When China Rules the World (48 page)

From the ASEAN perspective, the origins of the new rapprochement lay in two initiatives. The first was the decision taken in 1992 to establish AFTA - the ASEAN Free Trade Area - which required the ten member states to remove all barriers to free trade by 2010.
²²
The second was a call made by Mahathir Mohamed in 1990 that East Asia should establish an East Asian Economic Group, later termed the East Asian Economic Caucus, as a means of offsetting the negative effects of the Western-dominated international economic order.
²³
The proposal was supported by ASEAN but opposed by Japan, and it was only after the Asian financial crisis that it gained serious momentum. Mahathir’s initiative stemmed from his conviction that membership of East Asian bodies should be confined to countries within the region and his antipathy to APEC (Asia-Pacific Economic Cooperation), which included non-Asian members like the US and Australia. In fact Mahathir’s position prefigured what was to become an increasingly important fault line within the region - the exclusion or inclusion of the United States - with Japan always favouring inclusion and China,
sotto voce
, tending to favour - though not always - exclusion.

The shift in China’s approach took place between 1997 and 2001.
²⁴
At a China-ASEAN summit in 2001 - known as ASEAN+1 (i.e., China) - China proposed the creation of a China-ASEAN free trade area to be established by 2010 (initial discussions had begun in 1999).
²⁵
The ASEAN-China Free Trade Area, or ACFTA as it became known, was an extraordinarily bold proposal to create a market of almost 2 billion people, thereby making it by far the largest free trade area in the world.
²⁶
The ASEAN countries had become increasingly nervous about the effect China’s growing economic power might have on their own exports and also their inward foreign investment: its proposal for a free trade area helped reassure them that China would not pursue economic growth regardless of the consequences for others. At the ASEAN-China summit in 2003, China formally acceded to ASEAN’s Treaty of Amity and Cooperation - which committed China to the core elements of ASEAN’s 1967 Charter - the first non-ASEAN country to do so (India has since followed). In 2002 it also signed the Declaration on the Conduct of Parties in the South China Sea, which rejected the use of force in resolving the disputes over the Spratly and Paracel islands.
²⁷
These had been a serious and continuing source of tension between China on the one hand and Vietnam, Taiwan, the Philippines, Malaysia and Brunei on the other, culminating in military conflict with Vietnam
²⁸
and the Philippines.
²⁹
The agreements between ASEAN and China were to have a major impact on the political dynamics of East Asia. Prior to them Japan, which had long been the major external player in the South-East Asian economies, had resisted entering into regional trade agreements, preferring instead to operate by means of bilateral agreements. Japan now suddenly found itself on the back foot, outmanoeuvred by China’s bold diplomacy, and ever since it has been running to catch up.
³⁰

Already, in 1997, during the Asian financial crisis, there had been the first ASEAN+3 summit (China, Japan and South Korea) and this was later formalized into a regular event. At the ASEAN+3 summit in 2003, the Chinese premier Wen Jiabao proposed that a study be made into the feasibility of an East Asian Free Trade Area, which was accepted.
³¹
Following China’s lead, in 2005 Japan started to negotiate its own Free Trade Agreement with ASEAN, which was agreed upon in outline form in 2007. In 2009 Australia and New Zealand did likewise. There is now a complex web of Free Trade Agreements in the process of negotiation in East Asia which is intended to act ultimately as the basic infrastructure of a wider East Asian Free Trade Agreement, designed to be in place around 2007 and implemented before 2020.
³²
Whether this ever materializes, of course, is another question, but the progress towards a lowering of tariffs in the region - with China in the driving seat - stands in marked contrast to the effective demise of the WTO Doha round, a point lost on neither ASEAN nor the rest of East Asia.
³³

ASEAN lies at the core of the new East Asian arrangements and has provided them with their template. Although South-East Asia has always been the poor relation in the region (in 1999, for example, the GDP of the North-East Asian economy was more than nine times that of ASEAN),
³⁴
it would have been impossible for North-East Asia to have played the same role because the latter remains too divided, riven by the animosity between Japan and China, and to a lesser extent that between South Korea and Japan, as well as distracted by the disputes over Taiwan and the Korean Peninsula. As a result there is nothing like ASEAN in North-East Asia: such formal multilateral arrangements are almost completely absent. An important consequence of these various developments has been the effective exclusion of the United States from economic diplomacy in the region. This has never been China’s stated aim,
³⁵
but, intended or otherwise, it is what has happened in practice. The centrality that APEC enjoyed in the mid nineties, and in which the US was a key player,
³⁶
now seems a distant memory. The marginalization of the US is also manifest in the Chiang Mai Initiative, first agreed in 2000 on the proposal of the Chinese,
³⁷
which involves bilateral currency swap arrangements between the ASEAN countries, China, Japan and South Korea, thereby enabling East Asian countries to support a regional currency that finds itself under attack. The agreement was a direct product of the Japanese proposal for an Asian Monetary Fund during the Asian financial crisis,
³⁸
which was strongly opposed at the time by both the United States (on the grounds that it would undermine the IMF) and China (because it came from Japan). China has since swallowed its opposition - no doubt in large part due to the strengthening position of the renminbi - while the United States, weakened by the IMF debacle in the Asian financial crisis, has not resisted.
³⁹

If ASEAN has provided the canvas, it is the diplomatic involvement and initiative of China that has actually redrawn the East Asian landscape. In effect, China has been searching out ways in which it might emerge as the regional leader.
⁴⁰
Underpinning its growing influence has been the transformation in its economic power. This has been the real driver of change in East Asia, the force that is reconfiguring the region. Unlike the European Union, where economic integration followed politics, in East Asia economics has been the dynamo of change, with political change following in its wake.
⁴¹
In North-East Asia, intra-regional trade - even in the absence of formally binding agreements - now accounts for 52 per cent of the total trade of the five economies (China, Japan, Taiwan and the two Koreas), a situation that has been achieved in little more than a decade; the equivalent figure for the European Union is 60 per cent, which it took half a century to reach.
⁴²
Between 1991 and 2001, world trade increased by 177 per cent, whereas intra-regional trade in East Asia, despite the Asian financial crisis, increased by a staggering 304 per cent. By far the most important reason has been the growth of China, whose share in intra-regional trade almost doubled between 1990 and 2002.
⁴³
With the emergence of the first Asian tigers in the early sixties, followed by the later examples, including China itself, the East Asian economy used to be seen in terms of ‘flying geese’, with Japan in the lead and the others flying in formation behind.
⁴⁴
But with China’s economic rise during the 1990s, Japan’s role as the most important economy in the region is rapidly being challenged by China. Between 1980 and 2002, while China’s share of East Asian exports increased from 6 per cent to 25 per cent, Japan’s fell from 50 per cent to below 30 per cent; similarly, while China’s share of East Asian imports over the same period increased from 8 per cent to 21 per cent, Japan’s fell from 48 per cent to 27 per cent.
⁴⁵
Even at the peak of its economic power, Japan’s role was always limited by the fact that it steadfastly refused to open up its economy to exports from its neighbours (other than those from its own foreign subsidiaries) - or, indeed, to the rest of the world - so its influence was largely exercised by a combination of its own foreign direct investment in Japanese overseas subsidiaries, imports from those Japanese subsidiaries and Japanese exports to the region. In contrast China’s influence, because it has chosen to have an extremely open economy, is far more multifarious - as a market for the products of the region, as an exporter and as a multifaceted investor.

Zhang Yunling, one of the architects of China’s new strategy, and Tang Shiping have described the aim as: ‘to make China a locomotive for regional growth by serving as a market for regional states and a provider of investment and technology’.
⁴⁶
The most obvious expression of this has been the way in which, in less than a decade, China has become one of - if not the - most important market for many countries in the region: in a few years’ time, it seems likely that it will be the single largest market for every country in the region. For the ASEAN countries, the Chinese market is now three times the size of Japan’s.
⁴⁷
No country - not even Japan, whose trade with China has recently overtaken that with the United States - can afford to ignore the Chinese market, or, as a consequence, China.
⁴⁸
Since 2000 China’s imports from ASEAN have increased at an annual rate of 30-40 per cent.
⁴⁹
China, for example, accounted for 13.2 per cent of Singapore’s exports in 2001, compared with 2.5 per cent in 1993, 18.5 per cent of South Korea’s exports in 2001, compared with 6 per cent in 1993, and 9.2 per cent of Australia’s exports in 2000, compared with 6 per cent in 1994.
⁵⁰
It was widely feared in South-East Asia that Chinese imports from the ASEAN countries would be overwhelmingly comprised of raw materials. Certainly these are very significant, a case in point being the huge Chinese demand for timber, which is rapidly stripping the Indonesian forests.
⁵¹
The most important single category of ASEAN exports to China, however, is composed of intermediate goods. China is where the final assembly of many products of foreign-owned multinationals (American, European, Japanese, Taiwanese and South Korean) takes place prior to their export to their final destination. Countries like Malaysia and Thailand thus occupy a crucial niche in a complex division of labour centred on China.
⁵²
In addition, China is assuming the role of an increasingly important investor in the region, with a large quantity of investment aimed at the extractive industries and infrastructure like railways, toll roads and refineries, in order to speed the flow of natural resources to the Chinese market. In 2002, 60 per cent of China’s total foreign direct investment was directed towards Asia,
⁵³
making it by far the most important destination. As a consequence, Chinese investment in South-East Asia has helped to compensate for the decline in Western investment over the last few years.

Zhang Yunling and Tang Shiping have described China’s regional strategy in the following terms: ‘participate actively, demonstrate restraint, offer reassurance, open markets, foster interdependence, create common interests, and reduce conflict’.
⁵⁴
With one bold and unexpected stroke, China has succeeded, in the manner of Deng Xiaoping, in redefining the dynamics of the region and, in the process, given itself more space for its own economic development. For sheer courage and unpredictability, China’s East Asian initiative belongs to the genre of Chinese diplomacy initiated by Mao in the rapprochement with the United States in 1971. Even the intractable problems of North-East Asia are to some extent being redrawn by the ASEAN-BASED Chinese initiative, with both Japan and South Korea now involved in the creation of the East Asian Free Trade Area first proposed by the Chinese premier Wen Jiabao at the 2003 ASEAN+3 summit. It is impossible to predict the outcome of the process - or, more accurately, processes - now under way. They are open-ended and multi-layered, and could yet acquire another dimension, with the involvement of India and perhaps other South Asian countries in the future.
⁵⁵
It has been suggested that one day there might be a fully-fledged East Asia Economic Union, perhaps even with a common currency, although the latter seems fanciful given the huge economic disparities across the region.
⁵⁶
Nonetheless, the renminbi is likely to play a growing role in the region, especially if China further eases the restrictions on its use, as is likely over the next five years or so. In that eventuality, and assuming the dollar declines, the renminbi will increasingly be used for trading purposes, other countries in the region will peg their currencies to it, and in time it will surely assume the role of the reserve currency of choice in the region.
⁵⁷
It is worth noting that in the zones around China’s borders - Myanmar, Mongolia, Laos, Cambodia and Vietnam - the renminbi, though not yet convertible, is already traded freely and used as a de facto reserve currency, sometimes instead of theUSdollar.
⁵⁸