Asian Union Plans Attract Japan

 September 24, 2009

The plans for creating an Asian economic community grouping China, ASEAN and Japan have received an important boost recently. During his informal meeting in New York with Chinese president Hu Jintao, the new Japanese premier Mr. Hatoyama has proposed the creation of an East-Asian community which would emulate the model of the European Union. Closer ties between Japan and China should eventually create the nucleus towards which the other East-Asian nations would gravitate economically :

“Whilst recognizing our differences, Japan and China should surpass them and build a relationship based on trust. This would be the basis of the East-Asian community that I would like to create”. (Yukio Hatoyama, quoted by Asahi Shimbun and Courrier International)

The Japanese prime minister’s overtures have been positively received by the Chinese leader, himself in favour of closer economic and political ties with Japan.

At first glance, the new Japanese premier’s plans might seem premature. Not according to new data provided by seasoned economists, such as Neal Soss of Credit Suisse New York. Talking to The New York Times reporters recently, he points out that for some time now the gravity centre of the global economy is shifting towards China. The current crisis, however, marks a turning point. Until now, the United States was always the first to recover from recessions, followed by Europe and then Asia. This year, China has replaced the US as Japan’s biggest trading partner and it is actually leading the world out of the crisis, due to its massive recovery package and the banking credits extended to the business sector and individuals alike .

The corresponding increase in consumption by Chinese businesses and households has also prompted a surge in US exports to China, especially in May, June and July this year. German manufacturers, too, are looking East to increase their exports, less towards the United States. According to Jens Nagel from the Federal Association of German Exporters, “what we lose in exports to the US, we gain in China” (Courrier International).

Nor is this all. The Chinese have not only increased the amount of imports from the US, but continue to finance the huge US budget deficit on which the American recovery depends.

This considerable economic clout would have been unachievable in such a short period of time without the financial crisis, which spurred the Chinese recovery efforts. Little wonder, therefore, that Japan sees its economic future in Asia, which is fast replacing the impoverished US market as its main trading partner.

When all these developments are taken into consideration, the Japanese prime minister’s proposal makes a lot of sense. The two leading actors of the European Union, France and Germany, have gone through two devastating wars before becoming founding partners of the EEC. The bitter enmity between the two nations was in time superseded by strong economic bonds and ever-closer political ties, an outcome surely desired by the Japanese premier in his dealings with China.

However disfunctional the EU might prove at times to be from a political perspective, from an economic point of view it is the great success story of the last few decades. To be sure, the success achieved by the 27 European nations in bridging their differences and working together for economic prosperity represents a good model to follow by the world’s largest emerging trade bloc

The Phnom Penh Agenda

 Overshadowed by increased military  tension in the Korean peninsula, the 17th EU-ASEAN Summit held in Phnom Penh last week has nevertheless achieved a few notable successes.

Before the start of the meeting, Ms Benita Ferrero-Waldner had expressed the view that : “the EU and ASEAN are two successful examples of regional integration in the world” (Phnom Penh Post).

The summit was attended by 40 foreign ministers from the EU countries and ASEAN and had as its main theme the “ASEAN-EU Partnership for Peace, Economic Growth and Development”. Last Thursday, the representatives of the two trade blocs signed two very important documents, aimed at fast-tracking the EU’s accession to the Treaty of Amity and Co-operation (TAC) in Southeast Asia. Representatives also agreed to continue to promote an EU-ASEAN  Free Trade Area (FTA) which, once operational, would facilitate trade and investment between the two blocs.

The ministers present also discussed issues colateral to trade, such as terrorism, human and drugs smuggling, the tense situation in Myanmar and that in the Korean peninsula. Together, they agreed to implement the Phnom Penh Agenda, which mandates that all governments concerned should take between 2009 and 2010 all the necessary steps to facilitate co-operation between members of the two blocs in all fields of endeavour.

The signing of the documents about the EU’s forthcoming accession to the TAC was labelled by the Chairman of the summit, Cambodian Prime Minister Hun Sen as “another significant step forward in ASEAN-EU relations.”

Turkey Divides EU Political Leadership

 June 5, 2009

In the run-up to the European elections, German and French conservatives are pushing for a “privileged partnership” arrangement for Turkey, as opposed to full EU membership. From the West of the continent to the Balkans, the issue of Turkey’s accession is a hot one, given the 16 million Muslims now living within the Union’s borders.

The European Social Democrats are favourable to the idea of full EU membership for Turkey, a stance which has recently infuriated President Sarkozy. The issue is so contentious that following Carl Bildt’s interview in Le Figaro – in which he expressed Sweden’s support for accepting Turkey as a full EU member – the French president has cancelled his planned state visit to Sweden.

Nor is the situation any better in Germany. In a live chat with Spiegel Online, the President of the European Parliament, Conservative Hans-Gert Poettering, has recently declared : “it is my deep belief that — politically, culturally, financially and geographically — it would be too much to have Turkey as a member of the European Union”.(Source: Spiegel Online, 25 May 2009) Whilst Chancellor Merkel also favours a “privileged partnership” for Turkey, her foreign minister, Social Democrat Steinmeier supports the idea of Turkey’s inclusion within the EU.

To be sure, the lack of a common foreign policy and of a bipartisan approach to enlargement is responsible for the current divide affecting the EU’s polity. With the fate of the Lisbon Treaty in doubt, the Union seems unable to reach consensus on major issues such as enlargement and its limits. This creates a situation in which countries like Turkey are given mixed signals, which in turn could lead to confusion, frustration and disappointment, if not outright contempt for our political leadership.

For such political quagmires to be avoided in future, a consensus needs to be reached between the Conservatives and the Social Democrats, before adopting an official position and thrashing it out in the media. Political expediency apart, both sides should understand that some issues cannot be used for electoral purposes without doing serious harm to the EU’s influence abroad and at home. As matters now stand, the only general consensus developing is that the Union is rudderless and paralysed by infighting.

Can ASEAN+1 Emulate EU Integration Experience ? Interview with Professor Bruce McKern

 The current economic tsunami has accelerated integration moves between ASEAN countries, China and other regional powerhouses. The planned launch of Asia’s and the world’s largest trade bloc has prompted me to ask Professor Bruce McKern, a renowned International Management expert, for an interview concerning its prospects in emulating the European Union’s economic integration experience. Professor McKern teaches International Business at the Universities of Sydney and Stanford Graduate School of Business. During the 1980’s, as a Director of Macquarie University’s (Australia) Graduate School of Management, he has accomplished extensive work with and on behalf of ASEAN countries’ academic establishments.

Florian Pantazi: Ever since the 1998 Asian financial crisis, most ASEAN countries and China have intensified their economic integration drive. Do you believe the current crisis might lead to a European-style common market in Asia ?

Bruce McKern: The area already has a significant degree of integration. Intra-regional trade within East Asia was more than 53% of total trade in 2003, which is higher than the proportion within NAFTA. Japan is a major investor within the Asian region. The current crisis will accelerate this trend towards integration, partly because China will be unable to rely as strongly on the United States as it has in the past.

However, I believe this trend will not culminate in a common market or an economic union such as the EU, because of persistent differences between countries in terms of their current stage of development and policies on growth. Countries in the Asian region have already ratified some 37 Free Trade Agreements between themselves and countries outside the region, and China, Japan, Korea and Australia-New Zealand have implemented individual FTAs with ASEAN. I expect to see this patchwork of agreements evolving towards a broader Free Trade Area, rather than in an economic union, as a Free Trade Area will allow individual countries more freedom to set their own economic policies.

FP: In your assessment, will China replace Japan as the main economic powerhouse of Asia in the years ahead ? To what extent would reunification with Taiwan contribute to this ?

BM: China will very soon be a larger economy than Japan, if the current difference in growth rates between the two countries continues. In 2008, China’s GDP at nominal exchange rates was $4.2 trillion whereas Japan’s was $4.8 trillion. While there is reason to expect that China’s growth rate will fall somewhat over the next few years, which could make the catch-up somewhat slower, Japan is also experiencing a severe recession at the moment. So we can expect to see China on an equal footing with Japan as a major power in the region within the next decade. China will be an equal to Japan, not only in terms of its economic weight, but because of its great importance in trade in the region and its growing outward and foreign investment.

Reunification between mainland China and Taiwan would of course make a unified China a larger economic entity. But Taiwan, despite its high standard of living, has a GDP of only $400 billion at nominal exchange rates, only one tenth that of mainland China. So, important as reunification is for China politically, it is not significant in terms of China’s economic importance in the region.

China’s economic power has to be seen in relation to the ASEAN grouping. The ten ASEAN countries have a population of 570 million people, third after China and India and a combined GDP of estimated at around US$1 trillion, second only to China in emerging Asia. However, although their combined weight is substantial, they do not operate as a single bloc and no one country could be seen as a challenger to China. Indonesia, the most populous country in the region after China, has a GDP of $500 billion, not much greater than Taiwan’s.

FP: The ASEAN-plus-one trade bloc should become operational by 2011. Will Japan, South Korea and Taiwan follow suit and apply for membership ? How about Australia ?

BM: Japan and South Korea have been actively discussing closer relationships with the ASEAN bloc and it is likely that they will seek membership. It will be more difficult for Taiwan unless it becomes integrated with mainland China, as China will likely oppose its admission. Australia has already signed a Free Trade Agreement with the ASEAN (along with New Zealand), although it is not formally a member of the group. So enlargement is already under way, and it will no doubt continue, subject to the important caveat that all countries are at present concerned about their trade relationships, and protectionist sentiment could slow down the integration movement.

FP: How realistic are ASEAN politicians’ expectations that lost ASEAN exports to the United States could be compensated by stimulating domestic consumption and intra-ASEAN trade ?

BM: The United States will take some time to recover its economic growth, and it is very likely that US consumers will be more focused on repairing their balance sheets than on the high consumption patterns of recent years. So ASEAN and China will be less able to depend on the US consumer to restore the heady growth of recent years. Likewise, the European Union is not going to provide a replacement either. Nor is Japan. So the only realistic alternatives are to focus on domestic consumption growth and to promote intra-ASEAN trade. China is proposing steps to strengthen domestic infrastructure spending, and this is a possible path for the ASEAN countries. But this shift in spending will rely to a greater extent on government deficits, and will take some time to have an impact on employment and growth. Likewise, intra-ASEAN trade will be affected by the slowdown in all of the regional economies. The best opportunity for the ASEAN countries will be to focus on China and look to expand their exports to that country. There should be opportunities in areas related to infrastructure spending, foodstuffs, raw materials and capital goods.

FP: From a macro-economic point of view, is the planned Asian Currency Unit (ACU) feasible ?

BM: I don’t believe the proposed ACU is a feasible alternative as a reserve currency. A reserve currency requires three things: the backing of a central bank; a mechanism by which other nations can acquire assets denominated in that currency; and unshakeable faith in the issuer of the reserve currency. A common Asian currency unit would require a much higher degree of economic integration than I envisage for Asia for many years, and there is no country in the region that could provide the backing and credibility for the unit. Also, the long string of current account deficits that the United States has run over the last few years have resulted in huge holdings of dollars in the hands of creditor countries and the liquidity expansion which has led in part to our recent troubles. For an ACU to have comparable liquidity would require the Asian countries to run current account deficits, which is opposite to their recent history. Although the Euro is now traded widely, and even held amongst the reserves of central banks, it still has a relatively minor role compared with the US dollar.

FP: Could the United States continue to rely on Asian investment money to finance its budget deficits ?

BM: As American consumers contract their spending over the next few years, we will see the US narrowing its current account deficit with other countries, and that means that the growth of US dollar holdings amongst creditor countries will slow. So there will be a somewhat lesser dependence by the US on other countries to finance its twin deficits. However, it is very likely that the US will continue to look to other countries to hold liquid dollar assets. What I think we will see more of is countries swapping their short-term assets for longer term direct investments in the US.

FP: In your opinion, would the creation of the Asian trade bloc force the US and the EU into adopting protectionist policies ?

There is debate about the impact of free trade agreements on global trade relationships, and most economists argue for multilateral agreements as being a first-best solution. We should recognize that since the creation of the Bretton Woods system there has been enormous progress in trade liberalisation across the globe, with the resultant explosion in international trade and undoubted economic benefits. So the preference is for multilateral agreements, but progress is currently stymied by the difficulties in completing the Doha round.

In the absence of comprehensive agreements, regional trading blocs such as NAFTA, ASEAN and the European Union have been employed to expand the benefits of trade integration between members. Provided that countries within such blocs continue to be open to negotiating bilateral agreements with other countries, the pace of integration we have seen in recent years can continue. More recently we are seeing some agreements between trading blocs and individual countries, such as the recent agreement between ASEAN and the Australia-New Zealand free-trade area. There is no reason why this development should not continue, although more slowly, as the climate for expansion will be less favourable for some time.

The increasing integration we have seen over the last decades between the United States and Asia, and between the EU and Asia, has brought great benefit to all parties, and has resulted in a much higher degree of mutual interdependence than hitherto. It’s unlikely that this will disappear with the formalisation of a larger Asian trading bloc. I believe there is also a strong belief in economic integration amongst the world’s policy makers, and I am hopeful that this will counter calls for protectionism arising from opportunistic politicians.

(C) Florian Pantazi. April 22,2009

Turkish Voters Weary of Erdogan's Style

 March 30, 2009

The Turkish local elections ended on Sunday after a tense, national-like campaign designed by the ruling party AKP’s leaders to win key cities in Kurdish-dominated zones. Although it has won 39 percent of the vote, this is 8 percent short of the projected win envisaged by premier Recep Tayyip Erdogan. Moreover, this is the first time since the 2002 electoral win by AKP that the party has scored so low at the polls. Whilst many Turkish columnists argue that the global crisis is responsible for the poor electoral performance, many others including foreign observers blame it on Erdogan’s increasingly autocratic political style. Most likely, the truth lies somewhere in the middle.

Earlier this month, IPI (International Press Institute) and its affiliate SEEMO (South East Europe Media Organisation) have asked Commissioner Olli Rehn and other EU officials to press the Turkish government to respect freedom of the press and the life and limb of journalists who dare criticise the prime minister or lesser officials. The two organisations claim that Erdogan has publicly called for the boycott of newspapers critical of his performance in office and has slapped a 380 million-euro fine on Mr Dogan’s media empire. A friend-turned-foe, the Turkish media mogul’s journalists had been very critical of Mr Erdogan’s policies of late.

The premier’s critics claim he has all but abandoned his reform agenda. With unemployment in Turkey running at 14 % and with a fall in industrial production of more than 21 %, they had hoped his government would conclude negotiations with the IMF for a 20 billion plus bailout package. These were delayed, however, until yesterday’s election results became known.

The election results should act as a warning for Mr Erdogan if he wishes to continue in office and win the 2011 national ballot. To be sure, neglecting the economy and attacking press people critical of his performance is not the right recipe for success. Says Bilal Cetin, of Vatan newspaper: “The results show that the upward period for the AKP has ended. There are two possible reasons for that. First his choice to pursue tense policies and secondly the economic crisis that he underestimated, as well as increased corruption claims. If it continues, this downward trend poses a serious warning and even risk for the general elections due in spring of 2011. Turkey could return to coalition governments after the 2011 elections.”

In any free and pluralistic society, the press and its people are the guardians of democracy. By attacking them viciously and repeatedly, Mr Erdogan facilitates the return of his country to a time when the military played that role only too willingly – to everyone’s chagrin.

Integrating the Western Balkans into the EU

 March 18, 2009

Last week the Czech prime minister, Mr Topolanek, has lobbied hard for the admission of Croatia in the European Union. Talking to EurActiv, he stated that stopping EU enlargement is a “road to hell”.

According to him, many EU members would favour the admission of Croatia, but delay accession talks with Serbia, Macedonia, Montenegro or Albania. The wisdom of such an enlargement strategy is anybody’s guess.

What Mr Topolanek does not seem to understand is the fact that the European Union needs time to assimilate its new members before committing to further expansion. If we take enlargement history as a guide, we notice that there is a twenty-year interval between the accession of Spain and Portugal (1986) and that of the 12 new Central and South European members (2004-2007). (The admission of Austria, Finland and Sweden during the 90’s has not stretched the Union’s resources, as those countries’ overall performance was equal to or higher than the EU average).

Furthermore, experience shows that the newest members are also the hardest to integrate successfully, given their post-Soviet hangovers and economic or judicial handicaps. They have yet to achieve the level of economic and infrastructure development, or monetary and fiscal discipline enjoyed by older Union countries. This, alas, takes time, it cannot be accomplished within a decade. In fact, at least two full decades are needed before their integration can be called a success and new members could be admitted. As we now stand, even countries like the Czech Republic have problems accepting a higher level of political integration and, on occasion, its leaders mistake the euro for the Soviet ruble.

A better EU strategy could ultimately be to admit all Western Balkan countries in one wave at some later date. After all, most, if not all were formerly part of the now-defunct Yugoslavia. Admitting Croatia but refusing to consider Serbia’s bid to join, could prove politically unwise. Fast-tracking Montenegro’s membership application, on the other hand, will not wipe out organised crime over there anytime soon. Albania should be given the same sporting chance as its neighbours to join the Union, but only after it deals with its serious economic and social troubles. This way, former Yugoslav republics would probably understand that the Union does not reward fratricide, interethnic wars, quite the opposite. And finally, the leaders of newly-admitted countries should avoid embarking on lobbying efforts on behalf of Balkan countries, hoping for economic advantages in the region.

Beijing's Olive Branch Offer

 March 6, 2009

Even as Western economists disagree as to the depth and duration of the current economic crisis, one thing is certain : it fosters closer economic cooperation between China and its Asian neighbours. The crisis might also generate unexpected peace dividends for the region.

Speaking before the National People’s Congress yesterday, the Chinese premier claimed his country was ready “to hold talks on cross-strait political and military issues and create conditions for ending the state of hostility and the conclusion of a peace agreement between the two sides of the Taiwan Strait.” (source: China Post) In a bid to placate Taiwanese critics, premier Wen also hinted that China would consider ways of allowing Taiwan to participate in the activities of international organisations.

The Chinese premier was even more generous with the economic aid package. He promised financial assistance for Taiwanese businesses operating on the mainland and an acceleration of efforts to normalise cross-strait economic relations, culminating with the signing of a comprehensive trade agreement. To be sure, this was welcome news for the Taipei stock exchange, which was up 2.11 per cent following the announcement, whilst the New Taiwan dollar exchange rate rose by 12 cents. This contrasted sharply with the Dow Jones’s 4.1 per cent drop the same day, following news about the troubles affecting US icons General Motors and Citicorp.(source: WSJ)

The fresh peace overtures from Beijing come as the Chinese budget mandates another 15 per cent increase in defence spending for 2009. For Western military analysts, the rise is disquieting. Rightly or wrongly, most intelligence officials see it as leading to a heightening of military tensions in Asia-Pacific. Some also claim that the ultimate aim of increased spending is Asian hegemonism, a charge that Chinese officials reject. The latter cite US sales of sophisticated weapons to Taiwan as justification for the continued rise in the military budget.

Less hawkish analysts, however, consider that the reasons behind the repeated rises in China’s defence budget are Chinese paranoia about NATO’s presence in Afghanistan and its army’s need to modernise antiquated weapons systems.

Ultimately, it may just be that Beijing’s recent peace initiative is simply good old-fashioned Chinese pragmatism at work. As the crisis starts to bite, establishing closer economic ties with Taiwan could prove much more fruitful than continuing with the military or diplomatic confrontations of yesteryear. Time will tell.