurt M. Campbell, Assistant Secretary, Bureau of East Asian and Pacific Affairs, Remarks at Press Availability in Beijing, China, October 14, 2009. Available from . 60 Hillary Rodham Clinton, Secretary of State, “Remarks on Regional Architecture in Asia: Principles and Priorities,” Honolulu, Hawaii, January 12, 2010. Available from . 61 Interestingly, James Baker’s praise for pragmatic “ad hoc” multilateralism is also echoed in Secretary Clinton’s speech. As her fourth principle, she lists the need to “maintain and enhance flexibility in pursuing the results we seek.” When large multilateral institutions prove ineffective, the US will seek “informal arrangements targeted to specific challenges.” Hillary Rodham Clinton, Secretary of State (2010).

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In short, the U.S. remains at odds with the Asian style of dialogue-driven, process-oriented multilateralism. Finally, the Obama administration shares with its recent predecessors the growing constraint posed by rising skepticism toward liberal trade policies in public opinion and in Congress. Trade policy has become an Achilles heel for the U.S. approach to Asian regionalism, which remains centered on regional efforts to promote trade integration. The Obama administration has been strikingly ambivalent on trade policy, and its hesitation to push for Congress for a seemingly strong win-win deal like KORUS has created skepticism in the region about the prospects for American leadership in regional economic integration. President Obama heard an earful of these concerns and complaints by East Asian leaders during his APEC trip in November 2009, and he responded by announcing his administration’s decision to launch negotiations for the Trans-Pacific Partnership. The U.S. will have another opportunity to demonstrate regional leadership on economic cooperation when it hosts APEC in 2011. The Obama administration is also likely to announce in mid-2010 its intention to participate in the East Asian Summit, either by full membership or a more informal affiliation. The results of these U.S. efforts to respond to rising Asian regionalism will determine whether regionalism will return to a U.S.-led framework or will instead follow a more East Asian trajectory.

References APEC Economic Leaders Declaration (2004) “One Community, Our Future”. APEC Leaders Declaration (2003) “Bangkok Declaration on Partnership for the Future”. Baker, James (1991) “America in Asia: Emerging Architecture for a Pacific Community”. Foreign Affairs, 70(5), pp. 1–18. Barfield, Claude and Philip I. Levy (2010) “President Obama, the TPP and U.S. Leadership in Asia”. East Asia Forum. Capie, David (2004) “Rival Regions? East Asian regionalism and its challenge to the Asia Pacific”. In Jim Rolfe (ed) Asia-Pacific: A Region in Transition. Honolulu: Asia-Pacific Center for Security Studies, pp. 149–165. Crone, Donald (1992) “The Politics of Emerging Pacific Cooperation”. Pacific Affairs, 65(1), pp. 68–83. Destler, I.M. (2003) American Trade Politics. Washington, DC: Institute for International Economics. Dulles, John Foster (1950) Japan, [Memorandum by the Consultant to the Secretary (Dulles) to the Secretary of State (Acheson)]. In United States Department of State, Foreign relations of the United States, 1950. East Asia and the Pacific, VI. Washington, DC: U.S. Government Printing Office, p. 1359. Feketekuty, Geza (1998) “An American trade strategy for the 21st century”. In G. Feketekuty and B. Stokes (eds). Strategies for a New Era Ensuring: U.S. Leadership in a Global Economy. New York: Council on Foreign Relations. Fisher, Richard D. (1989) “Crafting a U.S. Response to Gorbachev’s “Peace” Initiatives in Asia”. Asia Studies Backgrounder, 93. Forsberg, Aaron (2000) America and the Japanese Miracle: The Cold War Context of Japan’s Postwar Economic Revival, 1950–1960. Chapel Hill, NC: University of North Carolina Press. Fukushima, Akiko (1999) Japanese Foreign Policy: The Emerging Logic of Multilateralism. London: Macmillan Press Ltd. London.

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Funabashi, Yoichi (1995) Asia Pacific Fusion: Japan’s Role in APEC. Washington, DC: Institute for International Economics. 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), pp. 575–607. Press-Barnathan, Galia (2003) Organizing the World: The United States and Regional Cooperation in Asia and Europe. New York: Routledge. Pyle, Kenneth (1995) “The Context of APEC: US–Japan Relations”. NBR Analysis, 6(3), p. 37. Ravenhill, John (2001) APEC and Asia Pacific Rim Regionalism. New York: Cambridge University Press. Reyes, Alejandro (1999) “Days of Diplomacy: The East Timor Crisis Showed APEC’s Worth – and Also Its Limits”. Asiaweek.com, 25 (38). Schaller, Michael (1985) The American Occupation of Japan. New York: Oxford University Press. Schaller, Michael (1997) Altered States: The United States and Japan Since the Occupation. Cary, NC: Oxford University Press. United States Department of State (1976) “Interest of the United States in a Regional Alliance of East Asian and Pacific Powers; Negotiation of a Mutual Defense Treaty with the Philippines and a Security Treaty with Australia and New Zealand”. Foreign relations of the United States, 1951. Asia and the Pacific, I(1). Washington, DC: U.S. Government Printing Office, p. 133. United States Department of Defense (1995) United States Security Strategy for the east AsiaPacific Region. Office of International Security Affairs, p. 14.

Chapter 6

The Politics of Singapore’s Bilateral Free Trade Agreements: Enlightened Self-interest to Promote East Asian Regionalism in the New Millennium? Lee Lai To and Ren Yi Hooi

6.1

Introduction

With total international trade three and a half times that of its gross domestic product (GDP), Singapore has been a natural and ardent advocate and supporter of free trade. For the trade-dependent city-state, it would be ideal if multilateral forums, notably the World Trade Organization (WTO) and Asia Pacific Economic Cooperation (APEC) meeting, could lay down the framework for international trade liberalization. However, as noted by many, multilateral negotiations and processes had failed to make much progress by the late 1990s. Singapore has thus been contemplating alternative strategies to boost trade, or for that matter, investments, in its perennial quest for trade liberalization. The country’s main strategy as adopted in the new millennium has been to actively pursue Free Trade Agreements (FTAs), especially bilateral ones, with an extensive network of trading partners. It is the aim of this chapter to examine Singapore’s political and strategic calculations for launching its bilateral FTA strategy, keeping in view domestic as well as foreign influences and reactions. It also analyzes the potential impacts of Singapore’s FTA strategy on East Asian regionalism. While the nation’s bilateral approach has drawn some criticism for potentially diverting attention from multilateral negotiations, this chapter argues that Singapore’s FTAs act as building blocks for wider regional and global economic cooperation. As such, they are not to be viewed purely as facilitators of bilateral trade, but part of Singapore’s new regional strategy in the absence of an effective regional framework. Since Singapore did not embark on its FTA strategy until the year 2000, the focus of this chapter is on bilateral FTAs signed by Singapore in the new millennium.

L.L. To (*) Department of Political Science, National University of Singapore, Kent Ridge, Singapore e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_6, # Springer Science+Business Media, LLC 2011

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6.2

L.L. To and R.Y. Hooi

Traditional Approach to East Asian Regionalism

Due to a lack of natural resources and high dependence on trade, Singapore has always maintained an open economy and adopted a liberal approach to trade (as well as foreign direct investment) since its forced independence in 1965. As emphasized by the then-Prime Minister Lee Kuan Yew at the time of Singapore’s independence, “I think we ought to trade with every country in the world that is prepared to leave us alone to be ourselves ... we can trade with the world including Russia, China and Indonesia, if the latter wants to trade with us.”1 With regard to East Asia for example, Lee’s fight with the pro-communists and leftists at home did not affect his desire to continue to trade with China, or for that matter, the then Soviet Union.2 Such thinking and approach has guided Singapore both in the Cold War period and after. During the Cold War, Singapore pursued an expansion of trade via multilateral and regional approaches. While primarily placing “highest priority in the multilateral trading system which is embodied in the World Trade Organization (WTO),”3 Singapore was also one of the founding members of the Association of Southeast Asian Nations (ASEAN) grouping in 1967, and later joined the Asia-Pacific Economic Cooperation (APEC) in 1989. In the early 1980s, S. Dhanabalan, Singapore’s Foreign Minister, further elaborated on the main precepts of the country’s foreign policy as such. First, “we will be friends with all who wish to be friends.” Second, “we will trade with any state for mutual benefit, regardless of ideology or system of government.” Third, “we will remain non-aligned with regard to the rivalries of great-power blocs.” Lastly, “we will cooperate closely with ASEAN members to achieve regional cohesion, stability and progress.”4 While Singapore maintained its open, trade-seeking foreign policy approach and continued to take an active role in facilitating regionalism after the Cold War, its frustration with the slow pace of regional integration, among other reasons, led it to pursue bilateral Free Trade Agreements (FTAs) from the early 2000s onward.

6.3

6.3.1

Establishing Bilateral FTAs: Singapore’s New Regional Strategy Ideas

Singapore’s bilateral FTA approach can be explained by three key sets of reasons drawn from various sources: (1) An increasing awareness of the weaknesses of 1

Singh (1999). Lee (1975), Singh (1990). 3 Singapore Ministry of Trade and Industry, “WTO.” Available from . 4 Lee (1982). 2

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existing regional institutions;5 (2) a deeper understanding of the economic benefits of FTAs; and (3) strategic calculations pointing to the strengthening of foreign relations through FTAs. While Singapore’s FTAs are exclusive to regional partners alone, they arguably form a key part of Singapore’s regional strategy. Seen by the government as “building blocks” for regionalism, Singapore’s FTAs form a “third track” that acts as a complement to the both the multilateral and regional tracks, potentially opening doors for its other regional partners as well.6 Singapore’s ideas driving its bilateral approach are further analyzed here.

6.3.1.1

An Increasing Awareness of the Weaknesses of Existing Regional Institutions

With respect to ASEAN, Singapore believes that the pace of regional integration “is slow, below what Singapore expects for its own benefit and that of ASEAN.”7 Although Singapore is committed to the ASEAN Free Trade Agreement (AFTA), regional economic integration has been impeded by political differences, intercountry competition, and the fact that countries place national sovereignty over regionalism.8 This was further aggravated by the Asian financial crisis of 1997. Valid concerns were expressed in the early 2000s that Southeast Asia had “lost the dynamism and drive toward trade and investment liberalization and integration,” and Singapore policymakers were keen to ensure that international investors did not “perceive it as being in the same boat as the rest of the region.” 9 As such, Singapore decided to move forward on its own FTAs instead of waiting for the region to catch up, with Prime Minister Goh saying that “those who can run faster should run faster ... and should not be restrained by those who do not want to run at all.”10 Similarly, Singapore found the pace of trade and investment liberalization and facilitation too slow in APEC and the WTO, instead believing that bilateral FTAs with selected and like-minded countries could produce faster and deeper results. In some ways, Singapore’s FTA strategy or approach could be viewed as “qu yi bu qu nan” (taking the easier rather than the more difficult option). After all, bilateral FTAs involve only two parties and the record shows that all the bilateral FTAs signed by Singapore and its counterparts have taken, at the most, a few years to finalize the negotiations. With a complex regional framework hindered by intercountry differences, FTAs have simply been a more efficient way for Singapore to forge trade agreements.

5

Ravenhill (2003). Rajan (2002). 7 Daquila and Le (2003). 8 Tan (2004). 9 Rajan and Rongala (2008). 10 Asian Economic News, 2001. 6

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Economic Benefits of FTAs

Naturally, economic considerations were also key to Singapore’s FTA strategy. After the collapse of the Uruguay Round of trade talks in the 1980s, Singapore felt the need to pursue FTAs for the elimination of tariffs and import duties as well as advancement of economic cooperation between countries, all of which would help the country to maintain its competitive edge. With trade hailed as “the lifeblood of Singapore,”11 the country needed to ensure that trade liberalization continued to be pursued for its economic interests, especially when multilateral and regional initiatives failed to yield results. As remarked by Ambassador Chan in August 2001: Today the free trade agreement may be the mechanism through which trade liberalization may be gradually achieved in the region. And we, Singapore, are an advocate of the bilateral FTA as the mechanism to push trade liberalization.12

Having observed the results of FTAs formed in other regions of the world, Singapore concluded that preferential trade agreements were beneficial as they had led to increased trade, positive competition impact, and faster economic growth among trading partners.13

6.3.1.3

Strategic Benefits of FTAs

Singapore’s FTAs also contain the strategic consideration of helping to keep Singapore “on the radar screens” of the countries with which they are formed.14 As a small nation, Singapore perpetually feels the need to strengthen foreign relationships and ensure that it has a presence in other countries. FTAs thus serve the purpose of consolidating Singapore’s external network and advancing its political relationships with its trading partners. They also “have the potential to augment Singapore’s minuscule negotiating power in the world by associating the country with powerful trade partners.”15 Moreover, having observed the proliferation of FTAs taking place in Europe and America, Singapore likely decided to engage in its FTA strategy to avoid being left behind, as well as to reduce the global imbalance of power in favor of the transatlantic region of the world. While these reasons outline the impetus for FTAs from the individual country level, it can be argued that Singapore sees FTAs not as standalone achievements, but building blocks toward regional economic integration and “trailblazers for other 11

Daquila and Le (2003). Chan Heng Chee (2001). Statement by Ambassador of Singapore to the United States before the National Governors’ Association. 13 Hocking and McQuire (2004). 14 Daquila and Le (2003). 15 “Trade Agreements Key Strategy for Singapore.” Available from . 12

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ASEAN countries.” As mentioned by RS Rajan in “Going It Alone – Singapore’s New Commercial Trade Strategy,” Singapore’s bilateral FTAs may be a means of “prompting other ASEAN/APEC member economies to hasten the process of regional and unilateral liberalization.” He added that Singapore could “act as the ‘flag bearer’ for the region in that its trade initiatives could maintain global interest and ‘draw extra-regional investments into the Southeast Asian region as a whole.’ ”16 In fact, as seen from some of the case studies to be examined later in the chapter, Singapore has formed most of its FTAs with the interests of ASEAN in mind.

6.3.2

Domestic Institutions

Since Singapore is very much a state-led economy, the calculations and assessments of its political leadership have been decisive in structuring the FTA strategy. The Prime Minister and his cabinet thus play a critical role in steering Singapore’s road to bilateral and multilateral economic cooperation in East Asia and other parts of the world. As far as trade is concerned, the Ministry of Trade and Industry (MTI) plays a particularly important part in policy administration and implementation. While there are ten statutory boards under the MTI which all play a role in supporting Singapore’s FTA strategy, it should be highlighted that International Enterprise Singapore (IE Singapore) is the lead agency spearheading the city-state’s efforts to develop its external trade and economic wing. Most related to this chapter, IE Singapore tries to assist Singapore companies to use various FTAs signed by Singapore for their own benefits. In this regard, the Singapore government, through IE Singapore, has been organizing numerous meetings and programs to raise the awareness of the FTAs. IE Singapore also tries to help the business community to look for overseas business opportunities by organizing missions and other events.17 Hence it is evident that the Singapore government has played the leading role in steering and implementing Singapore’s bilateral trade strategy.

6.3.3

Interests

As Singapore’s FTA strategy has been almost entirely government-led and planned, there is little concrete evidence on businesses pushing for or against FTAs in the country as well as domestic sentiment on the ground. Still, it has been highlighted that there has been an increased interest in preferential trade agreements within East Asian countries, stimulated by the “growth of such arrangements elsewhere” and the fact that companies “found themselves disadvantaged in markets where 16

Rajan (2002). International Enterprise Singapore. Available from . 17

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their competitors enjoyed preferential access.”18 Following this trend, there are businesses in Singapore that demonstrate support for free trade. For example, the CEO of the Singapore Business Federation (SBF), the apex business chamber that represents over 15,000 companies in Singapore, pointed out that restrictive trade policies have hindered many companies from tapping into profitable supply chains. It currently actively supports and helps to develop free trade agreements. The SBF also organized a joint conference with the APEC Business Advisory Council in November 2009, the main aim of which was to push for the removal of unnecessary regulations within APEC. However, the limited actual and intended usage of FTAs by domestic exporting firms as found in a recent survey reveals that the majority of companies (at least exporting ones) are fairly indifferent to Singapore’s numerous FTAs.19 Despite IE Singapore’s efforts, Singapore had the lowest FTA utilization rates among four other East Asian countries (Japan, Korea, Philippines, and Thailand), with 17.3% of firms utilizing FTAs and 28% intending to do so as of 2008. While lack of information of FTAs appeared to be the most significant deterring factor for companies (45%) in all the surveyed countries, Singapore’s smaller average firm size could account for the lower FTA usage compared to the other countries due to the fact that FTAs incur significant fixed costs.20 This means that Singapore’s FTA policies may not actually be helpful (and hence may not matter much) to the majority of small and mid-sized businesses in the country. Moreover, there in fact has been some local sentiment expressed against Singapore’s focus on international policies. During a local conference, members of the audience started to look uncomfortable as invited panelists expounded upon globalization and its effects. One of them pointed that “Before we go overseas, I’m more concerned about our own homes. Let’s go back to local issues.”

6.4

Singapore’s FTA Strategy: Regional Impacts and Reactions

Singapore’s bilateral FTA strategy has been fairly controversial among its ASEAN neighbors. It met with criticism during its earlier stages as its go-it-alone move was viewed as counter to the ASEAN spirit and hence regionalism. Some also believed that it would provide a potential “back door” for goods from partners’ countries to enter ASEAN duty free. Concerns about Singapore’s FTAs undermining the 18

Ravenhill (2003). Asian Development Bank Institute. Challenges posed by Asian Free Trade Agreements. Available from . 20 Asian Development Bank Institute. Challenges posed by Asian Free Trade Agreements. Available from . 19

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strength of the AFTA were expressed: Malaysia’s Foreign Minister Syed Hamid Albar, for example, stated pointedly that, “When we do something outside the ASEAN context which could weaken the organization, we must think twice.”21 In addition, several of Singapore’s FTAs appear to have succeeded in rapid conclusion because of the nation’s readiness to accept a number of conditions in the bilateral accords set forth by the larger partners, such as labor and environmental standards.22 While these conditions may matter little to Singapore, they do not help other developing countries in the region which may not be able to accede to the same conditions, and thus do not apply in facilitating FTAs on a regional scale. Related to this point, FTAs may pose the problem of adding to the “spaghetti bowl” of regional, transnational and bilateral arrangements, which may contradict each other to some extent or adopt differentiated clauses that may be difficult for businesses to reconcile. At the same time, the time spent on bilateral negotiations may divert time and attention of trade partners away from regional or multilateral efforts. However, the negative perception of Singapore’s FTAs among other ASEAN countries appears to have diminished over time. In fact, many countries such as Thailand and Malaysia have begun to follow in Singapore’s footsteps in pursuing an active FTA strategy, hence affirming Singapore’s idea of acting as a trailblazer for its regional partners to follow. Moreover, as Singapore has forged WTO-plus trade accords, which focus on “deep” integration going beyond the basic WTO requirements rather than just merchandise trade liberalization, they could help to establish a precedent or benchmark for multilateral trade negotiations.23 The impacts of Singapore FTA strategy and foreign reactions to it will be further examined along with the case studies below.

6.5 6.5.1

Relevant Case Studies The Initial Move: An FTA with New Zealand

Singapore’s forays into bilateral FTAs started with New Zealand, with which the FTA was signed in 2000 and came into effect in 2001. In terms of trade, New Zealand was not really that important for Singapore. By the turn of the century, the total volume of two-way trade stood at never-mind $970 million in the year 2000, many times smaller than the volume in Singapore-US trade and SingaporeMalaysia trade for the same year.24 However, as mentioned by Alan Chong in 21

Daquila and Le (2003). Rajan (2002). 23 Rajan (2002). 24 Yearbook of Statistics Singapore (2006), p. 143. 22

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“Singapore’s Political Economy 1997–2007,” it was “more than symbolic that Singapore negotiated its first bilateral FTA with another significant small state.”25 Both countries shared something in common – namely, the desire to be at the forefront of a drive to break down tariffs and open up markets; and to see both the WTO and the Asia Pacific Economic Cooperation (APEC) forum succeed in fostering trade liberalization. Alan explains three key reasons for the establishment of the SingaporeNew Zealand FTA. First, it was intended to be an additional and complementary step to build further momentum for these forums. This initiative by small was meant “to act as a catalyst for other larger economies in the APEC region to take similar steps.”26 Second, both countries wished to underscore the historic linkage between open economic markets and political and social stability. Third, he adds that it was a straightforward case of hedging through “common sense.” Against the backdrop of 1999, key leaders wanted a bridge between the nascent ASEAN FTA and the Australia-New Zealand trade partnership, and the FTA served the function well. These reasons underscore Singapore’s intention of forming the FTA as a form of regional and multilateral support. The FTA negotiation with New Zealand was beneficial to Singapore in several ways. It served as an important learning experience for later FTAs. As noted by Linda Low, the agreement with New Zealand was an important tutorial for Singapore before it engaged major trade partners in such negotiations.27 The FTA also paved the way for the trilateral FTA among Singapore, New Zealand, and Chile later on.28 In purely economic terms, the FTA bore fruits a year after its implementation as well. Two-way trade expanded about 10% in the first 10 months of 2001. For Singapore, its trade surplus with New Zealand soared more than eight times as its exports to New Zealand rose 20.8%, and its imports from New Zealand slumped 17% due to its sluggish economy in 2001.29 It remains to be noted that at this point Singapore’s initial venture into bilateral FTAs, as exemplified by its negotiations with New Zealand, had created doubts on whether it was still committed to a multilateral trading system. Notably, leading industrialized economies wanted to know if there was a policy shift from multilateral agreements to bilateral and regional arrangements at the Third Trade Policy Review of Singapore conducted by the WTO in Geneva in early 2000. The reply from the city-state, as made known by the then-permanent Secretary for Trade and Industry, Khaw Boon Wan, was that the Singapore government, based on lessons from the Asian financial crisis, would tread cautiously in being an active participant in globalization. He emphasized that globalization “is here to stay” but “it will be a disaster if we mindlessly liberalize.” As such, Singapore’s liberalization would be

25

Chong (2007). Goh and Shipley (1999). 27 Low (2003). See also Lee (2006). 28 Business Times (Singapore), May 30, 2002. 29 Straits Times (Singapore), March 27, 2002. 26

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done “systematically in a controlled manner.” As far as RTAs (regional trade arrangements) and bilateral FTAs were concerned, they were considered to be complementary to the WTO.30 However, this stance and clarification did not seem to be convincing, at least to some leaders in ASEAN as demonstrated by the initial disquiet and worries in Malaysia. As mentioned earlier, Singapore’s initiative was criticized as having betrayed solidarity among ASEAN members and as a potential backdoor entry into the AFTA’s preferential tariff system.31 Singapore’s reply was that ASEAN had already in place a mechanism that would pre-empt such a backdoor entry and that its FTA would serve as a catalyst to propel global trade liberalization.32 While this may not have been persuasive to the skeptics of the bilateral approach, it appeared that other states, including other members of ASEAN felt that they had to follow suit in order not to lose out in getting a share of the pie in international and regional trade.

6.5.2

Engaging the Major Players: Bilateral FTAs with Australia, Japan, and the USA

After New Zealand, it was logical for Singapore to work on another FTA with its close neighbor, Australia, a country that has a lot more trade and economic cooperation with the city-state. As of 2000, two-way bilateral trade between Singapore and Australia was S$9,500 million, almost ten times that of Singapore– New Zealand trade for the same period.33 Negotiations for the Singapore-Australia Free Trade Agreement (SAFTA) were launched in November 2000, with the agreement finalized 2 years later in November 2002. The comprehensive agreement covered areas not only in goods, services, and investments, but also in new-age cooperation areas such as telecommunications, financial services, movement of businessmen, government procurement, intellectual property rights, competition policy, e-commerce, and education cooperation.34 As revealed by Singapore’s MTI, the agreement committed both countries to “greater trade liberalization than they have currently committed at the World Trade Organization.”35 For Singapore, the FTA was not only a move that could save its firms about S$31.6 million a year in tariff concessions, but also a strategic move and catalyst for Australia to get more involved in ASEAN and Asia.36 In fact, Australia 30

Business Times (Singapore), April 1, 2000. Business Times (Singapore), August 7, 2001. 32 Business Times (Singapore), February 28, 2001. 33 Yearbook of Statistics Singapore (2006), pp. 143. 34 Sunday Times (Singapore), November 3, 2002. 35 Sunday Times (Singapore), November 3, 2002. 36 Straits Times (Singapore), July 29, 2003. 31

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made no disguise that it would like to have similar FTA arrangements with Thailand and the rest of ASEAN. Canberra was also keen to eventually negotiate an FTA with ASEAN as a whole.37 Besides helping both sides to increase trade and promote improved conditions of access for businesses, investments, and services on both sides, it appears that the FTA has also played a part in connecting Australia to the other countries within the ASEAN region and serving as a role model for others to follow suit. For Singapore, one of the most critical FTAs would definitely be the one with Japan. At the time when negotiations for the agreement between Japan and Singapore for a New-Age Economic Partnership (JSEPA) started in October 2000, Japan was the third most important trade partner of Singapore. In addition, Japan is one of the major investors in the city-state. As of early 2007, there were 2,200 Japanese companies in Singapore.38 Despite cutbacks in investments in recent years, more than one in four, namely 27.3% of the Japanese companies that Jetro polled had kept a presence in Singapore, a percentage higher than other ASEAN states except Thailand.39 While Japanese companies were still concerned with the high labor costs in Singapore, they were set to turn to new high-growth sectors that Singapore is focusing on. Japanese companies had also begun to use Singapore as a key base to expand into Asia and as a regional headquarter for their operations.40 Nonetheless, it is a well-known fact that it is difficult to break into the Japanese market. More importantly, Japan had not been participating in FTA talks and the negotiation with Singapore was the first one undertaken by Tokyo. As such, the FTA was a new experience for Japan. Following the recommendation of the Japan-Singapore Joint Study Group, the two sides conducted 12 rounds of negotiations. Basic agreement was reached in late 2001. However, the signing of the agreement was delayed until early 2002 as a result of the September 11 terrorist attacks on the USA, causing changes in the schedules of the prime ministers from both sides. Eventually, the JSEPA was signed in January 2002 by the two prime ministers and the agreement came into force in November 2002. The agreement not only covers liberalization of sectors such as trade in goods and services, including financial services, but also issues on mutual recognition, rules of origin, customs procedures, government procurement, investment, movement of people, intellectual property, competition policy, information and communications technology, tourism, science and technology, small and medium enterprises, broadcasting, and others.41 It should be noted that it was agreed that Japan needed to include only farm products whose tariffs had already been removed. This

37

Straits Times (Singapore), July 29, 2003. Business Times (Singapore), April 4, 2007. 39 Business Times (Singapore), April 4, 2007. 40 Business Times (Singapore), April 4, 2007. 41 For a complete list of the items covered by JSEPA, see Straits Times (Singapore), January 14, 2002. 38

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concession was no great loss to the city-state, whose agricultural exports to Japan accounted for about 4% of its total trade with Japan.42 In the light of the highly protected farm sector, it was easier for both to reach an agreement without including liberalization of agricultural products in the document. However, whether this exclusion is in conformity to WTO practice is debatable. It remains to be noted that a review of the agreement was conducted in April 2006 and an agreement to bring about a greater liberalization in trade in goods and services was reached in January 2007.43 As declared by the then-Trade and Industry Minister, George Yeo, Singapore’s strategic calculations in negotiating the FTA with Japan were threefold: namely to deepen Singapore-Japan ties, promote the stability and prosperity of Southeast Asia and spur further trade liberalization in the Asia Pacific region.44 To Singapore, the JSEPA was worth more than economic benefits to both sides. As stressed by Prime Minister Goh Chok Tong, the agreement played a strategic role in anchoring Japan in Southeast Asia. He noted that the USA-Japan Security Alliance had contributed to regional peace and stability and that Japan had played an important role in anchoring the USA in East Asia. Prime Minister Goh believed that the USAJapan Security Alliance provided balance to the Japan-USA-China triangular relationship.45 That was why, according to him, the decline in Japan’s share of the region’s trade and foreign investments had been troubling. As such, he hoped that the agreement would play a small part in encouraging Japan to re-invest and trade more with Singapore as well as the Southeast Asian region. In this regard, Singapore had no problem in backing Japan to work for closer economic cooperation with ASEAN. It is interesting to note that both Singapore and Japan agreed that their JSEPA should form the basis for broader ASEAN–Japan cooperation. As the first such agreement for Tokyo, the Japanese Ministry of Foreign Affairs planned to use the Japan-Singapore agreement as a reference, and hoped to knit all of the individual accords with ASEAN member states together into one overall Japan-ASEAN economic partnership arrangement.46 As a result, Japan was considering bilateral economic arrangements with Thailand, the Philippines, Malaysia and others even though it had agreed to work on a comprehensive economic partnership with ASEAN in November 2002.47 In addition, it seems that while working on bilateral and ASEAN-wide economic partnerships, Japan is also interested in promoting an East Asia wide economic group. Thus, the East Asian Business Area (or East Asian Free Business Zone), comprising of ASEAN, South Korea, China, and Japan was promoted by Japan’s

42

Straits Times (Singapore), October 13, 2001. Straits Times (Singapore), March 20, 2007. 44 Straits Times (Singapore), January 19, 2000. 45 Straits Times (Singapore), March 19, 2002. 46 Business Times (Singapore), October 17, 2002. 47 Straits Times (Singapore), November 6, 2002. 43

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Ministry of Economy and Industry and by the Japan External Trade Organization.48 More importantly perhaps, Japan indicated its interest in promoting a Comprehensive Economic Partnership in East Asia (CEPEA), comprising of the ten ASEAN states plus Japan, China, South Korea, Australia, New Zealand, and India.49 However, Singapore has its reservations in forging the CEPEA. As stated by Prime Minister Lee Hsien Loong in an interview with the Japanese media in early 2007, “if you are not able to have a good ASEAN–Japan FTA, you have no hope of having a good East Asia-wide FTA because more participants means more issues and more complexity.”50 As such, the suggestion was that Japan should work on a good FTA with ASEAN, and on that basis, expand the cooperation to the rest of East Asia through CEPEA.51 The most important FTA negotiated by Singapore is probably the one with the USA. The USA has been the most important investor and it is also the second most important trade partner after Malaysia for the city-state. As analyzed later, the USA is important for Singapore in terms of its strategic and security calculations. Initiated by Prime Minister Goh Chok Tong and President Clinton in November 2000 at the APEC summit in Brunei, the bilateral FTA was meant to reinforce the already strong economic and political ties between Singapore and the USA. Specifically, it was the hope that the agreement would help arrest the decline in two-way trade after the Asian Financial Crisis and September 11 terrorist attacks on the USA. Strategically, Singapore considered that the USA-Singapore FTA would demonstrate not only US interests in trade liberalization but also in strengthening its partnership across the Pacific with Southeast Asia and the East Asian region. As suggested by Singapore’s Trade and Industry Minister George Yeo, the FTA would “send a strong message to the region that America intends to remain a dominant player in Asia for a long time to come.”52 At a time when there were Southeast Asian concerns about the possibility that the new Bush administration would focus much of its trade policy on the Americas and pay less attention to East Asia, notably Indonesia, it was important for the USA to remain engaged in the region, as suggested by Minister Yeo.53 As the first US FTA with an Asian country, it was declared by both sides that they aimed at a “model” or benchmark for others on the removal of trade barriers. In fact, Prime Minister Goh Chok Tong made the same point after his meeting with President Bush in mid-2001 that the USA wanted an FTA with Singapore that could serve as a model trade pact for other Asian countries. He added by suggesting that at the right time, “the USA may wish to get another country to sign on to the FTA. So we do this for strategic reasons, not just for Singapore’s own interests.”54

48

Business Times (Singapore), October 17, 2002 and October 29, 2002. Business Times (Singapore), March 19, 2007. 50 Straits Times (Singapore), March 19, 2007. 51 Straits Times (Singapore), March 19, 2007. 52 Business Times (Singapore), March 15, 2001. 53 Business Times (Singapore), March 15, 2001. 54 Business Times (Singapore), June 12, 2001. 49

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This reflects Singapore’s idea of bilateralism as a building block for regionalism, or facilitating further trade agreements within the region. The FTA, which was signed in 2003 and went in force in 2004 garnered early reviews which show that the agreement had been helpful to further the already close economic relations between the two countries.55 Notably, the FTA seemed to have ignited an increase in bilateral trade and investment flows in its first year as noted by Singapore’s MTI and the US Embassy in Singapore.56 More importantly perhaps, in spite of the initial misgivings from parts of ASEAN, the FTA could serve as a model for the USA to expand its free trade links with the rest of ASEAN as envisioned by President Bush’s Enterprise for ASEAN Initiative (EAI). For a start, the Trade and Investment Facilitation Agreement (TIFA) was endorsed by the USA and ASEAN in August 2006.57 Under the non-binding arrangement of TIFA, it is possible that more bilateral FTAs could be negotiated between the USA and some ASEAN members. Still, while TIFA and bilateral FTAs may serve as building blocks for the formation of a larger USA-ASEAN FTA over time, it is impossible to have it in the near future because of the developments in Myanmar in 2007 as stated by US Trade Representative Susan Schwab in Singapore.58 It remains to be noted that Singapore’s strategic move to engage the USA in ASEAN, or for that matter, East Asia does not rely on the FTA initiative alone, but was built on a framework of agreements since 1990. These agreements, which included military as well as economic cooperation, affirmed the city-state’s longstanding position that American presence is vital to the peace and stability of the Asia Pacific region.

6.5.3

Strengthening Ties with East Asian Regionalism: Bilateral FTAs with China, India, and Korea

New Zealand, Japan, Australia, and the USA were among the first group of developed countries that Singapore worked with earnestly for its bilateral FTA strategy. However, it was also clear that the city-state would have to link up closely with rising economies in Asia, particularly China and India, and to a certain extent, Korea. China’s rapid growth for more than two decades since its economic reforms and opening to the world has actually produced and prompted a significant increase in trade and collaboration with various countries, including Singapore. This was

55

See, for example, the assessment of Professor Tommy Koh in Business Times (Singapore), January 29, 2005. 56 Straits Times (Singapore), February 4, 2005. 57 Straits Times (Singapore), August 26, 2006. 58 Business Times (Singapore), November 20, 2007.

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evidenced by the sharp rise in the volume of two-way trade, making China the third largest trade partner for Singapore. Singapore is also China’s seventh largest foreign investor.59 The leaders of Singapore were happy to learn that Chinese Premier, Zhu Rongji mooted the idea of having a China-ASEAN FTA at the ASEAN plus three meeting in November 2000. Progress had been made to put the idea into practice, as evidenced by the agreement of Premier Zhu Rongji and ASEAN leaders to set up the China-ASEAN FTA in a decade in November 2001 and adopt the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and the People’s Republic of China in November 2002. While giving its support to the proposed umbrella agreement for an FTA between China and ASEAN, Singapore did not rule out the possibility of negotiating a bilateral FTA with China if other ASEAN states proceeded to do so as indicated by the thenDeputy Prime Minister Lee Hsien Loong in November 2002.60 Subsequently, Prime Minister Goh Chok Tong proposed to start negotiating a bilateral FTA between Singapore and China when he met his counterpart, Premier Wen Jiabao in November 2003 in Singapore. By that time, Goh had considered that there was much progress made in the negotiations for the China-ASEAN FTA and that the negotiations could be completed by mid-2004. He also noted that the ASEAN ministers had agreed that individual ASEAN members could negotiate bilateral FTAs with China as part of the overall FTA framework between ASEAN and China.61 Nonetheless, Goh maintained that Singapore’s priority was to work for the early completion of talks on the ASEAN-Chinan FTA before starting negotiations with China on a bilateral accord. In the meantime, Singapore and China would explore separately the feasibility of having a bilateral FTA.62 Eventually, it was disclosed by Lee Hsien Loong that both sides would start negotiations on a bilateral FTA in November 2004.63 At that point, it was expected to be a fairly smooth path toward sealing the pact. Essentially, the proposed FTA would cover goods, services, and investments to encourage more trade and investments in both directions. Reduction of tariffs would be helpful to Singapore to export more to the Chinese market. The FTA was also expected to help Chinese companies go global, using Singapore as a base or headquarters for their expansion into the world. The optimistic expectation of sealing the FTA smoothly did not turn out to be true. This was primarily due to the disapproval of the Chinese government over Deputy Prime Minister Lee Hsien Loong’s visit to Taiwan from July 10–12, 2004. As reported by the China Daily, Lee’s visit “dampened the mood to negotiate the free trade area between the two countries.” The Chinese Foreign Ministry also

International Enterprise Singapore, Singapore FTA Network. Available from . 60 Business Times (Singapore), November 14, 2002. 61 Business Times (Singapore), November 21, 2003. 62 Straits Times (Singapore), November 21, 2003. 63 Straits Times (Singapore), May 15, 2004. 59

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stated that “whatever pretext the Singaporean leader used for the visit, it would damage China’s core interests and the political foundation for China-Singapore relations.”64 Lee maintained that Singapore had the right to make independent decisions and its international standing would be damaged if he canceled the trip at China’s request. However, he declared that Singapore followed a “one China policy” and that it did not support the independence of Taiwan. This was reiterated to President Hu at the end of 2004 by Lee, who was by then the Prime Minister of Singapore.65 By then, Singapore and China appeared to have put the bilateral spat behind them. By early 2005, China seemed to be willing to resume the stalled FTA talks with Singapore. In fact, Premier Wen Jiabao had called for an acceleration of the negotiations just before the Chinese New Year in 2005.66 Eventually, both sides restarted negotiations for a bilateral FTA in October 2006. It was claimed that the FTA, when completed would be a “comprehensive one, extending beyond trade in goods, services and investments.”67 It would also encompass cooperation initiatives in various areas and cover areas not included in the ASEAN-China FTA.68 In the meantime, it was announced in early 2007 that Singapore and China would collaborate on a new joint project to develop an “eco-city” which would showcase how rapid economic development could be balanced with sound environmental protection.69 This will be another flagship project for the SingaporeChina cooperation after the Suzhou Industrial Park. Eventually, the agreement to build a flagship eco-city in Tianjin to consolidate bilateral ties between China and Singapore was signed in November 2007. In the case of the Singapore-China FTA, it was signed in October 2008 and came into force in January 2009. As the first FTA signed by China with an Asian country, the agreement would allow most of Singapore’s exports to China duty-free. Likewise, Singapore would lift all tariffs for Chinese exports. In addition, Singapore and Chinese companies would find it easier to deploy their staff and enjoy better access to selected sectors in each other’s market. It was the hope of Prime Minister Lee Hsien Loong that the newly signed FTA would “give a push” to a similar agreement being discussed between China and ASEAN as a whole.70 As for India, it is not yet considered a major trade partner of Singapore – it ranked 12th in terms of the total trade for the city-state in 2006 and is equivalent to about 20% of the trade between Singapore and China.71 With a population of a billion and, more importantly, its decision to open up and follow the Look East policy, India would offer a large amount of trade and investment opportunities for

64

Straits Times (Singapore), August 4, 2004. Straits Times (Singapore), November 21, 2004. 66 Straits Times (Singapore), March 5, 2005. 67 Straits Times (Singapore), October 27, 2006. 68 Straits Times (Singapore), July 12, 2007. 69 Straits Times (Singapore), July 12, 2007. 70 Straits Times (Singapore), October 24, 2008. 71 Yearbook of Statistics Singapore (2007), p. 143. 65

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East Asian states. In fact, Singapore was India’s third largest foreign investor in 2005. While India would like to have an FTA with ASEAN within 10 years, it is also receptive to working on bilateral FTAs with individual ASEAN members. This was demonstrated, among other things, by the launch of a joint study group to look into the possibility of having a free trade deal for Singapore and India after a meeting between Prime Ministers Goh Chok Tong and Atal Behari Vajpayee in April 2002.72 The recommendation of the joint study group was positive and its suggestions were used as a framework for subsequent negotiations. The negotiations took longer than expected because of a change of government in India, what other things. However, after 13 rounds of negotiations, the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) was signed in June 2005 during Prime Minister Lee Hsien Loong’s visit to India. It was a landmark in the sense that it was the first of its kind for India and the first comprehensive bilateral economic agreement with a South Asian country for Singapore. It should also be noted that the agreement is wider than an FTA. It not only has a free trade agreement, but also a bilateral investment promotion treaty, an improved doubletax avoidance agreement, and other areas of cooperation.73 It was also the hope of Singapore that the agreement could serve as a catalyst for the conclusion of an ASEAN-India free trade pact. In the light of Singapore’s strong economic relations with China and India, Prime Minister Goh Chok Tong also believed that Singapore could serve as a bridge between India and China, and that would bring tremendous benefits to all the three countries.74 From the preliminary review by Singapore, it seems that the agreement has been helpful. Notably, since its signing, bilateral trade shot up by 40% to more than US $13 billion in 2006.75 In fact, according to Minister of State for Trade and Industry Lee Yi Shyan at the FTA Symposium in early 2007, of all the FTAs signed by Singapore, the one with India posted the highest utilization rate in 2006.76 Singapore also became the second largest investor in India in the first 7 months of 2006. Political ties also have been growing. As stated by Indian Prime Minister Manmohan Singh, India’s engagement with Southeast Asia owes a great deal to Singapore’s support. He acknowledged India’s debt to Singapore for helping it to enter various regional organizations, including the East Asian Summit.77 To promote closer bilateral relations, two new forums, the Joint Ministerial Committee and the bilateral Strategic Dialogue, were launched to steer and develop cooperation to greater heights in mid-2007.78

72

Business Times (Singapore), January 30, 2003. Business Times (Singapore), June 28, 2005. 74 Straits Times (Singapore), April 9, 2003. 75 Business Times (Singapore), June 8, 2007. 76 Business Times (Singapore), March 15, 2007. 77 Straits Times (Singapore), January 19, 2007. 78 Straits Times (Singapore), June 20, 2007. 73

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Finally, in the case of Korea, it was relatively late in joining the ASEAN circuit, but has also been trying to catch up in building up links with ASEAN and its member states. Just like India, it is interested in having an FTAs between ASEAN and Korea. However, it is keen on having bilateral FTAs with individual ASEAN members as well. Thus, after the positive recommendations by a joint study group, negotiations for the Korea-Singapore Free Trade agreement (KSFTA) were launched in October 2003. After seven rounds of negotiations, the agreement was signed in August 2005 and came into force in March 2006. A year after signing the agreement, it was estimated that the KSFTA had helped Singapore companies to expand their market share in Korea and boosted the two-way trade. Singapore investments in Korea also increased to S$790 million in 2006, a 33% jump from S$590 million in 2005. For trade, Singapore’s exports to Korea grew 10% to S$31 billion in 2006.79 The Korea-ASEAN FTA was later signed in 2005.

6.5.4

Beyond East Asian Regionalism: Cross-regional FTAs

From the analysis above, it can be seen that Singapore has been successful in working on bilateral FTAs with major players in the Asia Pacific, or for that matter, East Asian regionalism. However, it is also interested in moving beyond the Asia Pacific in its bilateral FTA strategy. While it is beyond the scope of this chapter to examine Singapore’s bilateral FTAs outside the Asia Pacific, it is pertinent to note that the city-state has been working on a large number of bilateral FTAs in different parts of the world. It has adopted a global approach in seeking cooperation with like-minded countries. This could be evidenced by Singapore’s moves in Europe, Middle East, Latin America, Africa, and former members of the Soviet Union. In turn, these global linkages could also help to strengthen links between ASEAN as a regional entity and the rest of the world, increasing the overall reach and weightage of ASEAN on the whole. Europe has also been one of the most important trade partners of Singapore. As a group, Europe has been either the first, second, or third top trade partner of the citystate since the turn of the century.80 Thus, it is not surprising that Europe has been a target of Singapore in its bilateral FTA strategy. It had some initial success wooing selected European states as demonstrated by the signing of an FTA in June 2002 with the European Free Trade Association (EFTA) composed of Iceland, Liechtenstein, Norway, and Switzerland. The agreement was the third FTA signed by Singapore after similar bilateral pacts with New Zealand and Japan and it came into force in January 2003, and the first between a European regional grouping and an Asian country.81 It was the hope of Singapore that it could move on to strike a 79

Business Times (Singapore), March 31, 2007. Yearbook of Statistics Singapore (2007). 81 International Enterprise Singapore, Singapore FTA Network. Available from . 80

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similar arrangement with other members of the European Union (EU). However, for Singapore, so far the EFTA remains to be the only FTA with Europe as the EU places more emphasis on multilateralism than bilateralism, although the EU is willing to explore the possibility of having an FTA with ASEAN as a bloc, namely as a region-to-region approach.82 As such, although there have been talks between Singapore and the EU on a partnership and cooperation agreement, the city-state will have to try harder to nudge the EU into a separate EU-Singapore FTA.83 Singapore’s outreach to other regions would include its initiatives in Latin America and the Middle East. For FTAs with Latin America, although Singapore had signed a plurilateral FTA, namely, the Trans-Pacific Strategic Economic Partnership Agreement with Chile, Brunei and New Zealand (P-4) in 2005, its first bilateral FTA with a Latin American state was inked with Panama in March 2006 and went into force in July 2006. Being its first FTA with a Latin American country, the Panama-Singapore FTA was expected to promote not only economic cooperation between Panama and Singapore, but also help pave the way for Singapore’s engagement with Latin America as a whole. Other than Panama, negotiations for bilateral FTAs were conducted with Mexico and Peru as far as Latin America was concerned. Eventually, the FTA with Peru was signed in May 2008. By the time of the APEC meeting held in Peru in November 2008, it was revealed by Lim Hng Kiang, Singapore’s Trade and Industry Minister, that the P-4 was set to be enlarged, with Peru, the USA, and Australia joining the first round of negotiations to form an expanded group (P-7).84 Prime Minister Lee Hsien Loong also made use of his trip to attend the 2008 APEC Summit to renew ties with APEC leaders in Peru and raise Singapore’s profile in Latin America. For the latter, he not only deepened Singapore’s ties with Peru, but also promoted closer bilateral economic ties with Brazil and Chile. Last but not least, Foreign Minister George Yeo, taking advantage of his presence in Latin America for the 2008 APEC Meeting, told businessmen in Brasilia that Singapore was keen to work toward an FTA with Mercosur.85 By the end of 2008 and as far as Latin America was concerned, it was announced that Costa Rica and Singapore would start talks on an FTA when Costa Rican President Oscar Arias Sanchez visited the city-state, and negotiations for the Costa-Rica Singapore FTA have already been concluded as of January 2010. The other strategic move of Singapore’s bilateral FTA strategy in recent years is its forays into the Middle East. As it turned out, the first bilateral FTA clinched by Singapore was the one with Jordan. The Singapore-Jordan FTA and the SingaporeJordan Bilateral Investment Treaty were signed in May 2004 and came into force in

82

Business Times (Singapore), September 8, 2004. Straits Times (Singapore), April 30, 2005. 84 Straits Times (Singapore), November 22, 2008. 85 Straits Times (Singapore), November 26, 2008. 83

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August 2005.86 Similar to the one signed with Panama, the agreement with Jordan was Singapore’s first FTA with a country in the Middle East and Jordan’s first FTA with an Asian state. For Singapore, they are meant to strengthen trade and economic cooperation not only with Jordan but also with the Middle East region. Ongoing negotiations were also conducted with other Middle Eastern countries, notably Egypt, Iran, member states of the Gulf Cooperation Council (GCC) composed of Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates and the GCC. By early 2008, it was announced that Singapore had concluded the final round of negotiations for the GCC-Singapore FTA, thus making the GCCSingapore FTA the second FTA that Singapore signed with Middle Eastern economies. The FTA was also the first one concluded by the GCC outside the Middle East.87 Eventually, the FTA was signed in December 2008 during a visit of Prime Minister Lee Hsien Loong to Doha, Qatar.88 Although the Middle Eastern countries are not major trade partners of Singapore, the potential for expansion in not only trade, but also investment and other areas is always there. More importantly, the Middle East was the so-called “missing piece” in Singapore’s overall plan to win friends worldwide, as highlighted by Prime Minister Goh Chong Tong. Thus sealing FTAs with Middle Eastern countries could be seen in the context of a larger strategy to engage the Middle East. In this connection, it should be noted that Prime Minister Goh was instrumental in initiating the Asia-Middle East Dialogue held in Singapore in 2005, similar to the earlier ones inaugurated for Asia and Europe and Asia and Latin America. Other than Europe, Latin America, and the Middle East, Singapore is beginning to work on FTAs with Africa and the states of the former Soviet Union. While this shows that Singapore will go anywhere as long as there are economic opportunities, ASEAN countries can also stand to benefit from these cross-linkages, that Singapore has helped to pioneer and forge.

6.6

Concluding Observations

As a small and trade-dependent state, Singapore, as reflected by the emphasis of its leaders, has actively pursued bilateral FTAs to broaden its trade and economic networks as initial steps to promote economic cooperation. The liberal and omnidirectional approach in broadening its trade links has increased its volume of international trade over the years. It also earned for the city-state the title of most

86

Business Times (Singapore), May 17, 2004. See also International Enterprise Singapore Website, Available from . 87 International Enterprise Singapore, Singapore FTA Network. Available from . 88 Straits Times (Singapore), December 15, 2008.

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globally connected country in the world in 2005 according to a Globalized Index compiled by A.T. Kearney, a management consulting firm.89 In addition, the bilateral FTAs have upgraded its economy, notably its services sector which is not as globally competitive as its manufacturing sector. This is especially true when it links up with developed economies like the USA and Japan. While Singapore is fully aware of the benefits of multilateralism and will play its part to support multilateral talks, or for that matter, regional cooperation, especially in ASEAN and the East Asian region, it notes with great concern the painfully slow progress in promoting trade liberalization and the breakdown of trade talks, especially in multilateral forums like the WTO. Thus it opts for the practical step of striking more bilateral FTA deals with others, a second-best option or plan B, to help itself and hopefully others in ASEAN, East Asia, the Asia Pacific, and beyond. Still, as many of these bilateral FTAs are not only firsts for the city-state, but also for its partners, it can be argued that Singapore’s FTAs are not formed with the sole intention of benefiting only the city-state, but are also seen by its leaders as building blocks for regionalism and multilateralism and pathfinders for others to broaden free trade. Judging from developments in ASEAN and East Asia, it is worth noting that the bilateral FTAs could have the demonstration effect of spurring others to follow suit. With the mushrooming of bilateral FTAs in East Asia and other parts of the world, it seems that they have been accepted as one of the practical means to promote the economic well-being of the states involved. It remains to be noted that while Singapore aims to be a globalized economy, it has placed considerable emphasis on East Asia, or for that matter, the Asia Pacific. Ostensibly, its leaders time and again have talked about the challenges and opportunities of the rise of China and India. With the onslaught of the global economic downturn that originated in the developed economies starting in 2008, it seems that Singapore will try to work much closer with the two Asian giants through the bilateral FTAs and other means. In terms of economics, politics, and security, it is also obvious that it has to be seen to be working together with its neighboring states in ASEAN. Thus, care has been taken by Singapore that its bilateral FTAs would not jeopardize ASEAN’s FTAs. In fact, it can be argued that its bilateral FTAs help to form the basis to help ASEAN, as well as ASEAN members, to eventually clinch similar deals. Finally, it should be highlighted that Singapore would like to strengthen its hub status within East Asia and the Asia Pacific. As such, it continues to work for East Asian regionalism and Asia Pacific economic cooperation through APEC, East Asia Summit, and other multilateral forums in parallel to its FTA strategy, while holding some hope that the two tracks may 1 day converge.

89

Straits Times (Singapore), April 28, 2005.

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References Chan, Heng Chee (2001) Remarks by Ambassador Chan before the National Governors’ Association meeting. National Governors’ Association, United States. Chong, Alan (2007) Singapore’s Political Economy, 1997–2007: Strategizing Economic Assurance for Globalization. Asian Survey, 47(6), pp. 952–976. Daquila, Teofilo C. and Huuy Huuy Le (2003) Singapore and ASEAN in the Global Economy: The Case of Free Trade Agreements. Asian Survey, 43(6), pp. 908–928. Goh, Chok Tong and Shipley, Jenny (1999) Singapore and New Zealand Get on with Free Trade. International Herald Tribune. Hocking, Brian and Steve McQuire (2004) Trade Politics. Oxford: Oxford University Press. Lee, Boon Hiok (1982) Constraints on Singapore’s Foreign Policy. Asian Survey, 22(6), pp. 524–535. Lee, Lai To (1975) China’s changing attitudes towards Singapore, 1965–75. In Teh-yao Wu (ed) Political and Social Change in Singapore. Singapore: Institute of Southeast Asian Studies. Lee, Lai To (2006) Singapore Yearbook 2006. Singapore: Ministry of Information, Communications and the Arts. Lee, Seungjoo (2006) Singapore trade bilateralism: a two track strategy. In Vinod K. Aggarwal and Shujiro Urata (eds) Bilateral Trade Agreements in the Asia-Pacific. London: Routledge. Low, Linda (2003) Policy Dilemmas in Singapore’s RTA Strategy. The Pacific Review, 16(1), p. 116. Rajan, Ramkishen S. (2002) Going It Alone – Singapore’s New Commercial Trade Strategy. Economic and Political Weekly, 37(6), pp. 534–536. Rajan, Ramkishen S. and Sunil Rongala (2008) Asia in the Global Economy: Finance, Trade and Investment. Hackensack, NJ: World Scientific Publishing Company. Ravenhill, John (2003) The New Bilateralism in the Asia Pacific. Third World Quarterly, 24(2), pp. 299–317. Singh, Bilveer (1990) The Soviet Union in Singapore’s Foreign Policy, An Analysis. Kuala Lumpur: Institute of Strategic and International Studies. Singh, Bilveer (1999) The Vulnerability of Small States Revisited: a Study of Singapore’s PostCold War Foreign Policy. Yogyakarta: Gadjah Mada University Press. Tan, Lay Hong (2004) Will ASEAN Economic Integration Progress Beyond a Free Trade Area? International & Comparative Law Quarterly, 53(4), pp. 935–967.

Chapter 7

Evolving Trade Strategies in the Asia-Pacific Vinod K. Aggarwal and Seungjoo Lee

7.1

Introduction

How have trade strategies of key countries in the Asia-Pacific evolved over time? At a time when the proliferation of bilateral trade agreements and a host of minilateral accords are underway, we believe that examining the strategies being pursued by countries in the Asia-Pacific is of crucial importance for both scholars and policymakers. This chapter evaluates the trends we have seen in the Asia-Pacific, with an eye to explaining the dynamics of the formation of trade policies and negotiation of agreements, focusing primarily on bilateral FTAs pursued by countries. As we suggest, it is not enough to look at national policies in billiard-ball fashion. Instead, our interest is in considering the interplay of ideas, interests, and institutions in the formation of trade policies. Only then can we understand how different subnational actors are maneuvering to achieve their desired outcomes. Simply examining the overall economic benefits of different types of trade accords is insufficient to understand the likely evolution of trade accords in the Asia-Pacific. After first considering the trends we have seen in a more general fashion in Sect. 7.2, we consider the specific policies of countries as discussed by the authors of the case study chapters in Sect. 7.3. We conclude with our own perspective on themost probable trajectory of trade policy in the region in Sect. 7.4.

V.K. Aggarwal (*) University of California, Berkeley, CA, USA e-mail: [email protected]

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3_7, # Springer Science+Business Media, LLC 2011

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Analyzing Trade Strategies in the Asia-Pacific

East Asian countries and the U.S. have responded with different trade policies to the external shocks and systemic changes we have seen over the last 2 decades. When East Asian countries embraced regionalism in the 1990s, their specific strategies and preferred institutional choices were different. In the 2000s as well, East Asian countries and the U.S. adopted divergent FTA strategies in terms of partner selection, sequence, actor scope, issue scope, nature, and strength of FTAs. Engaged in negotiations with 15 regional and transregional FTA partners, China has gradually shifted from regional to transnational FTAs in terms of sequence. Reflecting the fact that the Chinese government still finds it necessary to protect various manufacturing and service industries, China tends to prefer FTAs that are narrow in issue scope, weakly liberal in nature, and less binding. By contrast, Singapore has taken a much more aggressive approach. To conclude or negotiate 24 FTA pacts, Singapore adopted a multi-pronged approach with regards to the geographical distribution of FTAs. In addition, Singapore pursued FTA strategies that are comprehensive (including the so-called Singapore issues and economic cooperation) and very liberal in nature. In terms of the strength of FTAs, as a small power, Singapore takes a flexible approach to accommodate the preference of its FTA partners, rather than trying to impose its own preferences. For its part, the U.S. has negotiated a number of bilateral FTAs; but with the exception of the unratified Korea-U.S. Free Trade Agreement (KORUS), these accords are primarily with small countries. Japan and Korea have displayed largely similar postures in their FTA strategies. Both countries have taken a multi-directional approach by simultaneously launching FTA negotiations with regional and transregional partners. Still, Japan seems to place higher priority on signing FTAs with countries in the region. In terms of issue scope as well, both countries favor FTAs with comprehensive coverage. While Japan attempts to insert sections on economic cooperation in FTAs, Korea places less emphasis on economic cooperation. Japan and Korea also pursue rather liberal FTAs, although they attempt to exclude agricultural products from liberalization. Table 7.1 summarizes the main features of FTA strategies of East Asian countries and the US. Based on the divergence of East Asian and U.S. FTA strategies, we devised what we term four “trade strategy constellations” that help us to identify the main thrust of each country’s trade strategies. The first type is the continuation of the status quo where no changes in existing trade strategies take place. This type is not found in East Asian or U.S. trade strategies, as all countries have adopted bilateral and minilateral FTAs as a new center pillar of their trade strategies. The second type of constellation is modest or limited change. Countries in this category tend to prefer FTAs with such features as primarily few regional partners, limited coverage (many exceptions), and weak liberalization. China belongs to this category. Japan and Korea belong to the third type of constellation, where substantial changes in trade strategies are likely. Both Japan and Korea take quite a balanced

Comprehensive; includes economic cooperation

Narrow; simple; excludes various issues

Weak liberal

Less binding

Nature

Strength

Flexible

Liberal; excludes agriculture

Regional

Balanced

Actor scope Issue scope

Table 7.1 Divergent trade strategies in the Asia-Pacific China Japan Partners Many (15) Many (16) Sequence Regional ! Transregional Multi-directional

Comprehensive; less emphasis on economic cooperation Highly liberal; excludes agriculture Flexible

Balanced

Korea Many (16) Multi-directional

Flexible

Most liberal

Comprehensive

Singapore Most (24) Multidirectional Transregional

Most liberal; reciprocal agreement Most binding

Comprehensive

Regional

The U.S. Relatively few Regional ! Transregional

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approach in terms of the number of partners, geography, and sequence. In addition, while they generally pursue comprehensive FTAs with a strong liberal orientation, they sometimes try to incorporate protectionist elements with many exceptions in their FTAs, depending on their partner countries and domestic political situation. The U.S. also fits this type to some extent, but its policy objectives under the Bush Administration were primarily security‐rather than economics‐driven. The fourth type of constellation is most vividly demonstrated by Singapore. This type represents a fundamental departure from existing trade strategies. By adopting the new trade constellation, Singapore has attempted to conclude FTAs with as many countries as possible, either regional or transregional partners. The scope and nature of the FTAs Singapore has thus far concluded are comprehensive and strongly liberal. The main features of each trade strategy constellation are summarized in Table 7.2. As we have observed, East Asian countries have sought different trade strategies in the face of the same external shocks. In this regard, existing explanations fall short of illuminating the deeper micro-foundations of how each country’s regional and trans-regional strategies are formulated in the domestic arena. With this backdrop, we suggested that it is necessary to examine the way in which ideas and interests interact with each other within the contour of domestic institutions to locate the systematic sources of why each country formulated different trade strategies. With four distinctive types of trade strategy constellations and explanatory variables clearly defined, now we can add another dimension to better explain how the policies of East Asian countries and the U.S. have evolved (Table. 7.1). As discussed in Sect. 7.1, the first evolutionary path is likely when ideational changes do not take place, domestic-oriented groups remain strong, and/or domestic institutions are status quo-oriented. However, no country we have examined in this ideal type took this path. Ideational changes may not take place immediately, as existing players may still believe in the long-term efficacy of traditional trade strategies. Under these conditions, because major players tend to be cautious in actively reconfiguring their interests and revamping existing policymaking structures, the main thrust of traditional trade strategies is likely to remain intact. Thus, the first outcome derived from our framework is the continuation of the status quo.

Table 7.2 Trade strategy constellations in the Asia-Pacific Type Main features Type 1 No significant changes; existing strategies continued Type 2 Modest or limited changes; primarily regional; limited issue scope with many exceptions; weak liberalization Type 3 Substantial changes; balanced in terms of the number of partners and sequence; generally comprehensive, strong liberal with some protectionist elements Type 4 Fundamental departure from existing strategies; regional and transregional; comprehensive; strong liberal

Country None China Korea, Japan, U.S.

Singapore

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The second path, where modest or limited changes are expected, has been undertaken by China. In order to analyze the outcome in this path, we examined how ideas affect the interaction between key players’ interests and the policymaking institutions. The outbreak of external shocks spurs policymakers to re-evaluate the long-held trade strategies, igniting demand for policy shifts. In China, the political leadership played a pivotal role in adopting new ideas. External changes indeed facilitated the interest of the Chinese government in critically reexamining the efficacy of the traditional trade strategies that may potentially pave the way for business sectors to reconfigure their interests. However, because the Chinese government dominates the trade policymaking process, the magnitude of the change was quite limited. Rather than attempting to create a fundamentally new policymaking structure, the Chinese government chose to maintain the existing one. As a consequence, China moved away from traditional multilateral regional trade strategies to adopt a new bilateral one. As we expected, however, China pursued FTAs that created minimal changes in its current trade strategies. China sought FTAs that involve only a limited degree of trade liberalization. With these FTAs, the Chinese government could effectively prevent domestic opposition from escalating into social disturbances in China. Substantial changes are likely in the third type. In this path, the nature of competition between traditional key players and new players and institutional re-formulation combine to shape the range of changes in trade strategies. In Japan, ideational changes did not bring in new players. Instead, inspired by ideational changes, traditional key players redefined their interests. Traditional key players with reconfigured interests such as export-oriented industries, Keidanren, and the Ministry of Economy, Trade and Industry of Japan (METI) pushed for profoundly different trade strategies. However, recognizing that the creation of a new institution and policymaking structure involves high transaction costs, they chose to take advantage of the existing policymaking structure as a means to realize the newly forged interests. And they faced organized groups who are equally privileged under the existing institutional structure. Wielding substantial political influence, this protectionist group effectively blocked fundamental changes in new trade strategies that could cause massive-scale economic restructuring. Those who would benefit substantially from the new trade strategy could achieve substantially different trade strategies, but only by incorporating interests of other key players who are expected to suffer from it. In the case of Korea, the emergence of new ideas and institutional changes related to trade policymaking contributed to a shift in the subtle political balance between traditional players and new players in favor of the latter. Disenchanted with the existing trade strategy, the new players with the support of the political leadership and the relatively autonomous Office of the Minister for Trade (OMT) were able to seek fundamentally new trade strategies. However, traditionally politically entrenched groups favoring the status quo such as the agriculture sector attempted to block the fundamental changes at the ratification stage. It was thus inevitable for the new players to calibrate their interests to some extent to accommodate opposing voices. This competition between the two groups resulted in substantial changes in trade strategies rather than a fundamental departure from traditional strategies.

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In the case of the U.S., its policy has overtly changed from the pursuit of multilateralism to the active pursuit of bilateral FTAs. But the domestic constraints that the U.S. faces remain strong. Any efforts to negotiate with large trade partners, as for example, with KORUS, have faced dramatic opposition. Thus, the U.S. under the Bush Administration focused on the pursuit of a large number of what it viewed as “high quality” FTAs. Yet in many cases, these agreements were driven by security concerns, rather than by strong economic interests that were pushing for specific agreements. As a country where many veto players can block agreements, the U.S. trade representative has not found it easy to conclude and negotiate trade agreements – despite the clear preponderance of both security and economic capabilities that it possesses. In the fourth type, we expect fundamental changes in trade strategies. Along this path, new players are less likely to face serious political resistance to fundamental changes in trade strategies, as politically entrenched groups who used to be powerful are limited in translating their interests into policy outcomes. Furthermore, even in the face of opposition, policymakers will be able to cope with these pressures because they are effectively insulated from this pressure under the new institutional structure. In Singapore, the government and private firms with substantial stakes in new trade strategies were in a relatively good position to formulate new trade strategies. The absence of serious resistance provided a political backdrop in which the Singapore government could aggressively launch FTAs that were fundamentally different from its traditional trade strategies. However, if the government fails to develop institutionalized measures to incorporate opposing voices into the new policymaking process in the long run, traditionally powerful players may attempt to prevent the new players from seeking drastic policy changes. If this scenario plays out, the nature of policy change will look similar to the third outcome. To summarize, the analytical framework focusing on interaction among ideas, interests, and institutions allows us to examine the logical and theoretical paths that East Asian countries and the U.S. took in carrying out their trade policy changes. It also effectively explains the dynamics of how and why these countries varied in a specific choice of trade strategies. In the following, a concise comparison of case study chapters provides us with an in-depth analysis of how these changes took place in each country.

7.3 7.3.1

Cases China

In examining the evolution of Chinese regional and trade policies, Ming Wan argues that China has taken a state-centric approach to regional free trade agreements. Wan shows that various schools of reformers and conservatives, who viewed regional cooperation as vital to China’s strategic interests, took the initiative in China’s

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dramatic shift to regionalism in 2000. Recognizing the heightened U.S. interest in pursuing FTAs with East Asian countries, China jumped on the FTA bandwagon with vigor as a means to counter U.S. attempts to increase its influence in the region. In terms of institutional arrangements, argues Wan, all the ministries and commissions under the State Council have taken part in policymaking in regional economic cooperation forums or FTAs without invoking serious bureaucratic turf wars. Wan also argues that because the potential losers of FTAs are not well organized and the Chinese government is sympathetic to the plight of losers, sectoral conflicts are not fully developed in the making of foreign economic policy. Without being hampered by severe domestic struggles between winners and losers, the Chinese government could pursue strategic and decisive policymaking. Although it is estimated that China-ASEAN FTA could generate negative effects on 160 million farmers, they have not opposed FTAs vociferously. Wan explains that Chinese farmers still perceive the central government as their political ally, because they are in dire need of the support of the central government in order to solve more pressing concerns, primarily generated by the local government. Thus, Chinese farmers are relatively mute in opposing FTAs, which is a less palpable issue to them. By contrast, contends Wan, the interests of private businesses whose status rose to the third pillar of economic policymaking in China are better represented in FTA policymaking. In his view, the absence of political pressure arising from sectoral conflicts allowed the Chinese government to make strategic policymaking from the perspective of national interests.

7.3.2

Japan

Recognizing that Japan was traditionally more interested in regionalization rather than regionalism, Ellis Krauss and Megumi Naoi argue that Japan began to diversify its trade strategies as it aspired to distance itself from its traditional reliance on the bilateral relationship with the United States. The Japanese attempts were vividly demonstrated in its efforts to establish APEC. However, a domestic political landscape that blocked trade liberalization in sensitive sectors inherently constrained the Japanese government’s ability to work out compromises for trade liberalization in the APEC arena, dampening the hopes of big businesses and export-oriented manufacturing sectors. Coming into the 2000s, the aggravating domestic and external environments such as the decade-long recession and the emergence of NAFTA spurred the Ministry of Economy, Trade and Industry of Japan (METI) to adopt a new policy idea for FTAs. Krauss and Naoi argue that institutional arrangements, coalitions among key players, and their pattern of interaction combined to shape the nature of Japanese FTA policy. Within the government, METI was able to play a pivotal role in launching the FTA drive only after it overcame the skepticism of the Ministry of Foreign Affairs (MOFA) that perceived METI’s initiative with respect to FTAs as encroaching on its own mandate.

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Krauss and Naoi found that the domestic politics concerning Japan’s regionalism became complicated in the 2000s. Departing from their previous practices of organizing votes based on the urban-rural divide, the major political parties tended to incorporate broader interests to adapt to the new electoral system. The pattern of political coalition has become complicated as voters became ambivalent in identifying and articulating their interests and preferences about trade. The interests of the agricultural sector that had led staunch anti-liberalization movements diverged between traditional protectionists and internationalists corporations. The interests of the manufacturing industry were not monolithic, either, as they were divided between highly competitive multinational corporations and small and medium corporations. Krauss and Naoi contend that the simple dichotomy of conflicting interests between the agricultural sector and the manufacturing sector is misleading. As the power balance has gradually shifted to internationalist groups in the 1990s, the Japanese government was able to shift to a policy of promoting bilateral FTAs.

7.3.3

Korea

Sang-young Rhyu traces the way in which Korea’s foreign economic policy has evolved from multilateralism to regionalism and bilateralism. Rhyu argues that changes in Korea’s trade structure as well as the security order surrounding the Korean peninsula contributed to this policy reversal. In the aftermath of the Asian financial crisis, there was a dramatic turnaround in Korea’s trade structure as China and Japan took a bigger share of its trade, surpassing the United States. In addition, the inter-Korean summit in 2000, though did not eliminate, eased tension between South and North Korea. While the Asian financial crisis and improvement in inter-Korean relationship broadly provided a policy environment for Korea’s regional and FTA policies, argues Rhyu, the Kim Dae-jung government played a critical role in this transition. The Kim Dae-jung government chose East Asia-focused regionalism to overcome the crisis and facilitate economic reform. Rhyu argues that it was critical that in order to carry out its strategic vision, in March 1998, the Kim government reformulated trade policymaking institutions by revamping the organization of the Ministry of Foreign Affairs (MOFA) to create the Ministry of Foreign Affairs and Trade (MOFAT). Furthermore, the Kim government established the Office of the Minister for Trade under the MOFAT that is in charge of trade negotiations and overall foreign economic policy. This institutional re-arrangement enabled the Korean government to actively pursue bilateral FTAs with countries both within and outside the region. While not ruling out that the diametrically divergent interests of the manufacturing sector and the agricultural sector and their respective political influence shaped the contours of FTA policymaking in the domestic arena, Rhyu employs the concept of hegemony to explain why Korea could conclude an FTA with the U.S., but not with Japan. In addition to the fact that the Asian financial crisis

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ignited the emergence of regionalism in East Asia, argues Rhyu, it was critical that recognizing the role of the U.S. as essential in the Korean peninsula as well as in the region, the Korean government initiated FTA negotiations with the U.S. government as a way to revitalize and consolidate the bilateral security relationship. And the Korean government’s strategic approach to the KORUS also provided the U.S. with a window of opportunity to tap into East Asian regionalism.

7.3.4

The United States

Amy Searight contends that although the U.S. has departed from its reactive leadership, epitomized by its relatively passive participation in APEC to establish itself as an active player in designing regional frameworks in East Asia, the main thrust of U.S. policy toward East Asia remains reactive. With this backdrop, the U.S. strategy of maintaining the hub-and-spokes system has not fundamentally changed, while its tactics have shifted to incorporate its global strategic objectives. Searight conceptualizes the U.S. responses to welcoming the flurry of East Asian FTAs and East Asian economic groupings as “benign neglect.” For example, the U.S. neither opposed nor supported the East Asian Summit (EAS). Instead, the U.S. adopted a two-track approach in responding to East Asian regionalism: (1) to revitalize the Free Trade Area of the Asia Pacific (FTAAP); and (2) to actively seek FTAs with such countries as Singapore, Chile, New Zealand, and Brunei in the Asia-Pacific to create the Trans-Pacific Partnership (TPP). Searight argues that the U.S. conclusion of an FTA with South Korea demonstrated that FTA policy has emerged as an important element in the U.S. policies toward East Asia. However, Searight goes on to argue that the U.S. started FTA talks with South Korea in a broader strategic context rather than focusing on the KORUS FTA itself. In her view, the U.S. hoped that KORUS could serve as a building block to trans-Pacific network of FTAs and a broader APEC-wide trade agreement.

7.3.5

Singapore

Analyzing Singapore’s regional and bilateral trade policies, Lee Lai To and Ren Yi Hooi argue that the proliferation of PTAs in Europe and North America pushed Singapore to search for alternatives to multilateralism that it had supported throughout the Cold War period. Its frustration with ASEAN, which had been reluctant to embrace full-scale trade liberalization in the aftermath of the Asian financial crisis, further solidified Singapore’s determination to pursue alternative strategies that turned out to be a rush to FTAs. Lee and Hooi argue that while Singapore was initially interested in concluding FTAs with like-minded countries, Singapore perceived FTAs as stepping stones toward regional and global trade liberalization.

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In examining the formulation of Singapore’s FTA strategy, Lee and Hooi focus on its highly stratified and well-coordinated policymaking structure. As a state-led economy relatively free from societal pressures, Lee and Hooi argue that the Prime Minister and his cabinet were critical in guiding Singapore’s bilateral and regional trade policymaking. Within the government, the Ministry of Trade and Industry (MTI) mission lies in supplementing Singapore’s efforts for multilateral trade liberalization with bilateral FTAs with key trading partners and it thus played a pivotal role in orchestrating various issues in policy implementation stage. Moreover, various government-related agencies such as International Enterprise Singapore (IE Singapore) provide MTI with various support such as organizing meetings and programs to raise the awareness of the economic and strategic importance of FTAs. Lee and Hooi point out that to establish itself as a hub country in East Asia, Singapore has implemented FTA strategies that could be characterized as “omnidirectional” and “quyibu qu nan.” In terms of issue scope, Singapore has been consistent in negotiating FTAs with WTO-plus provisions. For example, in concluding a series of FTAs with advanced countries such as Japan and the U.S., Singapore was not reluctant in opening its service sector. As a result, the 2005 Globalized Index compiled by A. Kearney ranked Singapore as the most globally connected country in the world. In this sense, Lee and Hooi conclude that Singapore serves as a model case for other East Asian countries.

7.4

The Future of Trade Policy in the Asia-Pacific

More than at any time in the last six decades, trade policy among countries in the Asia-Pacific is in dramatic flux. The last two decades have seen the end of the Cold War, the rapid rise of China, the Asian financial crisis, the September 11 attacks, and most recently, the global financial crisis. In this environment, countries’ trade policies and the institutions to manage trade are under-going significant changes. The Doha Development Round of the World Trade Organization remains moribund. The Asia-Pacific contains institutions such as ASEAN with its AFTA trade efforts, ASEAN + 3, APEC, and the East Asian Summit. Moreover, this variable geometry in the broad region has been increasing with recent calls by the Australians for yet another institution – the Asia Pacific Community. Finally, and as the primary focus of this volume, countries through the Asia-Pacific (and elsewhere) are pursuing a host of bilateral FTAs, further complicating the institutional trade picture. Other recent calls, primarily from the U.S., have been to bring these FTAs into some semblance of order through the TPP, which would build on the existing network of bilaterals among Chile, Brunei, New Zealand, and Singapore (the P4). An important factor in the evolution of the trade architecture in the Asia-Pacific is the changing views of trade liberalization among countries. Of these, the U.S. has likely undergone the most dramatic transformation, with growing disenchantment among domestic constituencies of the benefits that they see from a global liberal

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trading order. Tied to the recent “murky protectionism” that we have seen in the current financial crisis, the call for “rebalancing of the global economy” and the rise of efforts by countries to provide their firms with competitive advantage through government intervention policies among countries, the trajectory of Asia-Pacific remains more complicated to analyze than ever before.1 How this institutional me´lange will eventually be sorted out is a function of both international political economy and the domestic political economy of policymaking within states. As this book has emphasized, the interplay of ideas, interests, and domestic institutions – which has led to considerable variation in trade policies in the Asia-Pacific – must be analyzed if we wish to make sense of the likely trajectory of institutions in this region.

References Aggarwal, Vinod K. and Simon Evenett (2010) “Rebalancing will require supply side policy changes, but pitfalls abound.” In Stijn Claessens, Simon Evenett, and Bernard Hoekman (eds) Rebalancing the Global Economy: A Primer for Policymaking, London: Center for European Policy Research, VoxEU.org Publication. Baldwin, Richard and Simon Evenett (2009) “Introduction and Recommendations for the G2O.” In Richard Baldwin and Simon J. Evenett (eds) The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G20, VoxEU.org Publication.

1

On “murky protectionism,” see Baldwin and Simon (2009). For a discussion of industrial policy in the context of the financial crisis and the rebalancing debate, see Aggarwal and Evenett (2010).

Index

9/11, 17, 101, 103, 109, 132, 134

A Afghanistan, 33 Agriculture, 36, 41, 42, 52, 63, 65, 83, 149 ASEAN. See Association of Southeast Asian Nations ASEAN Free Trade Area (AFTA), 6, 104, 129, 131 role in East Asian Regionalism, 7 ASEAN Plus Six, 7, 11, 107 ASEAN Plus Three (APT), 6, 7, 11, 101, 104–107, 136 ASEAN Regional Forum (ARF), 54, 76, 99, 103 ASEAN-China Free Trade Area (ACFTA), 6 Asia-Europe Meeting (ASEM), 6, 76 Asia-Pacific Economic Cooperation (APEC), 1, 7, 54, 57, 92, 98–100, 103, 105, 106, 110, 112, 113, 117, 120, 140, 151, 153 Bogor Declaration (1994), 54, 55 Early Voluntary Sector Liberalization (EVSL), 55–57, 59, 69, 100, 103, 111 Asian Financial Crisis, 48, 119, 134 impact on ASEAN, 47–48 impact on trade strategy, 18, 34, 59, 69 Asian Monetary Fund (AMF), 56, 96, 101, 112 Association of Southeast Asian Nations (ASEAN), 1, 33, 54, 74, 91, 124, 151 FTAs with China (CAFTA), 46, 47 with Japan, 11, 16, 17, 33, 42, 58, 134, with South Korea, 6, 33, 58, 79 role in East Asian Integration, 46 strength, 139

Australia, 1, 12, 16, 33, 53, 54, 58, 92, 93, 97, 103, 113–118, 131–135, 140 role in APEC, 53–57, 99

B Baker, James, 54, 98, 119, 121 Basic Telecom Agreement (BTA), 6 Bhutan, 33 Bilateral trade agreements, 1, 2, 145. See also Free Trade Agreements Brunei, 13, 58, 114, 117, 134, 140, 153 Burma, 40, 103, 104 Bush, George HW, 97–99, 111, 113–115 Bush, George W, 88, 101, 102, 104–106, 109, 110, 120, 121, 134, 135, 148, 150

C Cambodia, 40 Chile FTAs with China, 5 with Japan, 58 with South Korea, 5 China Bangkok Agreement (2000–2001), 33, 46 bombing of Chinese embassy in Belgrade (1999), 35, 44 coastal development, 40 dispute with Taiwan, 38, 44 economic liberalization, 35–37, 48 FTA Policy, 37, 46 FTAs with ASEAN (CAFTA), 46, 47 with Australia, 1, 33 with Chile, 11, 33 with Costa Rica, 33

V.K. Aggarwal and S. Lee (eds.), Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions, The Political Economy of the Asia Pacific, DOI 10.1007/978-1-4419-6833-3 # Springer Science+Business Media, LLC 2011

155

156 China (cont.) with Hong Kong, 11, 33 with Iceland, 33 with Macau, 11, 33 with New Zealand, 11, 33 with Norway, 33 with Pakistan, 11, 33 with Peru, 11, 33 with Singapore, 11, 33, 135 with South Korea, 5 with Thailand, 11, 33 with the Gulf Cooperation Council (GCC), 33 with the Southern African Customs Union (SACU), 33 Go West Campaign (1999), 40 participation in regional economic institutions, 34, 39, 41 regime characteristics and trade effects, 22 scope of FTAs, 11 Seventh Five Year Plan (1986–1990), 40 Sino-Japanese rivalry, 2 WTO accession, 36, 44 Clinton, Bill, 35, 55, 98–101, 103, 105, 111, 114, 115, 120, 134 Clinton, Hilary, 86, 120 Cold War, 4.2, 5.1, 5.2, 5.3, 6.2 end of, 2, 7, 18, 59, 97, 108, 119 impact on regional economic institutions, 18, 52, 59 Comprehensive Economic Partnership in East Asia (CEPEA), 134

D Deming, Chen, 44 Deng Xiaoping, 40 Development Research Center (DRC), 36, 38, 40, 46 Doha Round. See WTO, Doha Round Domino Effect, 15, 115

E East Asia Study Group (EASG), 7 East Asia Summit (EAS), 1, 11, 79, 91, 105, 142 East Asia Vision Group (EAVG), 7, 79 East Asian Economic Caucus (EAEC), 7 European Free Trade Area (EFTA), 11, 15, 79, 139, 140 European Union (EU), 4, 85, 140

Index F Financial Services Agreement (FSA), 6 Firms, 65–66 Free Trade Agreements (FTAs), 5, 33, 57, 73, 91, 123, 145 See also Preferential Trade Agreements role of domestic factors, 59 typology, 3 Free Trade Area of the Asia-Pacific (FTAAP), 1, 106, 107, 109, 114–119, 153

G General Agreement on Tariffs and Trade (GATT), 6, 47, 76, 92–97, 99, 108 Goh Chok Tong, 58, 114, 133, 134, 136, 138 Gorbachev, 95, 96, 98 Gulf Cooperation Council (GCC), 33, 141

H Hong Kong, 11, 33, 56, 94 Hu Jintao, 40, 45 Hub and Spoke, 52, 73, 75, 92, 93, 95, 101, 109, 153

I India, 1, 44, 105, 135–139, 142 Indonesia, 44, 56, 58, 93, 99, 124, 134 Information Technology Agreement (ITA, 1997), 6, 55, 100 International Monetary Fund (IMF), 56, 57, 78, 79, 96, 101, 108

J Japan Alliance with the US, 75, 92–93, 133 Democratic Party of Japan (DPJ), 51, 61–63, 66–69, 88 FTA Policy, 151 FTAs, 80–83, 104, 131–135 with ASEAN, 11, 16, 104, 134 with Australia, 58 with Brunei, 13, 58 with Chile, 11, 15, 58 with China, 33–34 with Indonesia, 58 with Malaysia, 58 with Mexico, 5, 12, 13, 15, 59, 60, 65 with Singapore, 5, 57, 59, 66 with South Korea, 5, 58, 73, 80

Index with Switzerland, 1 with Thailand, 58 with the Philippines, 58 interest in regionalism, 34, 39, 51–53, 55, 57, 68 Liberal Democratic Party (LDP), 56, 58, 60–64 Ministry of Economics, Trade, and Industry (METI), 52, 57–60, 68–69 Ministry of Foreign Affairs (MOFA), 52, 56, 57, 59–60 Ministry of International Trade and Industry (MITI), 52–54, 56, 59–60 Regime characteristics and trade effects, 22, 44, 52, 60, 62–64, 69 Role in regional economic institutions, 37, 52, 54, 55, 69 scope of FTAs, 11–12, 15 Sino-Japanese Rivalry, 2 Jiang Zemin, 40 Jordan, 17, 140, 141

K Kim Dae-jung, 7, 74, 80, 152 Kim Hyun-Chong, 81, 82, 84 Kristoff, Sandy, 54

L Labor, 3, 12, 14, 16, 34, 41, 46, 76, 115, 118, 132 Laos, 40 Lee Hsien Loong, 134, 136–138, 141 Lee Myung-bak, 43, 88 Liberalization (EVSL) Osaka Action Agenda (1995), 54 US interest in APEC, 56, 57, 69, 100, 111

M Ma Hong, 38 Macau, 11, 33 Malaysia, 45, 55, 93, 98, 104, 112, 129, 131, 133, 134 Mexico FTAs with EU, 12 with Japan, 5, 12, 15, 58–60, 65 Minilateral, 1, 2, 4, 75, 77, 80, 146 Ministry of Agriculture, Forestry and Fisheries (MAFF), 52, 56, 59, 60

157 Mongolia, 33, 40 Multilateral, 4, 6, 52–54, 60, 76, 97, 100, 108, 123, 130, 142 trade liberalization, 20

N Nath, Kamal, 44 Nepal, 33 New Zealand FTAs, 92–94, 103, 105, 114, 117, 129–131 with China, 11 with Singapore, 5 North American Free Trade Agreement (NAFTA), 7, 12, 58, 60, 99, 100, 104, 151 North Atlantic Treaty Organization (NATO), 35, 76, 92, 97 North Korea, 33, 40, 75, 86, 88, 102, 103, 109, 152

O Obama, Barack, 86, 105, 107, 120, 121

P Pacific Basin Economic Council (PBEC), 6, 53 Pacific Economic Cooperation Council (PECC), 6, 53 Pacific Free Trade Area (PAFTA), 53 Pacific Trade and Development Forum (PAFTAD), 6 Pakistan, 11, 33 Panama, 12, 140, 141 Peru, 12, 33, 117, 140 Philippines, 58, 93, 98, 128, 133 Preferential Trade Agreements (PTAs), 1–25, 31–48, 126, 127. See also Free Trade Agreements typology, 3, 5–6

R Regionalism, 2, 5, 7, 32, 35, 47, 51, 53, 58, 60, 68, 73, 74, 77, 80–83, 87, 91–121, 123, 139–141, 146, 152, 153 definition, 33–34 Regionalization, 51–53, 66, 68, 69, 151 Rice, Condoleezza, 101, 111 Roh Moo-hyun, 20, 82

158 Roh Tae-woo, 95 Rongji Zhu, 35, 44, 136 Russia, 40, 99, 105, 113, 124

S San Francisco Peace Treaty, 75 Shanghai Cooperation Organization (SCO; 1996), 33, 40 Singapore FTA Policy, 7, 11, 57–58, 79, 114, 123–142 FTAs with Australia, 12 with Chile, 11 with China, 135, 136 with India, 12, 135 with Japan, 5, 57, 59, 66, 132 with Jordan, 12 with New Zealand, 5 with Panama, 12, 140 with Peru, 12 with South Korea, 79, 139 with the United States, 5, 12, 114, 131–135 IE Singapore, 127 Ministry of Trade and Industry (MTI), 127, 131 Political Regime Type, 22 Trade Strategy, 17–19, 57 South Korea FTA policy, 7, 11, 12, 31, 96–108, 131–135 FTAs with ASEAN, 1, 11 with Chile, 5 with China, 5, 33 with EFTA, 6 with India, 1 with Japan, 5, 57–58, 73–75, 80–83 with Singapore, 5 with the United States (KORUS FTA), 573–75, 83–87, 104, 114–119 political regime type, 22 role in regional economic institutions, 39–41 scope of FTAs, 12, 15 Southern African Customs Union (SACU), 33 Sri Lanka, 33

Index T Taiwan, 22, 38, 41, 44, 93, 102, 113, 136, 137 dispute with China, 2.5 Thailand, 11, 34, 56, 58, 102, 104, 114, 128, 129, 132, 133 Trade Promotion Authority, 11, 104, 114, 118 Trans-Pacific Strategic Economic Partnership (TPP) or (P-4), 1, 117, 140 Treaty of Amity and Cooperation (TAC), 120

U United States Alliance with Japan, 52–55, 57, 59–60, 64–69 FTA Policy, 7, 11, 12, 15–17, 83, 84, 131–135 FTAs with Canada, 7, 12 with Caribbean countries, 7, 12 with Israel, 7 with Jordan, 17 with Mexico, 12 with Singapore, 5, 11 with South Korea (KORUS FTA), 17, 86, 104, 115, 153 interest in East Asian Regionalism, 2, 36, 41, 42, 56 role in the Asian Financial Crisis, 56 Uruguay Round. See WTO

V Vietnam, 22, 40, 94, 96, 107, 113, 117, 118 Voluntary Export Restraint (VER), 95

W Wang Yusheng, 40 Wen Jiabao, 45, 136, 137 World Trade Organization (WTO), 2, 14, 31, 80, 123, 124, 131 accession, 32, 36, 44 Doha Round, 44, 57 relationship to FTAs, 14, 34, 37, 57 Uruguay round, 99, 126 WTO Plus, 16, 129

Y Yi Xiaozhun, 34, 38, 47