PROSPECTS FOR ECONOMIC COOPERATION IN EAST ASIA IN THE 1990S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000200050001-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: May 18, 2012
• Sequence Number: 1
• Publication Date: February 1, 1987
• Content Type: REPORT

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Directorate of Gonfluentia"
Intelligence
,E i Gf `acs ` '
Cooperation in
East Asia in the 1990s
Prospects for Economic
An Intelligence Assessment
Confidnflid
EA 87-10005
February 1987
Copy 2 0 /
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Directorate of
_ Confidential
Prospects for Economic
Cooperation in
East Asia in the 1990s
This paper was prepared by Office of
East Asian Analysis. Comments and queries are
welcome and may be addressed to the Director,
Regional Issues, OEA
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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Scope Note
Key Judgments
The Potential for East Asian Economic Cooperation
1
Factors Mitigating Against an East Asian Customs Union
3
The Importance of Trade With the United States
4
The Natural Resource Content of Asian Trade
4
Political and Cultural Impediments
Wild Cards
Scenario 1: Increased Political Instability in East Asia
7
Scenario 2: Emerging Japanese Leadership in East Asia
7
Scenario 5: A Return to High Oil Prices
Implications for the United States
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i.onnaen[uai
Prospects for Economic
Cooperation in
East Asia in the 1990s
East Asia new momentum.
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
European countries
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
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
? 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.
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.
development.
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
25X1 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
Figure 2
Share of Total Trade, 1984
With Fast Asia
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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would increase
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
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.
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
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;
trade the same goods with each other as they
did before the union was formed.
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, 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.
Philippines
New Lcaland
Thailand 0
Malaysia
Indonesia I
United States
Japan
llong Kong
South Korea
China
Taiwan
Singapore
Australia
development of regional cooperation
and a resource-rich country with a very low per capita
income, China. Other important factors inhibit the
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
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 of Asian 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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~_onnaennai
Figure 4
Total Trade by East Asian
Countries: Relative Shares in 1984
Philippines 2
Thailand 2
Malaysia 4
Indonesia 5
Australia 7
Singapore 7 --