PROSPECTS FOR ECONOMIC COOPERATION IN EAST ASIA IN THE 1990S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00539R000400550002-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: October 19, 2011
• Sequence Number: 2
• Publication Date: February 1, 1987
• Content Type: REPORT

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Directorate of
Intelligence
Cooperation in
East Asia in the 1990s
Prospects for Economic
EA 87-10005
February 1987
308
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Directorate of
Intelligence
Cooperation in
East Asia in the 1990s
Prospects for Economic
This paper was prepared byl Office of
East Asian Analysis. Comments and queries are
welcome and may be addressed to the Director
Regional Issues, OE
Confidential
EA 87-10005
February 1987
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Prospects for Economic
Cooperation in
East Asia in the 1990s
? Scope Note
Our assessment is based on analysis of current trading patterns and
commercial policies of East Asian countries, and an exercise in which
country analysts in the Directorate of Intelligence simulated the responses
of finance and foreign ministers of their respective countries to various
economic and political developments. The scenarios presented to the
analysts in the simulation exercise were chosen not necessarily because we
expect them to occur, but rather to test how a wide range of forces would
affect the policies of East Asian countries and to identify those events that
might intensify interest in regional economic cooperation.
Confidential
EA 87-10005
February 1987
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Prospects for Economic
Cooperation in
East Asia in the 1990s
Key Judgments Economists recognize that close cooperation by East Asian states could
Information available accelerate the eastward shift of global economic influence-a potential
as of 5 January 1987 assured by East Asia's plentiful supplies of labor and natural resources. In
was used in this report.
particular, Washington's influence in Asia would be reduced sharply if
regional governments joined together in a customs union or other formal
arrangement for coordinating trade policies. Instead of being able to
negotiate separately with area governments for adjustments in commercial
policies, Washington would have to deal with an agenda set by the East
Asian union. As a worst case, US exports to the region would plummet, the
trade deficit would grow, pressure for depreciation of the dollar would
build, and US economic leverage would be offset in the rest of the world by
the combined resources of Asian states.
If East Asian countries formed, a customs union-eliminating tariffs on
trade among members and maintaining uniform tariffs against nonmem-
bers-the most efficient enterprises would displace higher cost producers in
the region, allowing East Asia to utilize its vast resources most productively
and allowing consumers to purchase products at lower prices. Increased
competition among members might also accelerate the shift in industrial-
ized countries in East Asia away from low-value-added, labor-intensive
industries-such as cotton textiles-to high-tech, capital-intensive produc-
tion. With regionwide trade rising in response to reduced trade barriers,
the efficiency gains might propel rapid, inward-focused growth in East
Asia.
Although the potential benefits to East Asian countries from formal
economic cooperation are large, in our view, differences in economic
structure and political interest will block the formation of regionwide
institutions such as a customs union or a free trade association. East Asian
countries are more likely to react to challenges to their economic interests
by entering into bilateral discussions with the United States-or other East
Asian states-rather than regional multilateral arrangements:
? The industrialized countries in East Asia depend heavily on sales to the
United States and Western Europe. They probably fear that forming an
Asian customs union would provoke trade protectionism in the West.
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? The natural resource exporters-Australia, New Zealand, and the
Southeast Asian countries-could expect few new sales from an East
Asian customs union, because present exports of oil, coal, and rubber are
not very restricted.
? Most East Asian states would be reluctant to enter agreements that
would enhance the economic or political influence of Japan or China.
The probable continued lack of a coordinated, multilateral East Asian
response to future developments has important implications for the United
States. First, the United States not only would retain strong influence in
East Asia in the 1990s, but it would be able to press East Asian
governments individually to accept US commercial or strategic interests,
rather than having to negotiate with a regional organization. At the same
time, however, many East Asian states would continue to expect the United
States to bail them out of economic difficulties. The US Government
would periodically come under strong pressure from countries such as the
Philippines and Thailand to grant trade concessions and step up aid and
investment.
Several international developments could spark changes in bilateral rela-
tions among East Asian states that would adversely affect US commercial
interests. We believe successful economic reform in China or increased
protectionism in the West, for example, would cause Japan and China to
boost bilateral trade significantly, thereby reducing Japanese imports of
US coal, soybeans, cotton, fruit, and petroleum products and Chinese
imports of US plastics, fertilizers, electrical equipment, and computers.
Heightened protectionism in the West might in extreme circumstances also
cause Taipei to overcome its political and security reservations and
formally permit direct trade with China. Finally, the transformation of
Japan into an increasingly service-oriented economy might cause Beijing to
upgrade its relations with Seoul in hopes of replacing declining commodity
sales to Japan with increased exports to South Korea.
Tokyo is not likely to enter into formal regionwide economic cooperation
schemes in the 1990s. Japan will continue to view the West as the primary
market for the high-tech manufactures it wants to promote during the next
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decade. And the shift away from "smokestack" industries will lessen its
dependence on East Asian raw material suppliers. Nevertheless, we believe
that Japan's interest in regional stability will cause it to expand its
economic ties in East Asia. Japan will respond to calls by Southeast Asian
countries for increased financial assistance, but will demand concessions,
such as improved terms for Japanese direct investment. East Asian
countries' dependence on Japanese loans and investment, and Japan's
position as a large net capital exporter, will give it leverage to exact
concessions.
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Key Judgments
Factors Mitigating Against an East Asian Customs Union 3
Scenario 5: A Return to High Oil Prices 9
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Prospects for Economic
Cooperation in
East Asia in the 1990s
The Potential for East Asian Economic Cooperation
East Asian nations ' traditionally have pursued their
economic interests primarily through bilateral negoti-
ations rather than multilateral cooperation. In the
past 20 years, however, a few institutions for multilat-
eral economic cooperation, such as the Association of
Southeast Asian Nations (ASEAN), have been estab-
lished, and economists from governments, businesses,
and universities have increasingly touted the benefits
of regional cooperation. Closer economic integration
would allow East Asian states to utilize fully their
abundant supplies of labor and natural resources.
Given the skilled labor forces and managerial exper-
tise available in the industrialized countries in East
Asia, and with Japan acting as a source of financial
capital, the region might attain rapid, inward-focused
growth. With protectionist sentiment in the developed
economies increasing, Western commentators have
questioned whether Asian nations might increasingly
look toward each other for growth opportunities-
thereby giving the move for regional cooperation in
East Asia new momentum.
An East Asian regional economic cooperation scheme
could assume a variety of forms. At the least it
probably would involve agreements among neighbor-
ing countries to give each other's goods preferential
treatment, while discriminating against products from
nonmembers such as the United States and West
Possible Forms of Economic Cooperation
? A Trading Club. East Asian countries in such an
arrangement would reduce tariffs on goods from
other members. Each country would maintain its
own set of tariffs on goods from nonmembers, such
as the United States or European countries.
? A Free Trade Association. East Asian countries
would abolish tariffs on goods from members. Each
country would maintain its own set of tariffs on
goods from nonmembers.
? A Customs Union. East Asian countries would
abolish tariffs on goods from other members and-
to moderate trade with countries outside the
union-maintain a common set of tariffs on goods
from nonmembers.
? A Common Market. East Asian countries would
form a customs union in which members allowed
unrestricted movement of labor and capital among
member countries.
? An Economic Union. East Asian countries would
form a common market in which members agreed
to conduct unified fiscal and monetary policies.
European countries.
Proponents of economic cooperation believe that
countries in the region can attain increased trade,
better allocations of resources, and higher standards
of living by lowering barriers to trade and resource
flows among selected neighboring countries. If East
Asian countries formed a customs union, for instance,
the most efficient enterprises would displace higher
cost producers in member countries. This would allow
the region to produce more, thereby giving consumers
' The East Asian states considered in this study were limited to:
Japan, South Korea, China, Taiwan, Hong Kong, Singapore,
Indonesia, Malaysia, Thailand, the Philippines, Australia, and New
products at lower prices. For example, China-which
because of its large population has an advantage in
producing labor-intensive goods-might displace oth-
er producers of handicrafts. Thus, resources in other
countries that had been devoted to handicraft indus-
tries could be reallocated, and less expensive handi-
crafts would be available throughout the region.'
' Economic well-being may be lowered, however, if the common
tariff structure prevents firms outside the union that are more
efficient than those in the customs union from exporting to member
countries.)
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Figure 1
Total Trade as Percent of GDP, 1984
United States
China
Japan
Australia
Philippines
Thailand
Indonesia
New Zealand
South Korea
Malaysia
Taiwan
Hong Kong
Singapore-
- Because of reexports, the percentages for Hong Kong and
Singapore exceed 100.
Figure 2
Share of Total Trade, 1984
- With US
100 With East Asia
Apart from gains caused by changes in resource
allocation, some East Asian countries might benefit
because low-cost production methods can be used in
many industries only when output is relatively large.
For example, Singapore could not develop a cost-
efficient automobile industry if it only sold cars
domestically. But by removing barriers to trade, a
customs union would greatly expand the potential
market. Governments and businesses might then be
willing to undertake investment to increase the scale
of operations and obtain low-cost production, and also
might spend more freely on research and
development
East Asian exporters would take advantage of re-
duced trade barriers within the customs union to enter
new markets and expand sales in previous markets-
boosting trade among members. Japan and the other
industrialized countries probably would increase
somewhat purchases of raw materials from mem-
bers-at the expense of sellers outside the region.
Intensified competition within the union probably
would accelerate the shift in industrialized countries
Japan
Hong Kong
South Korea
China
Taiwan
Singapore
Australia
Indonesia
Malaysia
Thailand
Philippines
New Zealand
in East Asia away from low-value-added, labor-inten-
sive industries-such as cotton textiles-to high-tech,
capital-intensive production. Industrialized countries
in the union probably would try to sell high-value-
added consumer and capital goods to each other,
while investing in labor-intensive industries in South-
east Asian countries and China to take advantage of
lower wage rates in those states.
The United States-which sells about one-quarter of
its exports in East Asia-and Western Europe would
be hurt by the formation of an East Asian customs
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union. In particular, over 60 percent of US exports of
transistors, cotton, and wood-and about one-third of
US exports of wheat, corn, soybeans, chemicals, pe-
troleum products, and plastics-are sold in East Asia.
Sales of those products, as well as computers, office
machinery, industrial equipment, and coal, would
plummet if East Asian countries switched their pur-
chases from the United States to countries within the
union. Consequently, US foreign exchange earnings
would fall, and pressure for depreciation of the dollar
would increase.
Furthermore, a decrease in purchases of exports from
the United States and Western Europe might cause
the price of those goods to fall-shifting the terms of
trade against nonmembers. For instance, if US wheat
sales to Asia decreased because of the formation of a
customs union, the price of US wheat might fall.
Faster technological development or the growth of
larger, cost-efficient enterprises within the union
probably would hurt nonmembers.
More broadly, Washington's influence in Asia would
be reduced if East Asian states formed a customs
union. Instead of being able to negotiate separately
with area governments for adjustments in commercial
policies, Washington would have to deal with an
agenda set by the East Asian union collectively. And
US economic leverage in the rest of the world would
be offset by the combined resources of Asian states.
Factors Mitigating Against an
East Asian Customs Union
Notwithstanding the significant benefits to East
Asian countries of forming a customs union, diverse
economic and political interests have prevented for-
mal economic cooperation in Asia. One of the princi-
pal barriers to regional cooperation is the wide diver-
gence in economic structures in these countries. The
region contains a major economic power-Japan;
newly industrialized countries (NICs) -South Korea,
Taiwan, Hong Kong, and Singapore; less developed
countries (LDCs) in Southeast Asia that rely heavily
on exports of natural resource-related products-
Indonesia, Malaysia, Thailand, and the Philippines;
industrialized countries that also export natural re-
source commodities-Australia and New Zealand;
Characteristics of East Asian Countries
Necessary for a Customs Union
East Asian countries have some of the characteristics
economists have identified as important to successful
regional cooperation. First, countries such as Japan,
South Korea, Taiwan, Hong Kong, and Singapore
produce similar manufactured goods:
Economists believe that benefits from a cus-
toms union are greatest when members' econo-
mies are "competitive'-in the sense that each
produces a wide range of similar manufactured
goods-and when demand patterns do not vary
much between countries. Then, when tariffs are
lowered within the union, cost advantages cause
widespread substitution of one member's goods
for another, increased specialization, and a
surge in intraunion trade. On the other hand,
the gains from a customs union are small if the
economic structures of member countries are
too different. For instance, if one country pro-
duces mostly high-tech manufactures while an-
other produces mostly handicrafts, the pattern
of specialization between the countries probably
would not be altered, and the countries would
trade the same goods with each other as they
did before the union was formed. 0
Second, Asian nations conduct a brisk trade with
each other-over 40 percent of East Asia's world
trade occurs within East Asia:
Economists believe that benefits will be higher
when members already conduct a large share of
their trade with each other. Then, members are
less likely to suffer economic losses if trade
with nonmembers is disrupted when the cus-
toms union is formed.
Finally, most governments in the region believe that
rapid expansion of international trade is necessary
for continued economic well-being, economic policy in
these countries is geared toward promoting exports to
stimulate economic development, and these countries
generally trade a high proportion of their output.
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Figure 3
Real Per Capita GDP in 1984
United States
Japan
Hong Kong
South Korea
China
Taiwan
Singapore
Australia
Indonesia
Malaysia
Thailand
Philippines
New Zealand
and a resource-rich country with a very low per capita
income, China. Other important factors inhibit the
development of regional cooperation.
The Importance of Trade With the United States.
Trade patterns suggest that some East Asian coun-
tries would be reluctant to enter a cooperative scheme
that might jeopardize their trade with the United
States. Five Asian states-Japan, Hong Kong, South
Korea, Taiwan, and the Philippines-sell over one-
third of their exports to the United States. These
countries probably fear that, if the United States
responded with protectionist measures to an East
Asian union, they would not be able to replace US
sales with increased exports to members. For instance,
Japan sells over one-half of its top export,' cars, in the
US market. Because per capita gross domestic prod-
uct (GDP)-a crude indicator of demand patterns-is
generally much lower in Asian countries than in the
United States, it is unlikely that Japan could transfer
a substantial share of its car sales from the US
market to Asia. Taiwan is particularly dependent on
US trade-about half of its foreign sales are in the
United States-while it sells less than 20 percent of
its top five exports within Asia.
The United States is also an important source of
imports for Asian countries. Japan, South Korea,
Taiwan, Australia, and the Philippines each purchase
more than one-fifth of their imports from the United
States. In our view, the prospect that customs union
tariffs might divert imports from US suppliers to
higher cost Asian suppliers might cause these coun-
tries to have additional reservations about regional
cooperation. Customs union tariffs, for example,
might make US machine parts prohibitively expensive
for Australian firms, forcing them to import those
parts from Japan at prices above what they had to pay
US firms before the union was formed.
The Natural Resource Content ofAsian Trade. Natu-
ral resources-such as crude petroleum, minerals, and
agricultural products-constitute a predominant
share of the exports of Indonesia, Malaysia, Thailand,
the Philippines, Australia, and New Zealand. For
instance, Indonesia's top three exports-crude petro-
leum, natural gas, and petroleum products-account
for over 80 percent of total export earnings, and
almost 80 percent of total sales of these products are
to East Asian nations. For Malaysia, sales of crude
petroleum and wood make up about 45 percent of
export earnings, and almost all of these goods are sold
within Asia. In our view, these countries, in particu-
lar, believe that the potential for increasing exports by
joining an East Asian customs union is limited.
The Dominance of Japan. Japan's real gross national
product (GNP) is about 15 times greater than the
average GNP of the other Asian states, and its foreign
trade accounts for over 40 percent of East Asia's
world trade. We believe that many Asian countries
would be hesitant to form a customs union with Japan
because of apprehension that Japan would dominate
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Figure 4
Total Trade by East Asian
Countries: Relative Shares in 1984
Philippines 2
Thailand 2
Malaysia 4
the union. Newly industrialized countries such as
South Korea and Taiwan probably believe that, if
they removed tariffs on Japanese goods, Japan would
flood their markets with high-tech manufactured
products-thereby preventing them from developing
similar industries. Less developed countries-such as
Malaysia, the Philippines, and Thailand-are count-
ing on development of electronic components and
similar light manufacturing industries to drive export
growth. If they removed barriers to Japanese goods,
the much larger Japanese producers might drive their
industries out of business before they became firmly
which are based, in part, on past Chinese support to
Communist insurgencies and fears that with closer
economic ties China would be able to manipulate
their sizable ethnic Chinese populations, and on the
realization that China would be producing the same
labor-intensive goods that they want to market. Tai-
wan-which does not officially allow direct trade with
China-would have even stronger objections to re-
gional cooperation schemes that included China.
them to colonial status.
Political and Cultural Impediments. We believe the
diversity of Asian cultural, political, and ideological
systems inhibits regional economic cooperation.
Moreover, some Asian states gained their indepen-
dence recently and still have sharp memories of the
colonial experience and of Japanese occupation. We
believe many of these countries fear that closer
cooperation might diminish their autonomy, and
would reject any arrangement that seemed to return
Wild Cards
Notwithstanding the impediments to formal regional
cooperation, economic and political relations are
changing rapidly in East Asia, and international
developments may strengthen common interests, pro-
pelling economic cooperation forward. In the past few
years, for instance, China has committed itself to an
ambitious economic reform program to introduce
market elements into its ossified Soviet-style planning
system and expand contacts throughout Asia. The
Philippines is in the throes of political transition.
Export-oriented policies of Asian countries increas-
ingly are clashing with protectionist-minded govern-
ments in the West, depressed prices for.minerals and
agricultural products are hurting export earnings-of
Asian LDCs, and growth rates in Asia have slowed.
established.
Concerns About Increased Chinese Influence. We
believe that Singapore, Malaysia, Indonesia, and
Thailand would be reluctant to enter into an Asian
union that included China. They have deep concerns
about China's long-run intentions in Southeast Asia,
To identify which, if any, international developments
might promote regional cooperation, we constructed
six scenarios. The first four-political instability in a
key East Asian state, changing Japanese foreign
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In our view, the Association of Southeast Asian
Nations (ASEAN) exemplifies both the most success-
ful effort at regional cooperation in East Asia and
also the difficulty of reaching consensus on funda-
mental economic issues among states that have diver-
gent interests. When ASEAN was founded in 1967 by
Indonesia, Malaysia, the Philippines, Singapore, and
Thailand (Brunei joined in 1984), its objectives were
primarily political-and its most significant achieve-
ments have been in the political realm. Since Vietnam
installed the Heng Samrin regime in Phnom Penh,
ASEAN has successfully lobbied UN delegates to
prevent the regime from occupying Cambodia's UN
seat. And ASEAN's annual meeting of foreign minis-
ters is often attended by counterparts from the United
States, Canada, Japan, Australia, and New Zealand
(and a representative from the European Economic
Community)-providing an important forum for dis-
cussion of East Asian issues.
In 1976 the ASEAN states formally decided to
pursue economic cooperation. Since then tariffs have
been reduced on thousands of goods, and several
industrial joint ventures have been started. The pref-
erential tariff arrangements, however, apply to only
about 2 percent of intra-ASEAN trade. And although
trade among ASEAN members increased 50 percent
from 1973-83, it still constitutes only about one-fifth
of members' total trade. We believe these statistics,
however, are somewhat misleading. Over one-half of
intra-ASEAN trade is in crude oil and petroleum
products and occurs primarily between Singapore and
Indonesia and Malaysia. Trade between ASEAN
countries other than Singapore is relatively low.
Trade with the Philippines, for instance, makes up
about 2 percent of Malaysia's total trade, and trade
with Thailand constitutes less than 1 percent of
Indonesia's trade.
At a meeting in October 1986, ASEAN states decided
to delay the goal of free trade among members until
the year 2000. Although all of the states are eager to
increase their exports to other members, many fear
the increased competition that would occur if tariffs
were eliminated on trade within ASEAN. Most
ASEAN states export the same types of natural
resource products-Indonesia and Malaysia, in par-
ticular, export almost exactly the same mix of raw
materials. Moreover, most ASEAN states hope to
develop clothing, consumer electronics, and other
light manufactures as export industries. Indonesia,
however, with its sizable domestic market, would be
reluctant to allow duty-free imports of Thai clothing
or Philippine radios. Although Singapore is a strong
proponent of reduced trade barriers within ASEAN,
it does not want to jeopardize its free trade status by
joining the other states in setting tariffs on goods
from nonmembers. Without a common tariff struc-
ture, however, goods would enter the region via the
low-tariff state-Singapore-and then would be sold
duty free to higher tariff members. We believe that
reluctance to reduce mutual tariff barriers (and to set
common tariffs on goods from nonmembers) will
continue to inhibit ASEAN from forming a customs
union.
policy goals, transformation of Japan's economic
structure, and economic reform in China-involve
developments within the region. The last two-a
return to higher oil prices and heightened Western
protectionism-consider events originating outside of
East Asia. Our conclusions regarding how East Asian
countries would respond to the six scenarios are based
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Scenario 1: Increased Political Instability in East
Asia. Sudden political change in East Asia might
alter the calculations of area governments regarding
economic cooperation. The region's response to sud-
den political change in the past, however, has varied
widely. The increased cohesion of ASEAN in the
1980s, for example, has been largely a response to
Vietnam's invasion of Cambodia. Recent political
turmoil in the Philippines, however, has produced
little in the way of economic concessions from
Manila's neighbors. To consider how area govern-
ments would react to much more far-reaching change,
we simulated the response of East Asian states to the
overthrow of a pro-Western government in the Philip-
pines by a Communist-led insurgency.
On the basis of Japan's response to the reduced
American presence in Asia following the Vietnam
war, we believe that, if Communists came to power in
the Philippines, Japan would initiate an aid program
for the market economies in Southeast Asia that
included increased direct grants and stepped up in-
vestment spending on industrial development projects.
Japan, however, would be unlikely to alter its com-
mercial policy and open its markets to manufactured
goods from East Asian countries. South Korea and
Taiwan would follow Japan's lead. The Southeast
Asian LDCs would call for increased regional cooper-
ation but would be unlikely-during a period of
heightened concern that political instability might
increase in their own countries-to offer each other
the trade concessions necessary for increased formal
economic cooperation. Most of the East Asian
states-particularly the Southeast Asian LDCs-
would ask the United States to increase aid.
Scenario 2: Emerging Japanese Leadership in East
Asia. Since the end of World War II, Japan has been
content to let other countries, particularly the United
States, exercise political leadership in East Asia
while it has steadily boosted bilateral trade with
Asian countries. Japan's reluctance to exert political
influence commensurate with its economic power
stems largely from its desire not to revive memories
of the Greater East Asian Co-Prosperity Sphere held
by its trading partners. As a new generation assumes
power, however, Tokyo may become more assertive.
To consider how increased Japanese assertiveness
would affect prospects for economic cooperation, we
simulated the response of East Asian states to new
Japanese policies designed to signal Tokyo's inten-
tion to exercise greater leadership. Specifically, we
assumed that Japan opened its market somewhat to
goods from East Asian countries by lowering tariff
duties and reducing bureaucratic obstacles to import-
ed goods, and also eased restrictions on technology
transfer, especially to China.
We believe that Asian countries would be wary of
Japanese policy designed to increase Japan's political
leverage by lowering import tariffs and other restric- 25X1
tions on East Asian goods. Although they would
welcome the opportunity to sell more to Japan, they
would be worried about greater economic dependence
on Japanese markets. China probably would be the
most enthusiastic supporter of Tokyo's new policies,
and would push hard for increased sales of oil and
petroleum products, coal, silk, soybeans, and light
manufactures to Japan. The Southeast Asian LDCs
would boost sales of raw materials to Japan, and
Malaysia and the Philippines might even respond to
the Japanese initiative by offering better terms for
Japanese direct investment in local industries-with
the understanding that a large share of the output
could be sold in Japanese markets. Hong Kong and
Singapore would support Tokyo's initiative-expect-
ing to gain somewhat by increased sales to Japan, and
even more by new sales to other Asian countries that
have benefited from Tokyo's new policies. South
Korea and Taiwan, however, would be concerned that
their competitive position in East Asia would be 25X1
eroded by Tokyo's policies. Australia and New Zea-
land would fear that their sales of raw materials
would be hurt by increased access of Chinese export-
ers to the Japanese market. East Asian countries
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Table 1
Major Trade Partners, 1984
United States (22)
United States (29)
China (21)
Japan (21)
Japan (14)
Saudi Arabia (4)
Taiwan (5)
Hong Kong (3)
Singapore
Japan (24)
United States (40)
United States (17)
Hong Kong (23)
Japan (17)
Malaysia (16)
United States (11)
Saudi Arabia (5)
Japan (14)
West Germany (3)
Hong Kong (5)
Indonesia (7)
Malaysia
Japan (24)
Japan (38)
Japan (24)
United States (17)
United States (20)
Singapore (17)
United Kingdom (5)
Singapore (11)
United States (15)
New Zealand (5)
Saudi Arabia (4)
West Germany (4)
Philippines
Japan (21)
United States (32)
United States (15)
Japan (16)
Singapore (8)
Malaysia (5)
Saudi Arabia (6)
Hong Kong (4)
would use Japan's new policies as a lever to press for
similar trade concessions from the United States.
Scenario 3: Decreased Demand for Raw Materials in
East Asia. Japan's economy is evolving slowly into a
high-tech, service-oriented economy in which heavy
industry plays a diminished role. This economic
transformation is already altering the structure of
Japan's imports-diminishing the raw material con-
tent relative to higher technology and service-related
imports. Most East Asian countries, however, are
heavily dependent on sales of industrial raw materi-
als to Japan. Sales of coal and iron ore to Japan
account for about 15 percent of Australia's total
export earnings, sales of wood and crude oil to Japan
constitute over 15 percent of Malaysia's total export
earnings, and sales of crude oil, natural gas, and
petroleum products to Japan account for more than
50 percent of Indonesia's total export earnings.' To
consider the long-run consequences of Japan's eco-
nomic transformation, we simulated the reaction of
East Asian states to a decrease in Japanese imports
of minerals and other raw materials and the resulting
fall in commodity prices.
' Sales of these products constitute about 50 percent, 75 percent,
and 90 percent, respectively, of Australian, Malaysian, and Indone-
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A shift in Japan's import pattern would prompt East
Asian natural resource exporters to look for new
markets outside Asia and probably would intensify
efforts by the Southeast Asian LDCs and China to
develop light industries. The possibility that East
Asian resource exporters would form a customs union
is remote, because they sell the same types of com-
modities. The less developed resource exporters also
would be reluctant to establish a formal cooperation
scheme with South Korea and Taiwan for fear that
those more developed countries would flood their
markets with light manufactures-thereby inhibiting
them from developing similar industries. China might
react to decreased Japanese demand for raw materials
by strengthening economic ties to South Korea-even
if it meant heightened tensions with North Korea. In
return for increased South Korean purchases of crude
oil and coal, China would agree to import more steel,
chemicals, and capital equipment. The resource ex-
porters in East Asia would press the United States to
increase investment in industrial development projects
in their countries and to reduce barriers to the sales of
their manufactures in the US market.
assumed that Chinese imports of industrial supplies,
capital goods, and high-tech equipment would grow
as China modernized.
Facing growing competition from Chinese exports of
clothing, textiles, and other light manufactures-in
both domestic and international markets-we believe
East Asian LDCs would consider joining a customs
union with Japan and/or South Korea if it guaranteed
a protected market for their products. Japan and
South Korea, however, would benefit from the success
of China's reforms by increasing sales of industrial
supplies, capital goods, and consumer goods to China
and would not be interested in joining such a union if
their membership prompted China to retaliate against
their exports. We believe that Taipei would come
under intense pressure from Taiwan businesses to
allow expanded economic contacts with China. If
Taipei refused, Taiwan probably would be one of the
big losers from successful reform in China. In hopes
of maintaining their shares of the US market, some
East Asian countries-Taiwan and the Philippines, in
particular-would lobby the United States to main-
tain strict quotas on imports of Chinese products.'
Scenario 4: Successful Economic Reform in China.
Since 1978 China has pursued a policy of economic
liberalization at home and increased trade and politi-
cal contacts abroad. In the past six years, China's
total trade has more than doubled. In 1985, China
was Japan's second-largest trade partner-after the
United States-while Japan was China's number one
partner. Although Beijing does not have formal polit-
ical relations with South Korea or Taiwan, bilateral
trade with each exceeded $1 billion in 1985, accord-
ing to US Consulate estimates. Although leaders of
most East Asian states have publicly praised China's
economic reform program, many undoubtedly worry
about the long-run consequences for their economies.
To consider the impact of sustained successful eco-
nomic reform in China, we simulated the response of
East Asian states to continued rapid growth in
Chinese imports and exports. Specifically, we as-
sumed that Chinese exports of clothing and textiles
would double in the next 10 years, and foreign sales
of coal, ships, consumer electronics, machine parts,
and manufactures of low- to mid-level technological
sophistication would also expand rapidly. We also
Scenario 5: A Return to High Oil Prices. When crude
oil prices quadrupled in 1973-74, East Asian states
were forced to make sharp adjustments in economic
policies. South Korea, for instance, devalued its
currency, and Japan implemented conservation mea-
sures and began to switch to alternative energy
sources. Oil-rich countries, such as Indonesia, experi-
enced a sudden increase in government budget reve-
nues. Although the oil price hikes during the 1970s
did not spark increased regional cooperation, we
considered whether a return to relatively high energy
prices in the 1990s would cause East Asian states to
boost regional ties. In this simulation we assumed
that by the mid-1990s the real price of oil will return
to the level it was at in the late 1970s.
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We believe that, just as in the 1970s when the first oil
price shocks occurred, each East Asian country would
go its own way in response to new oil price hikes.
Regional governments would have to contend with all
of the factors currently inhibiting regional coopera-
tion, plus the additional problem that some coun-
tries-such as Indonesia, Malaysia, and China-
probably would benefit from higher oil prices, and
thus would feel less need for formal multilateral
cooperation. East Asian LDCs hurt by the oil price
hike-the Philippines and Thailand-,would press the
United States for trade concessions and increased
loans and financial aid.
Scenario 6: Increased Protectionism in the West.
East Asian states export a large proportion of their
total output,' and most of these states plan to fuel
economic growth with expanded sales abroad-par-
ticularly to the United States. Few economic issues,
therefore, cause such concern among East Asian
countries as the specter of heightened protectionism
in the West. In our final simulation we considered the
probable response of East Asian states to increased
trade barriers in Western countries. Specifically, we
assumed that in the 1990s East Asian exporters
would face higher tariffs and quotas on sales of
textiles, clothing, steel, shoes, automobiles, consumer
electronics, and agricultural products.
We believe most countries in the region would look to
Japanese markets to make up sales lost because of
heightened protectionism in the West. Japan, howev-
er, would be skeptical of its ability to increase exports
in East Asia, and would prefer to make concessions in
bilateral negotiations with the United States rather
than in negotiations with East Asian governments
over forming a customs union. Tokyo's bargaining
position probably would be to accept higher US tariffs
on labor-intensive manufactures, make selected tariff
cuts of its own, and boost investment in US industry
in exchange for reduced US tariffs on high-tech
products. To increase pressure on the United States,
Japan probably would shift some of its purchases of
natural-resource-related products from the United
9 Table 2 shows that exports as a percent of gross domestic product
range from 9 percent for China to 133 percent for Singapore
States to Asia-particularly China. China would
retaliate against Western protectionism by slashing
imports selectively to match the value of lost sales in
the United States and Western Europe. China also
would increase its purchases from Asian countries-
particularly Japan-and would probably boost trade
with the Soviet Union and East European countries.
With growth slowing, unemployment rising, and ex-
port prospects worsening, Taipei might decide to
loosen restrictions on trade with China. Other East
Asian countries probably would enter bilateral negoti-
ations for trade concessions with the United States,
while using international forums to criticize the US
and West European governments for protectionism.
Prospects for Economic Cooperation in East Asia
Judging from current trade patterns and our simula-
tion exercise, we believe that the East Asian states
will not be likely to establish formal multilateral
arrangements for coordinating their trade policies
during the 1990s. Factors that inhibit regional cooper-
ation today-such as economic diversity and varied
political interests-will be significant barriers in the
next decade. In particular, the developed countries in
East Asia produce an export mix that is best suited to
US and West European markets and do not see
significant potential in increasing sales to the lower
income countries in East Asia. Even if protectionist
measures are enacted in the West, Southeast Asian
LDCs have little to offer the developed countries in
East Asia that they are not already getting without
regional institutions for economic cooperation.
Although regionwide economic cooperation is unlike-
ly, future international developments might cause
increased cooperation among some states. We view
stronger Sino-Japanese economic cooperation as the
most likely possibility. China and Japan are important
trade partners, and Japan has much to offer China-
eased restrictions on sales of goods in Japanese mar-
kets, increased direct investment in China, and great-
er technology transfer. Japan has been reluctant to
grant substantial concessions on any of the three,
however, preferring to limit its economic relationship
to commodity trade.
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Our simulations indicate that successful economic
reform in China or heightened protectionism in the
West could cause Japan to alter its relationship with
China significantly. Japan probably would be the
biggest beneficiary in East Asia of successful reform
in China-expanding its exports of industrial supplies
and capital and consumer goods to meet China's
development needs. If Japanese businesses became
convinced that the reforms were permanent, they
would aggressively exploit investment opportunities in
China. In response to Western protectionism, Japan
might shift some of its purchases of natural resources
from the United States to China, and China would
boost purchases of high-tech and capital goods from
Japan.
Future international developments are also likely to
heighten Japan's economic importance to the other
nations in East Asia. We believe that, although Tokyo
is much more likely to maintain its present course-
granting development aid, but denying technical
transfers and limiting imports of regional manufac-
tures-than to agree to formal multilateral coopera-
tion, Japan's interest in regional stability might
prompt it to begin to play the role of pacesetter and
caretaker in East Asia. In response to political insta-
bility or worsening trade balances, Southeast Asian
governments would call on Japan to step up aid. Given
the heavy exposure of some Japanese banks to the
debt of Southeast Asian LDCs, and Tokyo's determi-
nation to protect its sources of raw materials from
those countries, Tokyo probably will boost its scale of
imports, direct investments, and aid. In turn, however,
Japan will demand concessions such as eased restric-
tions on direct investment. East Asian countries'
dependence on Japanese loans and investment will
give Tokyo leverage to exact concessions, as will its
position as a large net capital exporter.
Increased protectionism in the West would also in-
crease the NICs' dependence on exports to Japanese
markets. And if protectionism caused a sharp deterio-
ration in the trade balances of the NICs, countries
such as South Korea might increase their borrowing
from Japan.
Implications for the United States
In our view, the United States not only will retain
strong influence in East Asia during the 1990s, but
will be able to press its commercial and strategic
interests individually with East Asian countries-
rather than having to negotiate with an East Asian
trade bloc. Instead of strengthening multilateral ties
in response to political or economic developments,
East Asian states will look to the United States (and
Japan) for aid and investment and as a market for
exports. This suggests that US policy might be a more
potent unifying force in East Asia than regional calls
for multilateral cooperation.
Some developments, however, could alter bilateral
relations in Asia in a way that would be detrimental
to US economic interests. If successful economic
reform in China or heightened protectionism in the
West strengthened trade ties between China and
Japan-US exports of coal, soybeans, cotton, fruit,
and petroleum products to Japan and of plastics,
fertilizers, electrical equipment, and computers to
China would be reduced. If Japan became an increas-
ingly service-oriented economy, Beijing might decide
to upgrade relations with Seoul in hopes of transfer-
ring exports of petroleum and coal from declining
Japanese markets to South Korea. Finally, heightened
Western protectionism might force Taipei to allow
open direct trade between Taiwan and China.
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Appendix A
Key Exports and Imports of Asian Countries,
in Rank Order by 1982 Data
Cars (8%) a Crude petroleum (23%)
Ships (14%) Natural gas (36%)
Steel tubes and pipes (20%) Petroleum products (48%)
Trucks (23%) Coal (42%)
Telecommunications Iron ore (45%)
equipment (23%)
Electric machinery and Unwrought aluminum (19%)
switchgear (37%)
Textile fabrics (41%) Clothing (76%)
Cameras (13%) Organic chemicals (13%)
Other metal manufactures (35%) Corn (2%)
Road motor vehicle parts (27%) Meat (38%)
Other electric machinery (33%) Soybeans (7%)
Transistors (42%)
Clothing (9%) Textile fabrics (91%)
Toys, sporting goods (11%) Petroleum products (90%)
Watches and clocks (22%) Clothing (85%)
Miscellaneous consumer Watches and clocks (72%)
goods (25%)
Electric domestic Miscellaneous consumer goods
equipment (11%) (71%)
Other textile products (36%) Other yarn and thread (72%)
Office machinery (18%) Fish (70%)
Precious stones (37%) Plastics (52%)
Electric machinery and Paper (69%)
switchgear (34%)
Telecommunications Other textile products (88%)
equipment (50%)
Electric machinery and switchgear
(69%)
a Number in parenthesis indicates the share of the product sold to,
or bought from, other East Asian countries.
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Key Exports and Imports of Asian Countries, in Rank Order
by 1982 Data (continued)
Clothing (17%)
Ships (13%)
Textile fabrics (43%)
Footwear (10%)
Other metal manufactures (25%)
Fish (74%)
Transistors (35%)
Steel sheets, plates (57%)
Miscellaneous consumer
goods (15%)
Ingots of steel (74%)
Other textile products (18%)
Toys, sporting goods (13%)
Television (10%)
Steel tubes and pipe (10%)
Crude petroleum and
petroleum products
Textile yarn and fabrics
Clothing
Military firearms
Miscellaneous manufactured
articles
Crude petroleum (10%)
Ships (33%)
Organic chemicals (41%)
Coal (39%)
Petroleum products (33%)
Wood (69%)
Transistors (42%)
Cotton fiber (2%)
Telecommunications
equipment (25%)
Iron ore (30%)
Electric machinery and switchgear
(46%)
Corn (2%)
Wheat (0%)
Steel sheets and other
steel products
Transport equipment
Electrical machinery
Textile fibers
Textile yarn
and fabrics
Organic and inorganic chemicals Plastics
Crude animal and vegetable Fertilizers
materials
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Key Exports and Imports of Asian Countries, in Rank Order
by 1982 Data (continued)
Clothing (14%)
Miscellaneous consumer
goods (19%)
Footwear (11%)
Toys, sporting goods (14%)
Telecommunications
equipment (15%)
Textile fabrics (65%)
Transistors (51%)
Plywood manufactures (20%)
Fish (74%)
Vegetables (52%)
Furniture (27%)
Crude petroleum (7%)
Transistors (65%)
Organic chemicals (33%)
Aircraft and parts (0%)
Electric machinery and
switchgear (69%)
Steel sheets, plates (84%)
Wood (94%)
Soybeans (0%)
Plastics (53%)
Cotton fiber (0%)
Telecommunications
equipment (44%)
Radio (12%) Corn (0%)
Other electric machinery (30%) Other electric machinery (66%)
Electric machinery and Textile machinery (57%)
switchgear (43%)
Other metal manufactures (23%) Coal (51%)
Petroleum products (74%)
Transistors (42%)
Crude rubber (22%)
Clothing (7%)
Radio (13%)
Electric machinery and
switchgear (27%)
Ships (9%)
Animal and vegetable oils (11%)
Construction, mining
machinery (64%)
Television (22%)
Telecommunications
equipment (26%)
Crude petroleum (22%)
Petroleum products (17%)
Transistors (53%)
Ships (29%)
Textile fabrics (91%)
Electric machinery and
switchgear (45%)
Crude rubber (97%)
Steel tubes and pipe (75%)
Construction, mining
machinery (37%)
Other metal manufactures (60%)
Other electric machinery (60%)
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Key Exports and Imports of Asian Countries, in Rank Order
by 1982 Data (continued)
Coal (80%)
Wheat (31%)
Meat (34%)
Other textile fibers (42%)
Inorganic chemicals (3%)
Petroleum products (46%)
Sugar (66%)
Uranium thorium ores (0%)
Other cereals (50%)
Fish (49%)
Other unwrought metals (20%)
Dairy (60%)
Meat (11%)
Dairy (29%)
Other textile fibers (34%)
Fish (69%)
Unwrought aluminum (99%)
Other chemicals, n.e.s. (27%)
Paper (74%)
Hides (21%)
Pulp (99%)
Fruit (24%)
Wood (94%)
Leather manufactures (33%)
Vegetables (68%)
Crude petroleum (74%)
Natural gas (98%)
Petroleum products (88%)
Crude rubber (31%)
Wood (83%)
Unwrought tin (55%)
Coffee (28%)
Crude petroleum (33%)
Petroleum products (38%)
Trucks (78%)
Cars (74%)
Electric machinery
and switchgear (30%)
Paper (25%)
Textile fabrics (66%)
Ships (26%)
Organic chemicals (19%)
Construction, mining
machinery (22%)
Road motor vehicle parts (37%)
Computers (23%)
Miscellaneous consumer goods
(52%)
Plastics (23%)
Clothing (80%)
Petroleum products (84%)
Crude petroleum (54%)
Cars (82%)
Textile fabrics (64%)
Plastics (39%)
Steel sheets, plates (91%)
Inorganic chemicals (70%)
Trucks (85%)
Crude minerals (8%)
Organic chemicals (23%)
Books (39%)
Other textile products (46%)
Electric machinery and switchgear
(42%)
Petroleum products (98%)
Crude petroleum (0%)
Steel sheets, plates (88%)
Steel tubes and pipe (67%)
Construction, mining machinery
(47%)
Trucks (82%)
Electric machinery and switchgear
(49%)
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Key Exports and Imports of Asian Countries, in Rank Order
by 1982 Data (continued)
Wood (85%)
Animal and vegetable oils (30%)
Transistors (26%)
Plywood manufactures (59%)
Clothing (11%)
Rice (38%)
Vegetables (16%)
Sugar (54%)
Fish (54%)
Crude rubber (83%)
Clothing (9%)
Corn (75%)
Unwrought tin (19%)
Electric machinery and
switchgear (52%)
Sugar (58%)
Animal and vegetable oils (10%)
Fruit (45%)
Ores of copper (91%)
Clothing (10%)
Wood (66%)
Other nonferrous ores (84%)
Plywood manufactures (34%)
Fish (41%)
Miscellaneous consumer
goods (24%)
Petroleum products (97%)
Crude petroleum (0%)
Construction, mining machinery
(66%)
Steel sheets, plates (92%)
Electric machinery and switchgear
(50%)
Crude petroleum (18%)
Petroleum products (85%)
Electric machinery and switchgear
(24%)
Steel sheets, plates (84%)
Organic chemicals (46%)
Road motor vehicle parts (90%)
Plastics (38%)
Fertilizers (42%)
Auto engines (85%)
Construction, mining machinery
(58%)
Crude petroleum (17%)
Petroleum products (51%)
Organic chemicals (41%)
Electric machinery and switchgear
(47%)
Wheat (0%)
Dairy (50%)
Ingots of steel (88%)
Steel sheets, plates (86%)
Plastics (51%)
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Table 2
Selected Economic, Demographic, and
Political Characteristics, 1984
Japan
Hong Kong
South Korea
China
Taiwan
Singapore
Australia
Indonesia
Malaysia
Real GDP (billion 1980$)
1,226.6
36.2
83.0
306.3
56.6
15.5
161.7
83.3
30.7
Real per capita GDP (1980 $)
10,222
6,704
1,917
297
2,888
6,200
10,432
492
2,020
Total merchandise trade (billion 1984 $)
292.3
56.9
53.7
52.9
52.4
49.1
46.5
36.0
29.9
Exports as percent of GDP
14
89
35
9
53
133
14
26
49
Imports as percent of GDP
10
89
35
8
39
149
13
15
37
Population (millions)
120.0
5.4
43.3
1,032.7
19.6
2.5
15.5
169.4
15.2
Literacy rate (percent)
99
75
90
75
94
84
99
62
72
Labor force (millions)
59.3
2.6
15.4
476
7.5
1.2
7.2
67.0
5.9
Labor force in agriculture (percent)
9
30
68
20
1
6.5
55
33
Unemployment rate (percent)
2.7
3
4.1
NA
2.4
2.7
7.8
NA
6.2
Ethnic composition of population (percent)
99 Japanese,
1 other
98 Chinese,
2 other
Korean
93 Han Chinese,
7 other
84 Taiwanese,
14 mainland Chinese,
2 other
76 Chinese, 15 Malay,
6 Indian, 3 other
99 European, 1 Asian and
Aboriginal
74 Malay, 26 other
50 Malay, 36 Chinese,
10 Indian, 4 other
Political system
Constitutional monarchy
British dependent territory, Republic with military rule Communist state run by
One-party (KMT) rule
Republic ruled by one man Parliamentary democracy
Republic ruled by one
Constitutional monarchy
will revert to China in 1997
party
since 1959
recognizing Elizabeth II
as Head of State
man since 1968
with bicameral parliament
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Thailand Philippines New Zealand
41.6 35.6 26.3
822 628 8,219
16.6 11.5 11.1
18 16 23
22 18 23
50.6 56.7 3.2
84 88 98
26 20.6 1.4
73 47 10
4.5 6.2 5.7
75 Thai, 14 Chinese, 92 Christian Malay, 87 European origin,
11 other 4 Muslim Malay, 9 Maori, 2 Pacific
1 Chinese, 3 other islander, 2 other
Constitutional monarchy Republic/participatory Parliamentary de-
with weak parliamentary democracy mocracy recognizing
system Elizabeth II as Head
of State
21
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