The rise of china and the future

of east asian integration

Byung-Joon Ahn

Asia-Pacific Review, Vol. 11, No. 2, 2004

The Rise of China and the

Future of East Asian Integration
BYUNG-JOON AHN

China is rising as the fastest growing largest economy and thereby leading a
market-driven economic integration in East Asia. At the same time, nationalism
is also rising and constraining East Asian countries from forming a state-driven
 The Rise of China and the future of East Asian integration
regional community. This paper examines the political economy of
interdependence and nationalism that is taking place in East Asia. Simply put, its
central theme is that the degree of interdependence, especially between China
and other countries, is deepening, and as a result, is pulling East Asia toward
regional integration, but due to the rising tide of nationalism, it is far short of
forming an actual community. In order to build a community, therefore, such
economic trend must be propelled by political leadership and will. In elaborating
on this thesis, the paper analyzes the trade and production networks centered on
China, the efforts to promote regional integration in ASEANþ3, the nationalist
rivalry between Japan and China in negotiating FTAs, and the difficulties in
achieving Sino–Japanese reconciliation. Finally, the paper proposes a Northeast
Asian Forum among Japan, South Korea and China while the US remains as a
stabilizing force in East Asia.

Interdependence and nationalism in East Asia

C hina is rising as the fastest growing largest economy and leading a

marketdriven economic integration in East Asia. At the same time,
nationalism is also rising and constraining Asian countries from forming a state-
driven regional community. Thus, economic and political imperatives are
diverging in East Asia. By and large, economic imperatives are working toward
interdependence, but political imperatives are working toward nationalism within
and between East Asian countries. The rapid rise of China as the world’s factory
is accelerating the pace of interdependence. This has raised much hope for
achieving an East Asian economic integration, and more specifically, for building
an East Asian Economic Community like the European Union. If we want to know
whether this is possible, we must

ISSN 1343-9006 print; 1469-2937 online=04=020018–18

Carfax Publishing, Taylor and Francis Ltd. ,http//www.tandf.co.uk/. 18
# Institute for International Policy Studies ,http://www.iips.org/. DOI:
10.1080=1343900042000292524
carefully examine the political economy of interdependence and nationalism that
is taking place in East Asia.
We can raise a number of questions for this task. Would it be possible for East
Asian countries to form such a community in the context of contemporary
international relations? What is the overall trend of economic interdependence
emerging between China and other countries? How is nationalism impacting the
moves toward regional integration in general and on the efforts to foster Free Trade
Agreement (FTA) in particular? How are Japan and China interacting and what
should they do to reconcile their historical and political differences? What can we
do to overcome those obstacles to regional cooperation?
In exploring these questions, this paper aims to highlight a central theme on
the interaction between economic interdependence and political nationalism.
Simply put, the degree of interdependence especially between China and other
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Byung-joon Ahn
countries is deepening by the growing volume of intra-regional trade and
investment, and, as a result, is pulling East Asian countries toward regional
integration, but it is far short of forming an actual community due to the rising tide
of nationalism; in order to build a community, therefore, such economic trend must
be propelled by political leadership and will. More specifically, the future of Asian
integration depends on the future of China and Sino–Japanese relations; hence,
Japan and China have to reconcile their historical and political differences to
provide the leadership for forging an East Asian community.
In this paper, “interdependence” means the degree to which economic
conditions in one country influence or harm those of other countries; the degree of
influencing is generally referred to as sensitivity and the degree of harming as
vulnerability. “Nationalism” means a form of political consciousness that people
express toward their nation or state; a major characteristic of Asian nationalism is
collectivist and ethnic in that Asian states put more emphasis on defending
sovereignty and independence from other, and especially Western, states.
Several points are in order to elaborate on this thesis. First, China is emerging
as a hub of trade, investment and production networks in East Asia as China’s
market and other countries’ markets become more and more interdependent; as a
result, the direction of economic interdependence is shifting from Japan to China.
Second, the efforts that East Asian countries are making to promote regional
integration are being constrained by the influence of nationalism—the formation
of ASEANþ3 in the wake of the Asian currency crisis represents a sort of Pan-
Asian nationalism, for it was their joint attempts to distance themselves from the
US. Their current moves for negotiating regional and bilateral FTAs also reflect
nationalist competition or rivalry, especially between Japan and China. Third,
building an East Asian community is not feasible without sharing a common
political base and identity; hence, Japan and China in particular have to reach
fundamental reconciliation and exercise joint leadership in promoting regional
integration; until this is done the US must remain in Asia to provide regional
stability and to support open regionalism. Fourth, it is time to launch a Northeast
Asian Forum among Japan, South Korea and China at the summit and other levels
among political leaders, business people, academics and civil society activists to
facilitate mutual understanding and trust.

Interdependence: from a Japan-centered to a China-centered

hub
With China’s rapid rise, the overall direction of economic interdependence in East
Asia is shifting from a Japan-centered to a China-centered one as China is
emerging as a hub of trade, investment and production networks especially in the
manufacturing sector. As a result, what used to be called “Flying Geese”
development with Japan as the mother goose is being replaced by “Galloping
Dragons” development with China as the head dragon. China is becoming a center
of intra-industry and vertical specialization as Japan and such newly industrializing
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 The Rise of China and the future of East Asian integration
countries as South Korea and Taiwan export intermediate goods to China, and
China processes them and re-exports the final products to the US. This has given
rise to a triangular trade relationship between China, Japan and other industrialized
East Asian countries, and the US and the EU. Since the Asian currency crisis in
1997, China has become a “Developmental State” directing industrial policy and
relying on economic performance for legitimacy but Japan, South Korea and
Taiwan have opted for “Developmental Democracy” in the sense that their
legitimacy depends on both economic development and democratic processes.

China as a hub of trade, investment and production

As China is becoming the world’s manufacturing factory, it is rising as a hub of
trade, investment and production in East Asia as it is attracting roughly one half of
intraregional trade, 60 percent of investments and the bulk of labor-intensive
production of manufactures. The main reason for this is that the costs of labor and
production in China are substantially below those in other Asian countries and yet
demands for goods and service are rapidly rising in the world’s most populous
country with 1.3 billion people and there are still huge underdeveloped areas in the
Northeast and Southwest. Since becoming a member of the WTO in December
2001, China has been rapidly integrated into the global trading regime. In 2003,
for example, China’s share in the world trade reached 5.5 percent with $850 billion,
which was almost the same as Japan’s global trade volume. China accounts for
more than half of the total Asian trade today. Not only did China survive the Asian
currency crisis but it has continued to sustain the world’s highest growth rate with
an average of 9 percent per year. In 2000–2003, China’s exports increased by an
average of 21 percent and her imports by 23 percent annually.
China is importing intermediate goods and commodities in order to export as
the Newly Industrializing Countries did during the 1970s and 1980s.
China is the biggest importer of goods from Taiwan and South Korea. In 2003
China overtook the US as South Korea’s largest export destination as its trade
surplus with China recorded $13.2 billion. If Hong Kong is included, China is
expected to become the biggest market for exports from Japan, Singapore,
Malaysia and the Philippines.
China is attracting most of the foreign direct investment (FDI) from other
Asian and Western countries. In 2003 China eclipsed the US as the biggest
recipient of FDI for the first time with annual levels exceeding $50 billion. In
recent years, FDI going into China involved the purchase of physical assets
including mergers and acquisition, joint ventures, investment in plant and
equipment, the buying of property and capital transfers to foreign owned
enterprises. It is important to note that in a globalizing economy trade tends to
follow investment. For example, over half of China’s imports are manufacturing-
intensive products like electronics, machinery, equipment and instruments. In
addition to acquiring capital, China is gaining managerial expertise, technologies,
and access to the global network of the investing company. The presence of a huge

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domestic market becomes the greatest appeal to foreign investors. Compared to
India, which received only $4 billion FDI in 2003, China received $53 billion.
Unlike India, China is welcoming multinational corporations (MNC) for both
foreign and domestic markets.
One characteristic of Chinese economic development is its heavy dependence
on FDI. The bulk of China’s exports are being produced by joint ventures or
MNCs. Thus far, most of these corporations have been concentrated in the coastal
areas in the East or in major metropolitan areas. Recently, Japan has become
China’s largest foreign investor by accumulating $34 billion. In 2002 China
became the largest market for Japan’s imports, surpassing the US.
With the help of this trade and investment, China has indeed become the
world’s production platform. This is because China’s comparative advantage lies
in the low cost of producing goods. A Chinese factory worker earns the equivalent
of less than $1 per hour as compared to the level of $16 to $33 in the US. Chinese
wages were no more than four percent of American and Japanese wages in 2002.
Even with these low payments, Chinese workers are working hard and
productively. Besides, China offers such other incentives as low-cost land, low
import duties and tax breaks to foreign companies.
In order to keep up momentum in industrial production, China is absorbing
more resources from abroad than any other country. In 2003, China absorbed
roughly half of the world’s cement production, one-third of its steel, one-fifth of
its aluminum and nearly one-fourth of its copper; China eclipsed Japan to become
the world’s second largest importer of oil after the US. About 40 percent of China’s
imports are resources goods, which include agricultural products, chemicals,
minerals, metals and textiles. This phenomenon has resulted in higher prices and
even shortages of commodities in other countries. China accounts for just four
percent of global GDP but consumes more resources than the US mainly because
it is the world’s largest production platform. The other 60 percent of China’s
imports are manufacturing-intensive products, such as electronics, machinery,
equipment and instruments that are used for labor-intensive packaging or
reprocessing and then re-exporting. As a result, China has become the largest
export market for most East Asian countries and replaced Japan as the region’s
economic engine.

A China-centered triangular trade and production network

A triangular trade and production relationship is taking place between China and
its Asian partners and the US. As noted above, this phenomenon is resulting from
the interaction between these countries as China imports intermediate goods,
mostly machinery and plants, from Japan, South Korea and Taiwan, and then
processes them into final products and exports them to the US and other Asian
countries. In 2003 China had a $68 billion trade deficit with Asian countries but a
$124 billion trade surplus with the US. As a result, China has trade deficits with
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 The Rise of China and the future of East Asian integration
Asia in intermediate goods, especially in parts and components, but trade surplus
with the US and the EU. This division of labor or vertical specialization is driven
by markets as it is led by private firms and individuals with the blessing from the
concerned states. The size of the Chinese economy is providing China with
enormous advantages for assuming a central place in the triangle and serves as the
engine of economic growth throughout East Asia. Partly as a result of
globalization, and more importantly as a result of Japanese, South Korean and
Taiwanese investments in China, intra-industry or intra-firm trade has expanded
between their home companies and their subsidiaries in China, thereby forming
various forms of production networks.
As Japanese and South Korean firms make investments in China according to
the requirements of comparative advantage, the volume of their cross-border
production and trade has risen, especially after the 1997 currency crisis. In other
words, these firms have turned to China to survive the rising level of wage and cost
at home by moving their production capacity there. Among them are a large
number of small and medium enterprises that are involved in labor-intensive
manufacturing. China’s export drive has given these firms further incentives to
move their production capacity to appropriate Chinese localities to reduce cost.
Many of them are engaged in processing electronic goods and exporting them back
to their home countries and the US. Now many large corporations also are
expanding their operation in automobile and machinery production in China while
trying to guard their high-technology secrets at home.
The trade liberalization that China began to undertake after joining the WTO
has made it easy for these foreign firms to produce in China and to export their
final products abroad. In fact, China’s foreign trade expansion has occurred mainly
in these processing operations. In 2002 almost 60 percent of China’s imports from
Hong Kong, South Korea and Taiwan, and about 40 percent of its imports from
Japan, were engaged in these processing production and exporting. The US and
the EU are importing about half of these final products.
Foreign firms are a key to forming this triangular production network. They
account for over half of China’s trade. As for China’s exports, they are carrying
out over two-thirds of China’s processed production and exports. As China set out
to capitalize on the benefits of international segmentation of production and of
financial globalization, Japanese and Korean firms have chosen to actively
participate in processing production by increasing direct investments in China.
Since Japanese and Korean affiliates in China import an increasing number of
intermediate goods from their home companies and process them into finished
goods to be exported to the US, this triangular relationship does not lead to
industrial hollowing but contributes to enhancing employment and interests on
both sides. Thus, China has become the center of triangular trade and accounted
for 40 percent of the increase in the intra-regional trade in East Asia.
As long as China enjoys certain comparative advantage in labor-intensive
industry, the interests of Japan and South Korea on the one side and China on the
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other side are complementary in deepening this kind of triangular network. So long
as China has vast reserves of cheap labor in inland areas which some people
estimate at 200 million, this China-centered network of trade and production is
likely to continue for a long time to come. Since these underemployed people need
to be integrated into the global economy over the next 20 years, China will
maintain its comparative advantage in the manufacture of exports as long as the
US and other advanced countries can absorb them.

China as a “Developmental State” and Japan and South Korea as

“Development Democracies”
As China seems to have entered the “take-off” stage of economic development that
South Korea experienced in the 1970s, its political economy reveals many features
of the Developmental State that Japan in the 1960s and South Korea in the 1970s
showed in guiding a state-led development of manufacturing sectors. The
Communist party-led state in China is still determining major contours of industrial
policy not only by setting targets of investment and production but also by
controlling the banking and foreign exchange system. In trying to ride out the
impact of the Asian currency crisis, for example, Beijing sought to generate
aggregate demand through increased direct public expenditure and lending by the
stateowned banks to other state-owned enterprises. In overcoming the effects of
SARS in 2003, too, it continued to pump-prime easy credit by state banks and to
provide tax breaks to the affected enterprises, and allowed provincial and local
authorities to continue investments in their independent projects.
Even in trying to prevent overheating in fixed-asset investment such as real
estate, machinery and factory building in 2004, the government used
administrative directives by prohibiting credits and by requiring authorization
instead of encouraging market mechanism. Thus, China has yet to carry out
reforms of its state enterprises and financial system including the fixed exchange
rate. So long as this Developmental State can generate enough growth and
employment to keep the people relatively satisfied, its legitimacy can depend on
the fruits of economic performance by calling for unity and stability rather than
democracy and human rights.
This Developmental State primarily relies on successes in economic
development for legitimacy by meeting such basic needs of material life as food,
shelter and clothing. Were it to fail in generating this kind of performance
legitimacy, however, it could turn to mobilizing nationalism by calling for
“liberation of Taiwan” or historical redemption from Japan. It is also true that
accomplishing economic success raises nationalist pride among the population. As
long as China remains a one-party state and is facing a “democracy deficit,”
therefore, it is more likely to resort to nationalism as an effective means of
enhancing legitimacy.
By contrast, Japan and South Korea have consolidated democracy to the extent
that it is irreversible. What distinguishes these Development Democracies from the
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Chinese Developmental State is that they rely on both economic development and
democracy for their legitimacy. In addition to performance legitimacy, these
pluralistic states can generate procedural legitimacy by consolidating
democratization and liberalization through regular elections and the rule of law. In
the degree to which their legitimacy relies either on economic performance or
democratic processes, they still rely more on the former than mature Western
democracies do. But as members of the OECD, Japan and South Korea have
undertaken more liberalization and privatization in their economic systems to meet
such global norms as transparency and accountability. The more they do so,
therefore, the more they may differ in their domestic political identities from
China; hence, their leadership could more easily overcome nationalist sentiments
with the consent of the people. In the absence of popular support in China,
however, the state tends to define and mobilize nationalism as a substitute for the
Communist ideology as the meaning of “Socialism with Chinese Characteristics”
gets increasingly fuzzier when China becomes more and more capitalistic in its
economic and social governance.
Nationalism and regionalism in East Asia
The rise of economic interdependence in East Asia described above has been
driven by markets but the rise of nationalism and the institutional efforts at
reaching a free trade agreement have been driven by the states. To a large extent,
Asian regionalism as expressed in ASEAN and ASEANþ3 also represents a sort
of PanAsian nationalism designed to guard Asian interests against the US and
Europe. Faced with the longest period of recession, Japan is now experiencing
what may be called “Wounded Nationalism” but as a rising power China is
exhibiting a kind of “Assertive Nationalism.” It is against this background that
China is seeking a regional FTA with ASEAN but Japan is trying to foster a series
of bilateral FTA with Singapore, South Korea, Thailand, Malaysia, the Philippines
and Indonesia. Thus, each side is trying to hold onto its nationalist posture.

ASEAN13 as Pan Asian nationalism

The formation of ASEANþ3 in December 1997 right after the currency crisis hit
Thailand, South Korea and Indonesia was a good example of asserting Pan-Asian
nationalism, for Asian resentment over the behavior of the US government and the
IMF became an important impetus for grouping three large Northeastern countries
(Japan, China and South Korea) and ten Southeast Asian countries for the first
time. In fact, this is equivalent to the East Asian Economic Caucus (EAEC) that
Malaysian Prime Minister Mahathir Mohamad proposed in 1990. By launching
this new group these 13 East Asian countries set out to develop an organization of
regional economic cooperation independent of the West and the US in particular.
Reinforcing this concept was some degree of anti-Western and anti-American

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Byung-joon Ahn
sentiment that they shared toward the way in which the IMF and the US had
handled the currency crisis.
The principal accomplishment of ASEANþ3 was the Chiang Mai Initiative
established at its finance minister meeting in 2000 under which several countries
concluded a series of “swap” agreements with each other so that they could lend
foreign exchange reserve to other countries to help them protect their currencies in
cases of crisis. This program now involves 16 bilateral currency swap
arrangements worth $36.5 billion among its members but remains small compared
to their foreign exchange reserves. In 1998 ASEANþ3 formed an East Asian
Vision Group that proposed a number of reports. At the 2002 summit, the East
Asian Study Group handed down another series of recommendations including the
idea of having an annual East Asian summit starting in 2005.
Even if this summit gets off the ground, it would be hard for this group to build
a common agenda, let alone identity, without decisive leadership. China has tried
to exercise some leadership but Japan is reluctant not only because its ally, the US,
is excluded from this regionalism but also because the historical legacy of its
colonialism still remains unsettled.

Japanese “Wounded Nationalism” vs. Chinese “Assertive Nationalism”

There are signs that tensions are rising between Japanese Wounded Nationalism
and Chinese Assertive Nationalism as these two core Asian powers are engaged
again in a positional competition in East Asia. In this paper, “Wounded
Nationalism” means the nationalist sentiments that Japanese are expressing in
order to regain a measure of their self-confidence that they lost in sustaining the
economic miracle they had achieved after World War II. To a different degree, this
is also found in other countries like South Korea, Thailand and Indonesia, which
have experienced currency crises. Herein, “Assertive Nationalism” means the
nationalist sentiments that Chinese are displaying as a result of enjoying their
rising power status now after a long century of humiliation forced by foreign
powers and of internal division caused by war and revolution at home.
It is well known that after the military defeat in World War II, Japan was able
to recover a sense of national purpose by trying to catch up economically with the
US. By the 1980s Japan did succeed in accomplishing this task. But during the
“lost decade” in the 1990s and in the early twenty-first century, Japan’s sense of
pride was hurt by its inability to come out of the continuing bubbles and recessions.
In this circumstance, many Japanese are now turning to their history, tradition, and
political and military roles in addition to their economic aids to regain some
measure of confidence in themselves and in their country, especially when Japan
seemed to be drifting without a centripetal force. The author terms this trend
“Wounded Nationalism.”
A good example for this expression is found in Prime Minister Junichiro
Koizumi’s determined visits to Yasukuni Shrine, which honors the nation’s 2.5
million war dead including 14 A-class war criminals. On 2004 New Year’s Day he
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 The Rise of China and the future of East Asian integration
prayed again at this shrine just before he prepared to send Japanese Self Defense
forces to Iraq. This caused angry protests from Beijing for “hurting the feelings of
the Chinese people.” But Koizumi was “puzzled” by this reaction, for he just
prayed for Japan’s peace and prosperity. In taking this position, he apparently
commanded popular sentiment as the Japanese government found that there was
not sufficient public support for establishing a secular memorial as an alternative
to Yasukuni Shrine. Among some conservative Japanese are those who say that
Japan may have been a harsh colonizer in Asia but was not so different from other
European colonizers and hence, there was little reason for the country to apologize.
Another example of Japanese nationalism is found in the quest for “a normal
state” that can shoulder an active international role beyond just providing money
and material aid. Recently, Tokyo adopted a number of legislations allowing its
Self Defense forces to be sent to the Indian Ocean in 2001 and Iraq in 2003 so that
“Japan can count on America, and increasingly America can count on Japan” as
US Deputy Secretary of State Richard Armitage so succinctly put it. Should Japan
implement this exhortation, its action amounts to performing “collective defense.”
In fact, there have been various attempts to revise the Japanese Constitution in such
a way that it could legitimate such act of collective defense. Some advocates of
constitutional amendment go so far as to call for an abrogation of Article 9 which
bans Japanese military action abroad. As far as the need for collective defense is
concerned, there is emerging a national consensus because even the opposition, the
Democratic Party of Japan which won decisively in the House of Councilors
elections in July 2004, also supports the idea.
As efforts to regain some measure of self-confidence, many Japanese are
trying to restore a sense of national respect for their history, tradition and symbols.
These are clearly found in such movements as honoring the rising sun national flag
and national anthem, “Kimigayo,” to which the Diet granted official status as
national symbols in 1999, educational reforms stressing patriotism and national
pride, and constitutional revision proposals. It is interesting to note that public
opinion initially was against sending the SDF to Iraq, but once these forces began
performing their duties successfully there, many Japanese became appreciative and
proud to see their nation’s flag fluttering above a desert encampment in Iraq.
In contrast to this Wounded Nationalism, it is Assertive Nationalism that
seems to be on the rise in China. This derives from a rising tide of self-confidence
that the Chinese leadership and people are feeling for having overcome the
humiliation that they used to feel toward the Western powers and also from a strong
streak of pride that they are now expressing for having accomplished the world’s
highest economic growth rate since 1978. China’s successes in entering the WTO
in 2002, inviting the 2008 Olympics to Beijing, completing the Three Gorges Dam,
which can tame the floods that have devastated the Yangtze basin for millennia by
2009, launching a manned Long March rocket in 2003, dispatching warships
through Hong Kong’s Victoria Harbor in May 2004, and producing the Chinese
teams’ best performance at the Olympic Games in August 2004 became good

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occasions for the Chinese leadership to express such nationalism toward the
outside world.
Consequently, China is gaining an upper hand over Japan in expanding its
influence in Asia. Beginning with Beijing’s proactive diplomacy in trying to
mediate the differences between the US and North Korea by brokering the sixparty
talks in 2003, China has initiated a host of Asian proposals. Most important among
them are FTA negotiations and the actual signing of the Treaty of Amity and
Cooperation with ASEAN in 2003, an assertion of its influence in central Asia
through the Shanghai Cooperation Organization, and the beginning of dialogues
with the US on preserving the status quo in the Taiwan Strait. The administration
of President Hu Jintao set out to assert a leadership role in East Asia to foster a
peaceful environment that is a key to continuing the economic boom at home. At
the same time, Beijing is busy modernizing its military by increasing expenditure
by 17 percent per year. In 2003–2004, for example, China’s import of armaments
increased by 7 percent in value to buy a $1 billion deal for 24 Russian Su 300
fighter aircraft and $500 million for Russian SA-20 surface-toair missile systems.
According to the annual report that the Pentagon released recently, China is
targeting some of its 500 shortrange missiles at US bases in Okinawa in addition
to Taiwan. This is why Japan decided to develop ballistic missile defense programs
with the US.
In order to dilute outside perceptions about “the China threat,” Hu Jintao tried
to project an image of a benign China by first using the terms “peaceful rise” at the
Boao Forum that Beijing sponsored as an Asian version of the Davos Economic
Forum in 2002. It was at this gathering that Prime Minister Koizumi stated that
Japan does not see China as a threat but regards it as an opportunity for mutual
benefit. And yet Beijing did not allow Koizumi to visit China on the occasion of
celebrating the 30th anniversary of Sino– Japanese diplomatic normalization in
2002 and the 25th anniversary of the peace treaty in 2003 because of his visit to
Yasukuni Shrine. Moreover, Beijing was hinting that Tokyo would lose a bid to
build a high-speed rail link between Beijing and Shanghai or even the multi-billion
dollar International Thermonuclear Experimental Reactor project should Koizumi
repeat his visits to the controversial war shrine. Nevertheless, President Hu
announced at the 2004 Boao forum that China would seek “security dialogue and
military-to-military exchange” with other Asian countries. These new gestures
confirm that the new leadership is more confident of China’s power in Asia.

Sino–Japanese rivalry over FTA: regional or bilateral

There is reason to believe that a clash between Japanese Wounded Nationalism
and Chinese Assertive Nationalism is turning into Sino–Japanese rivalry over the
issues of negotiating FTA. After Chinese Prime Minister Zhu Rongji proposed to
form a China–ASEAN regional FTA in November 2000 and actually announced a
negotiation plan in November 2001, Japan opted for negotiating a series of bilateral
FTAs with Asian countries. Prime Minister Koizumi visited five Southeast Asian
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countries in January 2002 and signed the Japan-Singapore Economic Agreement
for a New Age Partnership in Singapore. After China signed a Framework
Agreement on China–ASEAN Comprehensive Economic Cooperation in
November 2002 to be concluded by 2010, Japan began negotiation on bilateral
FTAs with South Korea and Mexico, and is planning to start similar negotiation
with Thailand, Malaysia, the Philippines and Indonesia. In completing the FTA
with Mexico in March 2004, Japan did open its markets to Mexican pork, orange
juice and other products, thus making a departure with its previous policy of
protecting agriculture at all costs. For South Korea and Japan, China’s formidable
economic rise prompted them to speed up their bilateral negotiation to enhance
competitiveness and thereby to avoid being overwhelmed by China.
In Northeast Asia, too, China proposed to form a regional FTA with Japan and
South Korea in November 2002. Given the huge size of China and pending
historical disputes, let alone the impact on agriculture, Japan is hesitant to
accommodate this idea. South Korea is now focusing more attention on completing
its bilateral negotiation with Japan by the end of 2005. It should be noted here that
China does not want to include Taiwan, the world’s 13th largest trading entity, and
Hong Kong in this Northeast Asian FTA. For China, therefore, its quest for
regional FTA is a means for asserting its political influence and leadership role as
much as economic benefits. For Japan, China poses both an opportunity for
deepening economic interdependence and an object of a worrisome competitor.
Significantly, these moves toward FTA are driven by the states involved. In
this sense, the diverging approaches that China and Japan are taking represent
balancing acts to enhance one’s leverage over the other. Since there is a widespread
perception that China is rising while Japan is languishing, the different approaches
shown for FTA are signs of rivalry as China is seeking to create a Chinese-led trade
region but Japan is trying to keep its stakes by promoting bilateral agreements.

Can interdependence prevail over nationalism?

It is desirable for economic interdependence to prevail over political nationalism
for regional cooperation in East Asia. To a certain extent, interdependence does
serve as a suppressor of nationalism and conflict. But there are limits to which
economic and functional cooperation can spill over into political and security
cooperation. Building an East Asian Community is not feasible until the major
actors come to share a political base for doing so. In a nutshell, the advent of Sino–
Japanese political reconciliation is a key to transforming economic
interdependence into regional integration. Until this task is achieved, it is
imperative that the US remain in East Asia to promote regional stability and open
regionalism.

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No economic community possible without political leadership
and will
In order for Japan, China, South Korea and Southeast Asian countries to build an
East Asian community, Japan or China must exercise political leadership and
demonstrate strong political will alone or jointly to overcome nationalist
sentiments. At the present, economic interdependence is pulling East Asian
countries toward cooperation but this needs to be pushed by political leadership
and will power. This is easier said than done, for acting on this tenet will face
enormous resistance by domestically weak sectors and nationalist groups.
Ultimately, the leaders must make primarily political decisions even by risking
their political lives. As of 2004, the pull factors for Asian integration are rising as
so many studies and so much rhetoric about economic integration show, but the
push factors are in short supply, for the growing economic interdependence
sometimes has the opposite effect of fueling more nationalism as the rising
tensions in the Taiwan Strait indicate. Taiwan–China economic interdependence
is growing as Taiwan has invested over $70 billion in China and had a robust trade
of $46 billion in 2003, but their political relations are deteriorating.
Purely in terms of economics, there are many factors that are pulling
interdependence. One clear example is the growing portion of intra-regional trade
reaching as high as 40 percent. Another one is the astonishing 70 percent of the
world’s currency reserve in East Asia reaching as high as $1.5 trillion according to
some estimates. Currently, Japan is holding the world’s number one status in
foreign reserves as the largest creditor nation, China is number two, Taiwan
number three and South Korea number four. But this does not make them regional
partners in economic and monetary cooperation. Instead, the current account
surpluses in these countries become one of the reasons for increasing global current
account imbalances and large US current account deficit in particular. In fact,
Sino–Japanese economic interdependence is also deepening as Japanese trade with
and investments in China are rapidly growing. In 2003 Japan’s trade with China,
if Hong Kong and Taiwan are included in this category, totaled $149.3 billion,
comprising $74.1 billion in exports and $75.2 billion imports. By comparison,
Japan–US trade amounted to $174 billion. Thus, Japan already buys more goods
from China than it does from America. Japan owes much of its recent economic
recovery to trade with China.
It is true that economic interdependence can suppress nationalism to a certain
extent as long as the political leadership on each side is committed to doing so.
This did happen in March 2004 when Tokyo and Beijing kept the incident
involving seven Chinese activists who landed on one of the disputed
Senkaku/Diaoyu islands claiming Chinese sovereignty from escalating into further
confrontation. This incident symbolized a renaissance of China’s Assertive
Nationalism against Japan. On this occasion Japanese authorities arrested them and
swiftly sent them back to China. On the other hand, witnessing the scene of
Chinese demonstrators burning Japanese flags outside the Japanese Embassy in
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 The Rise of China and the future of East Asian integration
Beijing on TV, many Japanese must have felt a profound sense of Wounded
Nationalism. Chinese authorities also did contain these anti-Japanese acts from
further escalating. The display of intense hostility by Chinese soccer fans toward
the Japanese team at the Asian Cup finals in Beijing in August 2004 suggested that
the prospects for Sino–Japanese reconciliation may not be so promising. Due to
these nationalist sentiments there is no political base on either side for accepting
the other side’s leadership in pushing regional cooperation.

Sino–Japanese reconciliation key to Northeast Asian regionalism

Without Sino–Japanese reconciliation on historical and political issues, therefore,
it would be difficult for Japan and China to agree on a bilateral FTA or a regional
FTA together with South Korea. In fact, this lack of fundamental reconciliation
between these resident Asian powers is the most important difference between East
Asia and Europe, for what made European integration work was the advent of
Franco–German reconciliation. In order for Japan and China to become regional
partners they need to share common historical facts and political values. The
process for realizing this will be long and tortuous. In the short run, therefore,
Japan has to come up with a formula for disposing of the Yasukuni Shrine issue
that is acceptable to China and Korea. In the long run, China has to undergo
democratization to the degree that its leadership could demonstrate transparency
and accountability in making foreign and defense policy affecting the interests of
its neighboring countries.
Apart from this prospect, there are some contemporary indications that Sino–
Japanese rivalry is on the rise especially over ASEAN. When China made inroads
into Southeast Asia, a sub-region that Japan used to regard as its backyard, Japan
began to make some countermeasures not to lose its influence there. In December
2003 Japan hosted a summit with ASEAN in Tokyo and pledged $3 billion in new
aid to the Southeast Asian countries over the next three years. By changing the
previous reluctance to sign the Treaty of Amity and Cooperation in consideration
of its impact on the alliance with the US, Japan did sign this treaty with ASEAN
at the ASEAN Regional Forum (ARF) in July 2004. Until 2001 China used to be
the largest recipient of Japan’s Official Development Assistance (ODA) but since
2002 Japan has cut the amount of the ODA allocated for China. In proposing a
more comprehensive partnership with ASEAN, Prime Minister Koizumi suggested
that Australia and New Zealand be included in it. At the ASEAN 0ministerial
meeting in Jakarta in September 2004 Japan agreed with ASEAN to negotiate a
FTA within two years. With these measures, Japan is determined not to fall behind
China in the competition for economic leadership in East Asia.

The need for American presence and open regionalism

The rise of Sino–Japanese rivalry reminds us of the need for American presence
and open regionalism in East Asia, for without the latter the former is likely to
intensify. Economically, too, the growing interdependence between Japan and
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Byung-joon Ahn
China, and between South Korea and Japan, depends on the US for their export
markets. Besides, economic integration can hardly make progress without
maintaining peace and stability in the Korean peninsula and the Taiwan Strait for
which American military presence is so vital. It is preferable that any bilateral or
regional FTA negotiation proceeds in a manner that is compatible with the spirit
of open regionalism advocated by APEC and global norms pursued by the WTO.
In all probability, forming an East Asian economic community excluding the
US is not in the interest of Japan, China and South Korea, for these countries need
to export their final goods to the US as their primary market, if not the largest one.
In addition to market, they also depend on the US for the sources of technology,
finance and knowledge. This is why the East Asian countries are still more
sensitive, and even vulnerable, to any abrupt change in the American economy
than to that in the Chinese economy. In fact, with trade dependence rising above
40 percent, the Chinese economy itself is more sensitive and vulnerable to abrupt
changes in the American economy and the international environment than the
Japanese economy is. For Japan, China accounts for only 12 percent of Japan’s
global trade. Hence, the Japanese economy may well be sensitive but not so
vulnerable to changes in the Chinese economy. In the case of Taiwan and South
Korea, however, their economic development is becoming more and more
sensitive and even vulnerable to the Chinese economy. When China coughs,
therefore, they have no choice but to at least sneeze.
Considering these strategic and economic situations, American military
presence in Northeast Asia is crucial to maintaining regional stability and peace in
the Korean peninsula and the Taiwan Strait. The US is providing a stabilizing role
on these two flash points by trying to keep the peninsula nuclear-free at the six-
party talks and by trying to keep the status quo in the Cross–Taiwan relations with
China’s cooperation. In the sense that they anchor American presence in Northeast
Asia, both the US–Japanese and the US–Korean alliances contribute to preserving
a balance of power and regional stability by serving as a political base for making
East Asian economic development and interdependence viable. In this perspective,
an exclusive East Asian region could have corrosive effect on the American
security role.
This is why the US has generally supported the idea of open regionalism at
APEC. As long as Asian countries go along with this principle, the US has not
discouraged them from promoting Asian regionalism. Since those attempts at
forming bilateral and regional FTAs have been a reaction to the failure of the WTO
and the APEC to liberalize trade, it is better for the US to reactivate its leadership
for liberal trade at this global and regional forums. Actually, the attempts at
reaching preferential trade agreements (PTA) are backward moves from the initial
direction of open regionalism and non-discriminatory principles even though they
are allowed by GATT Article XXIV under certain conditions. To keep these moves
from violating global norms, the US needs to take decisive leadership by seeking
a Pacific Community combining East Asia and NAFTA.

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 The Rise of China and the future of East Asian integration
Conclusion: initiating a northeast Asian forum
It is time that Japan, South Korea and China deepen a Northeast Asian Forum at
the summit level as well as at all levels to build trust and common identity through
more frequent dialogues, exchange and institution-building. This is urgently
needed to fill gaps between the overall trend of rapidly rising economic
interdependence centered on China and the growth of political nationalism in
China, Japan and other countries.
In all probability, East Asian security and prosperity will depend on the future
of China and Sino–Japanese relations. By all accounts, China’s economy is
expected to overtake Japan’s by 2020 and that of the US some time within this
century. Of course, it will not be so easy for China to achieve a superpower status
given the many problems it is facing: the widening inequality between regions and
groups, the lack of infrastructure, environmental pollution, the persistence of
unemployment, and bureaucratic corruption. Nevertheless, most observers think
that China will be able to maintain around seven percent growth with ups and down
unless some unexpected disaster occurs. What is not certain, however, is how
China’s political future and democratization will evolve. One thing is certain: how
to deal with this rising China in general and how to govern the various
interdependent networks is going to be a most pressing challenge to Asian
countries.
It would be in the common interest of all Asian countries for China to integrate
constructively into the networks of interdependence by abiding by global and
regional regimes and institutions. In order to accelerate the East Asian community
building processes, Japan and China must overcome their impulse for nationalism
by demonstrating far-sighted political leadership and will for undertaking genuine
reconciliation. To be sure, it will take a long time for these countries to overcome
their historical and contemporary differences. But serious strategic thinking must
start now.
For this purpose, Japan needs to form a new consensus on making a clean
break with its colonial legacy in ways acceptable to China, Korea and other Asian
countries.More importantly, Japanhas toformulateastrategythatcanintegrate
politics and economics in dealing with the China challenge. On the other hand,
China alsoneedsto makeasmoothtransitionfrom aDevelopmentalState toa
Development Democracy as South Korea did. But recent Chinese behavior toward
Taiwan and Hong Kong suggests that the prospect for this change is not promising.
Thus how China undergoes its political development is bound to affect the regional
stability and interdependence of East Asia.
When the heads of state have regular summit meetings, and when business
people, scholars, politicians and societal leaders have dialogues and exchange
candid views by deepening human networks, they can make significant headway
in addressing some of these problems and contribute to defusing potential sources
of confrontation and conflict.

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Byung-joon Ahn
South Korea can become a bridge-builder in this endeavor. In fact, South
Korea is seeking to become Northeast Asia’s logistics hub by mediating the
growing flow of transportation, communication and shipping between Japan and
China, and between China and other Asian countries. As a middle power whose
GDP is almost equivalent to the total of ASEAN’s GDP, Korea is strategically
located to bridge differences between Japan and China. In 2003 China became the
largest market for South Korea by importing 26 percent of Korean exports.
Considering the growing bond between Korea and Japan, not merely in economic
but also political and cultural ties, it is more likely that they could complete their
FTA negotiation early. Once this is done, it may be possible for South Korea to
begin negotiation on FTA with China. After this, it may be possible for Japan, too,
to explore such negotiation with China, depending on the progress of Sino–
Japanese reconciliation.
It is not possible to separate politics from economics in international relations
especially between states with different political systems. Accomplishing summit
meetings of the top leaders is perhaps the most effective way of overcoming
serious differences. For this reason, it is highly desirable that Japan, South Korea
and China hold their trilateralsummit meetings morefrequently. As they
accumulate these encounters,theycanbuild acommonagendafor
cooperationonthebasis of the existing reality. Track II meetings of non-
governmental organizations, civil society groups and academics could also help
build such agenda by making their specialized contributions. These meetings must
be open so that other interested parties including the US and Southeast Asian
countries may be represented there, if necessary. Only through these efforts can a
common regional identity or an “epistemic community” be constructed gradually,
however long it may take.
In order to facilitate these dialogues and exchanges, concerned leaders and
scholars could form leading groups among Japan, South Korea and China to carry
out on-going studies and to preserve institutional memory for building an East
Asian Community. As a future-oriented project, educational programs for training
young leaders including politicians, scholars and business people should take
priority. For these kinds of programs, civilian organizers must take leadership to
maintain intellectual honesty and to promote uninhibited dialogue. The more these
leaders come to share common views and identities, the better they can work
together toward achieving economic and political integration in East Asia.

About the author

Byung-joon Ahn is currently a Visiting Professor of International Relations at the
KDI School of Public Policy and Management in Seoul, Korea, and a Member of
the Korean National Academy of Sciences. Previous posts include Dean of Social
Sciences and professor of political science at Yonsei University and visiting
professorships at Johns Hopkins University, George Washington University,
University of California, Berkeley, and University of Michigan, Ann Arbor. Most
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 The Rise of China and the future of East Asian integration
recently in 2002–4, he also taught at the National Graduate Institute for Policy
Studies, Tokyo, Japan, as a visiting professor of international relations. He has
served as advisor to the Foreign, the Defense and the Unification Ministry, the
Republic of Korea, president of the Korean Association of International studies, and
council member of the Seoul Forum for International Affairs. Ahn received his BA
from Yonsei University, MA from University of Hawaii, and PhD from Columbia
University. His articles have been published in Asian Survey, China Quarterly,
Foreign Affairs, and Journal of Asian Studies.

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