Economic Interests, Values, and Policies
by Marcus Noland, Peterson Institute for International Economics
Paper presented to the National Intelligence Council Federal Research Division, Library of Congress conference on East Asia and the United States: Current Status and 5-Year Outlook
February 17, 2000
© Peterson Institute for International Economics
I would like to thank Mina Kim for research assistance.
Over the next five years, the world economy faces significant challenges in both the trade and financial policy realm. Three main themes will emerge: disputes over substantive agendas, haggling over filling top leadership posts, and Asia's possible desire to go its own way, and expand regional organizations in parallel with, or in opposition to, the existing global order. These issues will develop in the context of a probable slowing of the US economy, which could contribute to a more conflictual environment than has existed in the recent past.
The US is currently in the midst of the longest recorded economic expansion in its history. A number of factors have undoubtedly contributed to this remarkable performance, including improvements in economic policymaking, commercialization of technological advances, globalization, favorable demographics, and probably just plain luck. Ironically, the Asian financial crisis probably contributed positively to economic performance in the US by reducing global demand for capital and facilitating maintenance of low interest rates in the US for the past several years.
Yet all good things must come to an end, and this 107-month expansion is surely one of them. A number of developments over the next five years could bring this expansion to a halt. The most obvious weakness in the US economy is its very low level of saving. This low saving rate has two particular implications. First, the high level of household consumption in recent years has been made possible by the rapid increase in asset prices. That is to say, a considerable amount of the recorded increase in household wealth has taken the form of capital gains on existing holdings, rather than incremental flow additions to existing holdings. At the same time, Standard and Poor's recently classified the US as one of 20 financial systems "vulnerable to a credit bust" due to concern about the quality of bank portfolios, especially exposure to commercial real estate. A significant downturn in asset markets, which many believe currently embody a bubble, could force a severe retrenchment of spending by the private sector.1 As households increase their savings rates to rebuild their balance sheets and firms cut back on investment in response to less favorable conditions for raising funds in response to both weakened stock prices and curtailed bank lending, a recession could result.
Low national saving also manifests itself in the trade deficit, the difference between the value of what a country produces and what it consumes, which reached a record $257 billion in 1999, nearly three percent of GDP, its highest level since 1987.2 Concerns about the level of US indebtedness (which must be financed by foreign lending to the US) and/or recovery in the rest of the world (and hence the growth of desirable investment opportunities elsewhere) could reduce the attractiveness of the US as an investment destination. To maintain the same level of capital inflow, the US would have to offer more attractive terms (i.e. higher interest rates) or experience downward pressure on the value of the dollar in global markets. A falling dollar would cause prices of imports to rise. In this situation, the Federal Reserve would come under pressure to tighten interest rates, which in turn could cause a recession. The reduction in the level of economic activity (and hence a fall in the demand for imports and an increase output available for export) would be part of the mechanism by which the US would re-establish a sustainable balance of payments position.
A less dramatic end to the expansion could result from a gradual rise in global commodity prices generated by increased demand associated with recovery elsewhere in the world (including most prominently Asia) and/or a tightening of supply conditions in the US (especially in the labor market) could prompt the Federal Reserve into recession-inducing increases in interest rates in an attempt to pre-empt inflation. Furthermore, the US economy could be adversely affected by supply shocks originating abroad, including disruptions in oil supplies originating in political developments abroad, or financial market turmoil emanating, for example, from a meltdown in the Tokyo stock market, or, more benignly, a shift in portfolio preferences toward the euro in response to European monetary integration. Policy mistakes by the incoming new Administration and Congress could subvert the economy. The point is that one can identify numerous plausible threats to continued US economic growth over the next five years.3
This possibility could have important implications for US economic relations with Asia, and could condition how a number of issues evolve. In the recent past, there surprisingly has been relatively little political interest in trade issues, despite the record-level trade deficits. Presumably this lack of interest is due to the favorable macroeconomic performance exhibited by the US economy. If the US economy were to weaken and if unemployment were to begin rising, however, trade issues could quickly increase in political salience, with the enormous US trade deficit acting as a political lightning rod for discontent about US economic performance. Despite the fundamental reality that macroeconomic conditions, not trade policies, are the primary determinants of the overall US trade balance, US politicians continually have conflate traded policies, which can strongly affect the commodity and bilateral partner composition of trade, with the trade balance. Indeed, the single best predictor of the amount of US government attention given to bilateral trade issues has been the level of the bilateral trade imbalance.4
This could have serious implications for US economic relations with Asia. Asia already receives more scrutiny on trade issues than the magnitude of its trade with the US would appear to warrant.5 Moreover, the US's largest bilateral trade deficits are with Japan and China, the two largest economies in Asia. There is some evidence that the US already pays more attention to bilateral issues with Japan than objective indicators would predict. Of similar concern, the US bilateral deficit with China is likely to grow as China is integrated into the World Trade Organization (WTO) and quota restrictions on its exports of textiles and apparel to the US are phased-out.6
In sum, the US economy is likely to weaken at some point in the next five years. Trade issues will take on a greater salience. If the US political system responds as it has in the past, it is likely to experience increased trade conflicts with Asia, in particular with Japan and China.
Historically, in the absence of any effective multilateral dispute resolution mechanism, these disputes were resolved predominantly through bilateral means. Typically, the US used the threat of closing its large and lucrative market to extract concessions from its trade partners. Two developments will significantly change such dynamics in the future. First, a declining dependence on the US market will temper foreign responsiveness to such threats. Although this process has been interrupted by the Asian financial crisis and the need to export to the US market, the clear historical trend is toward orientation away from the US market. This is simply algebra at work: if one trade partner is growing faster than another, it is quite natural that trade volumes will increase more rapidly with the faster growing partner. This trend has been particularly acute in Asia, where the rates of national income growth across the region typically been significantly higher than that experienced by the US. The result, up to 1997, was a strong increase in the share of intra-regional trade and a reduced share of trade with the US.7 As the US becomes relatively less important in world trade, threats of market closure will lose their effectiveness.
At the same time, the development of the WTO and its improved dispute settlement resolution procedures significantly constrains the US's ability to pursue its old unilateral strategies. Although under domestic law the US retains its various trade remedy measures (Section 301, Special 301, et al.), the unilateral use of these measures will certainly not withstand a WTO challenge. Thus they are reduced to the domestic legal mechanism by which WTO-authorized retaliation can proceed (as was the case in the banana dispute with the European Union). The deathknell of unilateralism tolled in 1995, when Japan called the US bluff in the automobile dispute, refused to acquiesce to US market-opening demands, and threatened to duke it out in the WTO. The US decided to settle out of court.
Both of these developments mean that the WTO will be increasingly central to the resolution of disputes between the US and its trade partners, including Asia. (Indeed, the US has filed by far the largest number of cases of any WTO member.) The US faces a number of issues with regard to the future development of this organization. The most immediate questions concern what to do in the aftermath of the debacle in Seattle and how to integrate China into the organization. In the longer-run, issues of personnel and substantive agenda issues will re-emerge.
The November 1999 attempt to launch a new round of multilateral trade negotiations in Seattle was driven by a political compromise left over from the Uruguay Round, rather than any global groundswell for trade liberalization.8 To secure a conclusion to the last round of negotiations, the US accepted less than complete reform of agricultural trade practices on the part of the EU in return for a commitment to revisit the issue in 1999. This deal was the origin of the so-called built-in agenda of talks on agriculture and services motivating the new round. A certain sense of urgency was attached to the negotiations over agriculture inasmuch as the "peace clause," which prohibits WTO cases against certain practices (principally undertaken by the EU and US), is due to expire in two years.
This built-in agenda shaped participants' negotiating strategies as they headed into the Seattle ministerial. Japan and the EU wanted to broaden the agenda to hide their inevitable concessions in agriculture and use gains in other areas to reach an agreement emerging from the new negotiations that would be politically palatable at home. They preferred to see a "comprehensive round" involving not only talks on agriculture and services, but also on industrial product tariff-cutting, competition policy, investment, and reform of antidumping rules. Within agriculture, the EU jumped onto the Japanese bandwagon, promoting the notion of "multifunctionality" in agriculture to distract attention from its increasingly indefensible export subsidies.9
For its part, the US showed little flexibility. It largely tried to limit the agenda to agriculture and services in which the US was not be expected to make major concessions, while simultaneously trying to force relatively new and controversial issues such as the relationship between trade and labor standards, human rights, and environmental concerns onto the agenda.
At Seattle, officialdom was caught off-guard by a wild melange of protest groups whose motivations and aspirations appeared at times only tenuously connected to the issue at hand. Despite police intelligence, the authorities in Seattle appeared unwilling or unable to comprehend the violent tendencies of some of these groups. Seattle officials were slow to react on 30 November when they temporarily lost control of the streets. The US was humiliated throughout the world by the televised scenes of foreign diplomats being roughed up by the rabble. Only when the White House demanded that authorities restore order in preparation for the President's arrival in the wee hours of 1 December were police permitted to reclaim the streets.
The Clinton Administration's behavior in Seattle was perplexing, especially in light of its interest in promoting the social clause issues. President Clinton's statement, in which he said that he would like to see economic sanctions used against countries not meeting labor standards, took his cabinet members by surprise and destroyed any possibility of making progress on the issue. Indeed, conversations with a number of developing country negotiators indicated that the President's remark, together with the behavior of the demonstrators, strengthened their resolve to resist US demands. Some regarded the demonstrators as an officially sanctioned attempt to physically intimidate foreign negotiators.
Yet, in the end, it was the traditional US-EU dispute over agriculture — the same dispute that nearly scuttled the launch of the prior round of negotiations and nearly torpedoed those negotiations a half dozen times — not the shenanigans of the Raging Grannies or the Ruckus Society that sank the Seattle negotiations. This, together with the emergence of the developing countries as a coherent negotiating group, are the real lessons from Seattle.
The bottomline is that the meeting was unlikely to accomplish much. The US was unlikely to take major actions on trade policy given its electoral calendar, the Clinton Administration's lack of "fast-track" negotiating authority, and the change in presidential administration in January 2001. As a consequence, the best that could have been hoped for would have been the launch of a two-year extended negotiation over the agenda for a genuine new round of global trade negotiations two years hence. And in the aftermath of Seattle, it has principally been the EU and, to a lesser extent, Japan, which have moved to right the organization. They had led the resuscitation of the built-in agenda talks and the undertaking of "confidence-building" measures.10
With the activities of the WTO once again fallen off the US political radar screen in the aftermath of Seattle, the most immediate domestic political issue will be the Congressional vote to extend permanent normal trade relations (PNTR) to China. For twenty years, as a result of the Jackson-Vanik amendment to the Trade Act of 1974, the US has performed an annual ritual during which it decides whether or not to extend NTR (née most-favored nation or MFN) relations to China. This provision, originally aimed at encouraging the Soviet Union to permit the emigration of Soviet Jews, requires the President to certify annually that non-market economies allow emigration. China first gained MFN status in the US market in 1980, and the certification was routine until the Tiannamen Square massacre of l989. Since then, the annual renewal has been a point of contention involving a bilateral coalition of anticommunists, human rights proponents, and protectionists, who have attempted to use the threat of nonrenewal as leverage to promote human rights, discourage nuclear proliferation, and reduce the bilateral trade imbalance.11 The President has never failed to extend NTR to China, and the Congress has never overridden his decision. In recent years, a rough consensus has emerged that the annual "Rite of Spring" was not producing desirable results, and the margin of votes supporting the Administration has grown.
In the current situation, the US has reached a bilateral accord on WTO accession with China, though the Administration has not released the text of that agreement. After China reaches similar agreements with other WTO members (the EU is the only major player with which China has not concluded the negotiations), the WTO secretariat begins compiling the bilateral agreements. The final outcome is that every WTO member receives the best terms agreed upon with any member (i.e. if China agreed to reduce its tariff on watches to ten percent with the US, but agreed to five percent with the EU, the US would receive the better deal that the EU was able to obtain), so that the bilateral agreement could be, at worst, the treatment that the US will receive when China enters the WTO.
The issue, then, is not whether China will enter the WTO — it will — but whether the US will live up to its WTO obligations by extending PNTR to another member state. The US could always refuse, but then it would be out of compliance with its own obligations under the agreement, leaving China free to take the US to the WTO, as it has indicated that it would. The WTO dispute resolution panel would presumably rule in China's favor and authorize retaliation against the US. Hence the vote on PNTR is not a vote on whether China joins the WTO — that train is leaving the station as soon as the EU climbs on board — but rather a vote whether the US is on that train or left standing at the tracks, subject to completely legal discrimination against its economic interests in China.
Presumably this issue will be resolved within a year or so, if not much sooner.12 In the long-run, both personnel and substantive issues could generate conflicts between the US and Asia. With regard to the former, the US actively backed New Zealand's Mike Moore over Thailand's Supachai Panitchpakdi in a protracted dispute over who would succeed Italy's Renato Ruggiero as the WTO Director General. An eventual compromise was reached by which Moore and Supachai would split the term. This haggling did nothing to promote the institutional development of the organization, and the US's strong support for Moore won it no friends in Bangkok, or Asia more generally. Another such brawl can be expected in 2005 when the Moore-Supachai term ends. The search for Supachai's successor could get entangled with personnel decisions made in other international organizations, as will be discussed further below.
Beyond personnel issues, the WTO has a series of intellectually and politically challenging issues to confront. Most immediate will be the built-in agenda of agriculture and services. As mentioned earlier, as part of the Cairns Group, Southeast Asia is generally supportive of the US position and in opposition to Northeast Asia. When China enters the WTO, it could be expected to side with Japan and South Korea against agricultural trade liberalization.
On services, developed countries typically have demanded liberalization of financial and professional services on the part of developing countries. (Developing countries have countered by demanding increased possibility for movement of people, so that, for example, a developing country service firm could bring its workers into a developed country on a temporary basis to work on a project (in construction or maintenance, for example.) The natural alliance is the US and Japan against the rest of Asia. In reality, Japan is relatively uncompetitive in much of the service sector, and Southeast Asia tends to be more competitive in services than countries at similar income levels. Thus, the divisions on this issue are not so stark.
Beyond the built-in agenda, trade liberalization in industrial products is dominated by traditional tariff-cutting on the one hand and the need to better integrate antidumping and competition policy rules on the other. With respect to the former, the main problem is the US resistance to cutting some extremely high tariff "spikes" on some products of interest to Southeast Asia (athletic shoes, for example). Nevertheless, since the tariff-cutting exercise is a well-understood process, amenable to traditional WTO tariff offer negotiations, and it is a matter of reaching international consensus on an acceptable formula.
Reform of anti-dumping rules and the creation of a more coherent international competition policy regime present greater challenges. Asian countries, among others, want to see reform of antidumping procedures, which they regard, with significant justification, as simply closet protectionism. Within the US, there is little intellectual consensus as to what the goals of a desirable international competition policy should be beyond prohibiting horizontal collusive practices such as cartels. Although the topic is of relevance to a wide range of producers, the most active have been import-competing firms, who regard competition policy as prospectively a much less protection-friendly alternative to the existing, and WTO-consistent, antidumping (AD) laws. (There is also some evidence that AD actions have facilitated anticompetitive behavior — another reason to prefer them to the application of competition policy.) The intellectual debate has been hijacked by lawyers arguing that the goal of trade policy should be "market access," not "efficiency". Indeed, some commentators go so far as to argue that these putative differences in orientation demonstrate that trade and competition policies are fundamentally incompatible.
Within the US government, the bureaucracy is split. The Antitrust Division of the Justice Department fears that any multilateral accord would amount to a dumbing down of US law, and a weakening of US antitrust practices, while the United States Trade Representative (USTR), stung by its defeat in the WTO in the Kodak-Fuji case, opposes the narrowing of antidumping laws in the interests of its import-competing clients. The import-competing sectors and their hired guns are fully prepared to block any weakening of antidumping law. Unless there is a significant shift in domestic politics, it is hard to envision much constructive activity on this issue emanating from the US in the next five years. Perhaps the only hope for action in this area, is that US exporters, increasingly subject to the equally irrational antidumping actions of US trade partners (including some in Asia), will emerge as a more forceful domestic lobby for constructive change.
The antidumping-competition policy issue is an inside-the-Beltway matter compared to the hot-button issues of the social clause. Barring a significant shift in US government priorities (which could occur under the next administration), the US will continue to press its labor and environmental agendas within the WTO. This policy thrust has found little support in Asia (Thailand and Malaysia were among the complainants which triumphed over the US in the infamous sea turtle case), and will find even less support once China, which could be expected to vehemently oppose the US labor and human rights agendas, enters the organization.
Indeed, conflict on these issues could encourage Asia to go its own way, creating regional preference arrangements similar to those which exist in Europe and North America. One such scheme, the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA), already exists, though has not had much impact on trade.13 The goal is to have 80 percent of trade tariff-free by 2000 and 98 percent of tariff lines under five percent, with some sensitive sectors (agriculture) given longer adjustment times. Treatment of non-tariff barriers have been left vague, and the new, poorer, socialist members, (which were not members when the negotiations began), have been given more time to implement their commitments. Although ASEAN espouses "open regionalism," AFTA may violate non-discrimination clauses of the WTO. Econometric evidence concerning its impact is mixed; the intraregional bias in ASEAN members' trade disappears when imbedded in larger Asian groupings.14
The other major regional initiative, APEC, includes countries from outside East Asia, most notably the US, and could potentially play an important role, though it can point to few tangible accomplishments in its decade of existence. APEC was originally an Australian initiative; the Asians wanted US involvement to counterbalance Japan which had a similar proposal. After its first meeting in Canberra in 1989, the next big step was in 1993 when, at the first APEC "leader's meeting," the US hosted history's first pan-Asian summit, ironically, held outside Asia. APEC's membership accounts for more than two billion people (40 percent of world population) and more than half of world output. An officially appointed Eminent Persons Group issued a report calling for free trade and investment in the region by 2020 (2010 for rich members, 2020 for poorer ones), a goal that the governmental leaders adopted in their Bogor Declaration of 1994.
Due to great political-economic diversity among membership, no one anticipates "deep integration" along the lines of the EU. Rather, much activity has been in terms of "business facilitation" such as streamlining procedures, etc. Progress on trade and investment implementation has been uneven; agriculture is a highly sensitive issue, and the Clinton Administration lacks the statutory authority to implement early tariff cuts.
Neither APEC nor ASEAN played an important proactive role in the financial crisis, though both may have served to constrain backsliding. Both organizations were developed largely by their members' foreign ministries; their finance ministries (in particular the US Treasury in the case of APEC) have remained unenthusiastic, and neither organization has a highly developed financial component. (The Finance Ministers do have their own, separate, annual meetings, however.) Rhetorically, at least, both groups have continued to support liberalization, however.
The growth of regionalism outside of Asia and the failure of the WTO meeting in Seattle have encouraged Asian countries to take a second look at regional economic integration schemes. The old East Asian Economic Caucus idea has been revived recently as the East Asian Free Trade Area. In Japan, the Ministry of International Trade and Industry is actively studying the possibility of free trade areas involving Japan, South Korea, Singapore, and possibly even China and others. The South Korean government, too, has been studying the possible free trade areas bilaterally or trilaterally with China and Japan. The problem, of course, is agriculture. Because of its inefficiency in agriculture Japan is constrained to look to partners which either do not have an agricultural sector (Singapore) or have similarly inefficient agricultural sectors (South Korea). Japan's search for regional alternatives to the multilateral system is hamstrung by its own agricultural policy. The same holds for South Korea.
International Financial Policy
The other important dimension of trans-Pacific economic relations is financial, and a similar set of themes: disagreement over substantive and key leadership issues and a possible Asian desire to go their own way reoccurs. The focal points have been Asian dissatisfaction with the performance of the US government and the Washington-based International Monetary Fund (IMF) during the Asian financial crisis, subsequent debates over reform of the international financial architecture, and proposals for regional initiatives that could run counter to policy emanating from "Washington."15
With regard to actions at the time of the crisis, Thailand was stunned by the initial US refusal to come to its financial assistance and its refusal to participate in the "second line of defense" associated with the initial IMF program.16 This unfavorable response was compounded by what are now widely regarded as fundamental mistakes in the Fund programs which actually exacerbated the crisis.17 These perceptions — that the US was an unreliable ally and that the economic prescriptions being written by Washington were at best incompetent and at worst malevolent — were compounded by the US and IMF opposition to Japan's proposal for an Asian Monetary Fund which was regarded as obstructionist.18
The focus has since shifted to what should be done to reform the financial architecture in general, and the IMF, in particular. The US proposal, contained in Summers (1999), makes a number of constructive and largely unobjectionable recommendations. However the recommendation that the IMF to phase out long-term lending and take on a more narrow crisis-prevention mission than its current activities encompass is controversial. It calls for the Fund to play a quasi-lender of last resort function, lending significant amounts at "prices to encourage rapid repayment" (p.6). At the same time, it seems to support the same kind of intrusive conditionality that proved to be so controversial in the Asian crisis, arguing that "issues of social cohesion and inclusion...should be addressed as a condition for IMF support" (Ibid.). These two thrusts appear to be logically contradictory. If the IMF is to offer short-term financing at penalty rates, then there is a reduced need for policy conditionality, much less the kind of deep conditionality embodied in the Asian crisis packages.19
The Summers proposal goes on to recommend a recalculation of member quotas (the basis for weighted voting within the organization and in principal, determining the amount of resources that a country can call upon in a crisis).20 This reallocation could have important implications for Asia, inasmuch as Asian countries appear to be greatly underweighted, while European countries are similarly overweighted. As Bergsten (2000b) observes, Japan's economy is half as large as that of the US or EU, but its quota is one third of ours and only 20 percent of Europe's. Other Asian countries, South Korea for example, are even further underweighted, arguably constraining their access to Fund resources, and limiting their influence in the Fund's Executive Board. Nevertheless, it proved difficult diplomatically to allocate the Japanese the second largest national quota within the Fund, and further quota reallocation could be equally if not more problematic.21 That is all to say, over the next several years, the US may attempt to get Asia to pony up more money for the IMF, while at the same time try to move the organization substantively in a different direction than would be supported by much of Asia.
These issues may receive their first high profile public airing in the dispute over who is to succeed Michel Camdessus as Managing Director of the IMF. Traditionally this job has gone to a European, while the Presidency of the World Bank has gone to an American, and a Japanese has traditionally led the Asian Development Bank (ADB). In a break from previous practice, Japan has promoted the candidacy of former Ministry of Finance official, and promoter of the Asian Monetary Fund, Eisuke Sakakibara for the Managing Director's job. Some other Asian countries have been convinced to give token public support to his candidacy. It is a bit hard to know what to make of this. Of the potential candidates to succeed Camdessus who have been bandied about in the press, Sakakibara appears to be the least temperamentally suited to run the IMF.22 Indeed, the fact that Japan has promoted Sakakibara could be interpreted as an indication the extent to which the Japanese pool of potential candidates for important international positions is weak. And, if a Japanese national did get the position, Japan would come under pressure to release its hold on the ADB presidency.23
In the end it, is highly unlikely that an Asian will be appointed to the IMF Managing Director position, and interest in developing Asian regional financial institutions will continue. Already, there has been limited cooperation among central banks within the region. Prior to the crisis, a number of these central banks had established currency swap and repurchase ("repo") arrangements. These were easily swamped by the crisis, but agreements among the members of the organization of East Asian and Pacific Central Banks and the organization of Southeast Asian Central Banks were deepened and expanded in January 2000. In the longer-run, Japan may seek to resuscitate its proposal for an Asian Monetary Fund. The countries of the region possess enormous foreign currency reserves (on the order of $600 billion) and financing such an organization would not be a problem. Japan has already committed $30 billion of regional finance through its "New Miyazawa Plan."
Yet as in the case of trade, domestic politics and international rivalries constrain Asia's ability to move forward on these initiatives. Japan is a major source of saving for the region, and some in Japan would like Japan to play a greater role as an international financial intermediation center. Yet despite Japan's great wealth, the government has never shown the willingness to deregulate its own market to the extent that would be required to become a global center of financial intermediation. Even regionally, it is unclear whether Tokyo could ever play the roles that Singapore and Hong Kong play today and that Shanghai may play some day in the distant future. Despite the promise of the "Big Bang," the Japanese government remains ambivalent about financial deregulation. Politically it is fundamentally inwardly-oriented toward its domestic parochial political interests and financial markets and institutions, not toward global markets. As a consequence, it appears unwilling or unable to act in ways that would reassure non-Japanese institutions that it would play a responsible role as an efficient and unbiased regulator.
This unease is compounded by lingering distrust of Japan in region, especially in China. For its part, Japan remains wary of China, particularly in light of its authoritarian political system. The kind of political exigencies that fueled the rapprochement between France and Germany after the Second World War appear to be missing from Asia, and will limit Asian attempts at greater regional cooperation, at least in the medium-run.
Asia has been shaken by its experience during the financial crisis. Among other things, this has led to a reappraisal of its relationship with the US government and the Washington-based multilateral economic institutions. There is a sense of disappointment in both aspects of "Washington." US government attempts to reshape the policies of the international financial institutions, along with the WTO, are likely to encounter opposition in Asia. Haggling over leadership posts could fuel further resentment of the US and disaffection with the international institutions.
The virulence of this conflict could intensify, if as is probable, US economic growth slows down, and trade issues rise in prominence in US domestic politics. The US political system could be strained by the political need to "do something" about trade and the constraints on unilateral action imposed by the WTO. Japan and China due to their large bilateral trade surpluses would be the most likely targets of US ire.
In such an environment it would be understandable if Asians intensified efforts at regional cooperation as an alternative, either as a complement to, or a substitute for, multilateral cooperation. The heterogeneity of Asia in terms of levels of economic development, political systems, and culture and ethnicity would appear to greatly raise the "transactions costs" of regional integration. And although Asians exhibit a kind of grudging disappointment in the performance of the US government and the global multilateral institutions, this does not appear to be sufficient to propel them into significantly greater regional cooperation in the medium-run. Rather than expending efforts to construct regional bodies from heterogenous countries, individual Asian countries may be better off working though global institutions or plurilateral forms of functional cooperation among like-minded countries. To the extent that regional initiatives can be molded in ways consistent with the broader global institutions, Asian countries can follow a two-track approach. However if regional cooperation is seen as an alternative to the global order then Asian countries may face a choice. An ASEAN head of state could face the following question: which is likely to yield more gains — AFTA or the Cairns Group within the WTO? It is not at all obvious that it is the former.
1. For discussions of possible bubbles or bubble-like phenomena in US asset markets, see Miller, Weller, and Zhang (1999) and Makin (2000).
2. This refers to goods and services. The deficit on goods alone was an eye-popping $351 billion, nearly four percent of GDP — the highest level in history. For 1999, the current account balance, which includes some financial flows and is the amount that the US actually needs to finance externally, is not yet available, but expected to be on the order of -3.3 percent of GDP, roughly the same as 1987, its highest level ever.
3. This is not inevitable — the US could experience a "soft landing." See Mann (1999).
4. See Noland (1997).
5. See Noland (1996).
6. With regard to Japan, see Noland (1997). With regard to China, the vast majority of Chinese exports to the US compete primarily with exports from other sources, not US domestic production (Noland, 1998). In particular, a removal of quota restrictions on Chinese textile and apparel trade with the US could be expected to increase China's bilateral surplus with the US for the simple reason that imports which are currently sourced form third countries such as South Korea or Kenya, would in the future come from China, reflecting a more rational locational pattern of production worldwide. That is to say, even if the overall US trade balance remained unchanged, the pattern of bilateral balances would change. The bilateral deficit with China would increase and bilateral deficits (surpluses) with other countries would decrease (increase) to offset this change.
7. See Noland (1995) for more substantiation of this argument.
8. Just the opposite: The developing countries believed that they had been taken to the cleaners during the Uruguay Round, the previous round of negotiations, and were skeptical about taking on further trade liberalization commitments. They were far better prepared to defend their interests in these negotiations. Similarly, Asia was still recovering from its financial crisis, and policymakers there believed they already had enough issues with which to grapple. Japan showed its lack of interest in further trade liberalization by blocking the Early Voluntary Sectoral Liberalization effort in the Asia Pacific Economic Cooperation forum (APEC). And in the US, President Clinton has been unable to secure "fast track" trade negotiating authority from the US Congress.
9. In contrast, Thailand, the Philippines, Indonesia, and Malaysia are members of the Cairns Group of self-identified non-subsidizing agricultural exporters, which generally takes positions similar to that of the US in the agricultural trade negotiations. More a more detailed analysis of Asian countries' positions on agricultural trade issues, see Noland (1999).
10. These include the possible extensions of the 31 December 1999 deadline for developing countries to implement WTO agreements on intellectual property, investment measures, and customs valuation.
11. See Noland (1998) and Bergsten (2000a) for more on the PNTR issue.
12. In his January 2000 State of the Union address, President Clinton indicated that he would like to a vote on PNTR this year, and Republican Congressional leaders voiced mild support for this initiative. However, China has yet to reach a bilateral accession agreement with the EU. Once the bilateral agreements are complete, observers expect the WTO secretariat to take around six months to compile the various bilateral accords into a single accession protocol. Given the US electoral calendar and the relatively short Congressional session, it is unlikely that the Congress could vote on PNTR this year — if it waits for the Chinese WTO accession protocol to be completed. The Congress could, however, vote on PNTR before the WTO process is complete, presumably on the basis on the US-China bilateral agreement.
13. ASEAN was founded in 1967 as a Cold War response to the war in Indochina.In 1992 it began talks leading to the creation of AFTA. The original members were Singapore, Indonesia, Thailand, Malaysia, and the Philippines. Brunei joined in 1984. Ironically, Vietnam joined in 1995 and was followed by Laos (1997) Myanmar (1997) and Cambodia (1999). ASEAN initially attempted regional industrial ventures which failed; in 1978 it put into place a preferential trade agreement (10-15 percent preference margin on designated items). A free trade agreement was discussed, but rejected, at the time. The impact of the policy was insignificant. Important items were excluded, and, in one infamous case, Indonesia granted its partners a preference on snow removal equipment. A decade after the deal, it covered less than three percent of actual trade.
14. See Frankel (1997).
15. Many in Asia regard the IMF as a front for the US government and do not distinguish between the actions and positions of the two entities. In part this reflects ignorance, but in part it is an understandable response to the predominate influence the US wields in the Fund, and the fact that in the case of South Korea, the Fund program conditionality included items of direct mercantilist interest to the US, which were of questionable relevance to the financial crisis.
16. The US participated in the "second line of defense" associated with the second IMF program in Thailand. However, even this participation was purely symbolic inasmuch as the US Treasury fought the actual use of "second line" funds and has never disbursed a dime.
17. To cite but one example, Joseph E. Stiglitz, at the time the chief economist of the World Bank, contemporaneously put forward serious criticisms of the IMF programs. See Stiglitz (1998, 1999).
18. In the interest of brevity, these statements blur distinctions among Asian countries. In Indonesia, in particular, some segments of the society actually welcomed the IMF, which was regarded as less cozy with the Suharto regime than the World Bank. At the other extreme, a widespread view in South Korea is that the IMF program was a deliberate attempt to subvert the South Korean economy which was believed to pose a threat to the US in sectors such as automobiles.
19. Frankly, the US position is unclear on this point. Some have interpreted this ambiguity as reflecting a desire by the Clinton Administration, in general, and the Treasury, in particular, to pre-empt the strongly market-oriented critique expected from the Congressionally appointed International Financial Institutions Advisory Commission (known colloquially as the Meltzer Commission after its chair, Professor Allen Meltzer), while at the same time preserving support from Congressional members concerned with labor, human rights etc.
20. The traditional quota constaint on borrowing was bent for Mexico in 1994 under US pressure, and was broken dramatically during the Asian crisis, when South Korea was permitted to borrow nearly 20 times its quota.
21. Indeed, the problem with quota reallocation would not be giving Asia a greater share, it would be how to reduce the European share while preserving the historical prerogatives of individual countries. Simply treating the EU (or, alternatively, the ECB members) as a single member could result in the European quota exceeding that of the US. This situation would not only be unacceptable to the US on diplomatic grounds, but it would also require moving the IMF and the World Bank headquarters to Brussels (which no one wants), since the charter states that the organizations' headquarters must be located in the capital of the largest member.
22. To cite a mild example, while in the midst of "campaigning" for the job, Sakakibara publicly blasted, Masaru Hayami, Governor of the Bank of Japan, as "incompetent" and called for Hayami's resignation. Sakakibara would presumably need the Bank of Japan's support to get the Managing Director position. Some have speculated that Sakakibara's ultimate goal is Hayami's job, not Camdessus'.
23. The problem for Japan is that there is no other Asian country able to provide major support for a Japanese candidacy at the IMF in exchange for Japanese support in the ADB.
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