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    Greater China
     Oct 1, 2005
Hedging China with FTAs
By Sherman Katz and Devin Stewart

After a hot summer of heated debate in Washington about China, US policy toward China has settled into one of dissuasion and persuasion. US officials in the Pentagon aim to dissuade China from seeking to become a regional military power, while other parts of the government, the State Department in Foggy Bottom for example, aim to persuade China to adopt civil society and democratic institutions.

Both faces of US policy recognize that the central question is political: what if China becomes rich and powerful, but not democratic? Unlike the Soviet Union, China does not seek to destroy the US and the international system it created. By contrast, China is playing by American-made rules, although it

may be playing a different game, taking advantage of its lack of democratic constraints. The US therefore must hedge against a number of possible futures for China - strong, weak, cooperative, or aggressive.

One area in which China has demonstrated creativity and long-term thinking is its economic diplomacy and the promotion of an East Asian Summit this December that excludes the United States. The Summit may lay the groundwork for an eventual East Asian trade agreement, charter, and community. The operating principle in the US government is that any institution without the US in Asia will lack credibility, and will ultimately fizzle.

The US approach toward the East Asia Summit has been to bet that many participants in the meeting, suspicious of its intentions, will stop China from controlling the agenda. Moreover, it is believed friends of the United States, in particular Japan, India, and Australia, will protect US interests at the summit. But the US also may wish to offer its own, alternative vision.

An idea that is gaining support in Washington is to deepen economic integration with countries, such as Japan, South Korea, and Australia, which share values with the United States. In this way, the US would have a stake in East Asian economic integration and could point the way toward a model of high quality growth. Such an economic zone, which could even include China when it is ready, would nudge China toward more transparency and accountability.

Five aspects of such a zone are particularly attractive. First, deeper economic integration will signal to regional challengers and domestic polities that US, Japanese, Korean, and Australian interests are contiguous. Initiating integration would allow the US and its friends to have a larger influence on the terms of the final shape of a future Asian trade bloc. The US and other democratic countries also could collectively bring pressure to bear over intellectual property rights, among other issues, on countries like China at the World Trade Organization.

Second, labor-abundant economic competitors of China in Asia, such as Thailand and Indonesia, would find economic liberalization with the US and Japan, two countries rich in capital and technology, to be equally beneficial to opening up to China. The increase in economic growth attained from economic liberalization would help spread the benefits of globalization and contribute to stability.

Third, US companies would risk losing competitive advantage in large Asian markets without US involvement in Asian integration. Little of the recent push in the US in the area of FTAs has included East Asia, and China and Malaysia are proposing regional agreements that would exclude the US. A logical strategy would be for the US to work with Japan, Australia, South Korea and other democracies to create an FTA, forming the bedrock of future East Asian integration that will in time include China. It is encouraging that the US is working toward concluding a free trade agreement with Thailand and has already concluded one with Singapore.

Fourth, US integration with East Asian nations is more feasible than ever. The combination of a historically low level of trade friction between the US and Japan, and the momentum created by the conclusion of other free trade agreements by the governments of the US and Japan, also make integration more feasible. Abandoning a policy of only considering multilateral agreements, Japan signed its first bilateral free trade agreement in 2002 with Singapore and a second in 2004 with Mexico. It has also issued a report and has been in talks with Korea on a bilateral FTA and is pursuing an agreement with ASEAN Plus Three.

The US signed FTAs with Australia, Bahrain, and Morocco in 2004 alone. The forecast for the Doha Round is cloudy. The US Chamber of Commerce has pushed the US to sign more FTAs, and the National Association of Manufacturers included Japan in a list of potential FTA partners.

Finally, promoting democracy is consistent with President Bush's worldwide vision and the security and history of East Asia. Strong economic and security relationships among democratic nations can become a model for how countries in East Asia can develop. The spread of democratic governance and transparency promotes regional political stability, while the spread of democratic markets will promote regional economic stability. Japan, after more than a decade of economic reform, is now in a position to make the case for better corporate and political governance in the region. The practices of lifetime employment and cross-shareholding are ending, and corporate profits are at record highs.

An economic partnership agreement could take initial shape in around four areas. The first would be border measures: Rich countries should lower tariffs and aim to reform their subsidized, protected agricultural sectors in the long term. Although regional agriculture reform has been problematic elsewhere, pressure from regional partners can only help to add leverage, particularly as long as Asian countries seem to free ride behind EU problems with agricultural reform. The second would be the harmonization of regulatory systems, such as professional standards, to facilitate business transactions.

Third, the countries in the zone would collaborate on new energy technologies and enforcement of intellectual property rights to set positive precedents for the international system. Fourth, the zone of countries would reduce border and visa security regulations for businesses in exchange for tighter security cooperation in areas such as container security and business visas. Greater opening at the border would depend on governments sharing basic democratic values.

The zone could be negotiated in tandem with the five-party security organization advocated by Francis Fukuyama. The security organization would include the United States, Japan, Russia, South Korea, and China, and would address security concerns beyond the North Korean nuclear program.

China's economic growth must not be regarded as a problem in itself. The US cannot, and should not want to, stop China from becoming prosperous. Rather, the US and the democratic states in Asia should set a benchmark of high-quality growth that embraces civil society, and at the same time engage China by establishing a permanent five-party security organization that can work to avoid surprises.

Sherman Katz is the William Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, DC. Devin Stewart is a Fellow of the Office of the Japan Chair at CSIS.

(Used by permission of Pacific Forum CSIS .)

America's China problem (Jun 7, '05)

Land of the rising FTA (May 12, '05)

US says too early for Taiwan-US FTA (Jun 15, '04)

The US and economic stability in Asia (Dec 6, '03)

FTA gives Singapore trans-Pacific benefits (May 21, '03)


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