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Potential for an Asian free trade area.

The world center of economic gravity is shifting from Europe or the Atlantic Basin to the Pacific Basin. The export-led growth of the Asian economies is no longer based on tariffs, quotas and subsidized exports as these nations move toward freer, more open economies. Exclusion of the U.S. and Canada from these initiatives would lead to development of three major world trading blocs, viewed as a retrograde move. However, formation of a single currently bloc in Asia is not considered likely.

1989 IS THE FORTIETH anniversary of two important events that, in different ways, have been fundamental to the prosperity of Asia in the postwar years.

The first of these events was the imposition in Japan of what was known as the "Dodge Line," the domestic economic stabilization package devised by Joseph Dodge of the Detroit Bank, which ended the immediate postwar period of hyperinflation and economic chaos in Japan, fixed the external value of the yen at a single exchange rate of 360 [Yen] per U.S. dollar (from April 1949), and laid the foundations of Japan's postwar economic domestic stability.

The second event was the creation of the GATT, the General Agreement on Tariffs and Trade, which has provided the framework for the development of nondiscriminatory, i.e., fair, if not free, multilateral trade in the global economy. It is under the umbrella of GATT that Japan and other east Asian economies have flourished, especially in the past two decades, as dynamic, export-oriented economies. Japan itself has played a major role in stimulating Asian economic development, gradually displacing the United States as the largest partner for smaller Asian economies in trade, tourism, investment, aid and other forms of regional cooperation.

Today on the eve of the 1990s it is clear that the world's economic center of gravity is shifting away from Europe or from the Atlantic Basin towards the Pacific Basin. Within that broad area and in response to economic incentives that are likely to remain in place for at least the next two decades, manufacturing production is being shifted from high cost areas such as Japan and the United States towards the lower cost areas of Southeast Asia. Numerous examples also can be cited of industries relocating from Korea, Taiwan and Hong Kong to the next tier of countries such as Thailand, Malaysia, the Philippines and Indonesia. Northern Asia, North America and Europe will remain the high-tech high value added centers of research, development and manufacturing, while the Southeast Asian area is fast becoming the low-tech, low value-added workshop of the world.

But export-oriented growth is not the only sign of economic development. With rapidly rising incomes in the East Asian economies, their domestic economies are simultaneously witnessing rapid development. These trends simply reflect the economic impact of comparative advantage, i.e., the smaller, less developed Asian economies have abundant, well-educated and productive labor, and transportation and communication costs have fallen to such an extend that it now makes sense to locate productive facilities anywhere in the world where the job can be done within certain parameters of political risk and technical tolerance.

Assuming the domestic stability of Japan -- the region's chief economic dynamo -- continues to be maintained, the question to be considered today is the outlook for the region's external trade prospects. '

STEPS TOWARD FREER TRADE

It is often presumed that Asian economies have generated export-led growth only on the basis of tariffs and quotas on imports while subsidizing or otherwise promoting exports through infant-industry protection. No doubt these policies were true in some degree in certain countries in the past, but it is far less true today than at any time in the past three or four decades. Taking the case of Japan, for example, tariffs and overt NTBs in industry are as low as, or often lower than, those in the United States. Agricultural quotas remain a problem, but the main source of antagonism (and hence incipient U.S. protectionism) stems from Japan's persistent bilateral trade surpluses with the United States. Nobody at this conference would accept the concept of bilateral trade balance as a desirable criterion of trade equity, yet it is the bilateral surpluses of the Asian NICs with the United States that are now attracting attention as the focus of friction between the U.S. and the NICs. To quote William Cline, "Whether the criterion is the current (or trade) account position over time, the average surplus relative to GNP, or average imports relative to GNP, Japan's profile shows no marked signs of excessive protection."(1) However, I do not wish to be side-tracked by this debate. For every anecdote about a U.S. manufacturer who is frustrated in his attempts to sell in Japan, Korea or Taiwan, anecdotes of successful case histories point in the opposite direction (e.g., in Japan, Coca-Cola, Schick razors, Nestles instant coffee, and Johnny Walker Scotch Whiskey).

The main point to note is that numerous economies on the East Asian Pacific Rim have, in recent years, moved towards much freer, more open economies. In some cases these moves have been undertaken unilaterally without significant outside pressure (e.g., Indonesia, Australia, New Zealand), while in other cases these moves have been primarily in response to external political pressures and only to a small degree in response to domestic political pressures (e.g., Japan, Korea, Taiwan).

INITIATIVES FOR REGIONAL ECONOMIC COOPERATION

According to Edward Olsen, professor of Asian Studies at the Naval Postgraduate School in Monterey, California, "Many leaders and ordinary people among the United States' Asian trading partners are unreconstructed economic nationalists whose commercial chauvinism verges on mercantilism." For many of them, he believes,"free trade is an abstraction which is appropriate to apply in the U.S., but should not be prematurely forced on their economies."(2) In spite of this, there has been intense diplomatic activity in recent months aimed at creating some kind of Asian or Pacific Basin organization that might promote freer trade in the region.

Japan's Initiatives

Briefly, three sets of initiatives have been seen. First, Japan has created a series of official and non-official domestic organizations aimed at enhanced cooperation with Japan's South Asian neighbors. These organizations include the Foundation for Advanced Information and Research (FAIR), sponsored by Dr. Yuichiro Nagatomi, director of customs and tariffs at the Ministry of Finance, which has a Committee for Asian-Pacific Research, led by Mr. Taroichi Yoshida, formerly president of the Asian Development Bank. This committee contains nine working parties drawn from Japan's leading academics.

At the Economic Planning Agency they have also been hard at work, producing in 1988 a study entitled "Promoting Comprehensive Economic Cooperation in an International Environment Undergoing Upheaval: Towards the Construction of an Asian Network." This paper suggests an integration of the Asian NICs as well as the second-tier NICs, coordinated by an "Asian Brain" -- a code-word perhaps for an international arm of the Japanese civil service, which might play the role that MITI played in the creation of Japan Inc. in the 1950s and 1960s. These and numerous private sector study groups are evidence of enormous Japanese interest in developing Asia. The intentions may be entirely laudable; the risk is that these organizations extend Japan's domestic industrial policy strategies to the rest of Asia. Not only could such actions fuel political resentment in the economies of the region, but there is the possibility of economically discriminatory policies aimed at infant-industry protection within Asia, the emergence of excessively export-oriented development strategies, and so on. Japan's efforts in this direction are in part motivated by fear of exclusion from Europe after 1992, but to a significant degree they also are motivated by the increasing involvement of Japan's private sector firms in developing Asian economies. It is not surprising, therefore, that Japan's policy-making agencies are finding themselves drawn more into policy issues affecting Asia.

Australia's Initiative

A second set of initiatives has been led by the Australian government, following a proposal made by Prime Minister Bob Hawke at a meeting of South Korean businessmen in Seoul during a visit to South Korea in January 1989. The main points of that speech were:

1. The fundamental, underlying base for the

recent dynamic economic growth of the Asia-Pacific

region -- the multilateral system of

global trade operating under GATT

rules -- is under threat;

2. Countries of the region are essentially

interdependent and economic futures are

interlinked;

3. There have been several proposals recently

for new and closer regional consultations; this

indicates that the time is ripe for increased

efforts to "seriously investigate what areas it

might focus on and what forms it might take."

Some of the potential benefits are:

a. effective regional cooperation could boost
 the chances of success of the Uruguay
 Round of GATT negotiations and thereby
 preserve the GATT-based trading system;


b. allow dialogue on regional trade issues;

c. better coordination to maximize economic

opportunities in the region.

Undoubtedly, part of Australia's motivation derived from the lack of progress on trade liberalization in agriculture -- the so-called Montreal impasse of the Uruguay Round of the GATT, and the feeling that an alternative but nonthreatening framework might help to break the impasse. While there was a flurry of diplomatic activity up to June, progress since then has stalled somewhat because it had been intended that the People's Republic of China would be a participant in the forum, but since the June 4 massacre in Tienanmen Square it has not been possible to make substantive progress.

PECC and OECD INITIATIVES

The third set of initiatives comes from already existing multilateral organizations such as PECC and the OECD. The Pacific Economic Cooperation Conference was founded in 1980, and consists of businessmen, academics and government officials (in their capacity as individuals), but it is not a governmental organization, and therefore it is not appropriate for negotiations on concrete policy issues. (Essentially, the Australian proposal mentioned previously seeks to create a more formal intergovernmental vehicle of regional cooperation.) It is possible that PECC could develop into a Pacific version of OECD, but this is still some way off. The OECD itself hosted a conference early in 1989 with representatives from government and nongovernment sources of the Asian NICs. These discussions were aimed mainly at devising solutions to the problems of economic adjustment between the NICs and their trading partners, and important among the issues discussed were freer trade, privatization, deregulation, as well as currency adjustment as a part of the economic policy packages for correcting overall balance of payments problems.

These various initiatives will no doubt see further developments in the months ahead. A critical question is the extend to which the United States and Canada are included, or choose to be involved, in any of these Asian forums. Exclusion of the U.S. and Canada brings with it the possibility of the world degenerating into three major trading blocs: the U.S. and Canada, Europe, and Japan plus Asia and Australia. This would surely be a retrograde move, and I am confident that enough Asian leaders understand this risk to ensure that there is no emergence of any exclusive Asian customs union, or anything like it.

RELATION BETWEEN TRADE (AND CAPITAL) POLICY AND MONETARY POLICY

The question of the emergence of regional economic blocs raises the fundamental issue of the relation between trade policy and other domestic policies, particularly monetary policy. In the example I wish to offer, any country can make three broad choices. The proposition is that a country can choose any two of them, but not all three. The three possibilities are: (1) free trade and capital movements; (2) a fixed exchange rate; and (3) an independent monetary policy.

Prior to the Group of Seven agreements on setting exchange rate dating from the Plaza Agreement of September 1985, it was possible to say that the United States maintained (1) and (3), as did the United Kingdom. The EC, on the other hand, tended to pursue (2) and (3), which meant that a high degree of free trade and capital movements was simply not feasible. With the implementation of the Delors Plan for Unification of the European Monetary System, the EC may move closer to (2) than (3), which should permit the EC to pursue (1) and (2), i.e., free trade and capital movements within the framework of a fixed change rate system. This choice, (1) and (2), is the policy choice adopted by Hong Kong.

However, turning to other countries in Asia, most of the smaller Asian countries have in recent years moved away from rigidly pegged exchange rates towards some kind of managed currency system. (The only possible exception among the larger countries is New Zealand, which maintains a free float, i.e., pursues (1) and (3).) I have explained earlier how several countries have liberalized trade policy, and the same countries have for the most part also liberalized capital movements. Therefore, aside from Japan and New Zealand, most Asian countries and Australia maintain (3), i.e., independent monetary policies, and they are moving towards (1), i.e., free trade and capital movements.

I believe the prospects for the formation of a single currency bloc in Asia over the next decade are minimal. Most countries have bitter memories of Japanese domination during World War II, which will prevent the creation of a yen-bloc, and yet most countries (Hong Kong and Macau excepted) wish to maintain some independence or separation from the U.S. dollar and the monetary policies of the Federal Reserve system. Regrettably, managed currency systems are unlikely to be the optimum mechanism from the point of view of promoting freer trade, because they imply a high degree of discretionary governmental intervention in the currency markets to manage the currency and the balance of payments, and this can easily spill over into industrial policies to manage imports or exports. The currency systems that are most conducive to free trade are either unified currency systems, such as the Hong Kong dollar's link to the U.S. dollar, or absolutely freely floating systems, such as that of New Zealand. I therefore expect managed currency systems to continue to be the norm in Asia, accompanied, sadly, by managed trade. In colloquial language, we live in an era of "dirty floating;" unfortunately and perhaps inevitably that also implies "dirty trade" and "dirty capital movements."

FOOTNOTES

(1)William Cline, Reciprocity: A New Approach to World Trade Policy?, Institute for International Economics, September 1982. (2)Edward Olsen, Far Eastern Economic Review, January 19, 1989.

John G. Greenwood is Chairman/Group Economist, G.T. Management (Asia) Ltd., Hong Kong.
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Author:Greenwood, John
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Date:Jan 1, 1990
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