[asia-apec 91] Japan's Strategy of Attrition in APEC

[daga]

Japan's Strategy of Attrition in APEC
by Walden Bello*


APEC was originally Japan's idea.  But the Japanese have become, in
Washington's eyes, the wild card in APEC.  Indeed, Washington's relationship
with Japan in APEC is representative of the broader relationship it has with
that country--one that the Americans  see as tremendously important yet one
that they also find quite infuriating.

Washington's Japan Conundrum 

Japan is, on the one hand, Washington's closest Asian ally, serving as the
host of numerous US bases and installations and some 45,000 US troops.  On
the other hand, the US sees it as a potential military rival, one with
tremendous capability in military technology, which can, among other things,
manufacture a nuclear bomb within, at the most, two months after the
political decision to build the weapon has been taken.  

Washington and Wall Street see Japan, with its $4.3 trillion economy, as a
vital market and a valuable source of capital to finance, among other
things, the US budget deficit.  Yet Japan's massive trade surplus with the
US, which stood at nearly $60 billion in 1995, continues to be regarded as
one of America's biggest economic headaches, though it has been decreasing
in recent months.

In APEC as well, the Japanese have behaved in a manner that alternately
disarms and infuriates Washington.  On the one hand, the Japanese
rhetorically endorse the goal of freer trade in the Asia-Pacific region, and
they have continued to refuse to endorse Prime Minister Mohamad Mahathir's
alternative economic grouping, East Asia Economic Caucus, which would
exclude the United States.  But Japan, by working behind the scenes, has, in
Washington's view, been more effective than Mahathir in derailing
Washington's free trade thrust in APEC.  Japan was the main engineer of the
1995 Osaka Declaration, which slowed down the momentum toward converting
APEC into a free trade area by diluting its focus on trade liberalization
and enshrining the principle that liberalization must be flexible,
voluntary, and non-binding.  This moved APEC away from the US's preferred
strategy of binding, comparable, collective liberalization, with fixed
schedules, that appeared to be dominant after the Bogor Summit of 1994.

Why is Japan against the sweeping liberalization that Washington pushes so
hard for in APEC?

Protecting Agriculture and Domestic Business

One reason is, of course, Japan's farmers.  Tokyo knows that, while
Washington this year has avoided pressing the issue of agricultural
liberalization, it is no secret that one of the key reasons it values APEC
is that it would provide a mechanism of getting Japan and the Asian NICs
("newly industrializing countries") to open up their agricultural markets
more widely than they were willing to do so under GATT in order to absorb
government-subsidized US agricultural surpluses.  But the Japanese
government is responding not only to pressure from the Japanese farmers.  It
is also responding to the Japanese populace, who by and large prefer
Japanese to foreign rice, as well as to pressure from a strong environmental
and consumer lobby that says that free trade will make agriculture in Japan
unprofitable, thus submitting the country's food supply almost entirely to
external sources, and subjecting it to  the vagaries of world trade.

Another reason Japan is fearful of the emphasis on liberalization in the
APEC agenda is because it knows that Washington has an extraordinarily
expansive view of liberalization--one that goes beyond the reduction of
tariffs or the elimination of quantitative restrictions.  Tokyo knows that
Washington, in its free trade crusade, would also include so-called
"structural factors" as impediments to to free trade.  As the United States
Trade Representative's (USTR) 1996 report on foreign trade barriers puts it,
"While Japan has reduced its formal tariff rates on imports to very low
levels, invisible, non-tariff barriers--such as non-transparency,
discriminatory standards, and exclusionary business practices--maintain a
business environment protective of domestic companies and restrictive of the
free flow of competitive foreign goods into the Japanese domestic market."  
     
Agreeing to APEC as a medium of liberalization, Tokyo fears, might lead to
that body eventually adopting, under US pressure, such an expanded
definition of trade barriers to include "structural impediments," and thus
provide Washington with a multilateral mechanism to supplement its
unilateralist trade offensive on Japan, which has moved away from a
preoccupation with bringing down tariffs to bringing down "invisible
barriers" to trade.  This fear of an expansive definition of trade barriers
becoming eventually institutionalized in APEC is shared by many other Asian
governments, among them the Korean government, whose campaigns exhorting its
citizens to "Buy Korean" have been denounced by the USTR as "creating a
trade barrier."

Japan's De Facto Trade and Investment Bloc
     
But the main reason that Japan does not want an APEC free trade area to form
is that it is well on the way to creating a de facto trade and investment
bloc--thanks, ironically, to the US.

In 1985, Washington, in a desperate move to erase its trade deficit with
Japan, forced the latter to accept the Plaza Accord, which sharply raised
the value of the yen relative to the dollar, in the hope that this would
dampen American consumers' enthusiasm for Japanese products.  The agreement
did little to relieve America's trade deficit, but, by making production
costly and non-competitive in a global context, it provoked a massive
migration of Japanese capital seeking to lower production costs to cheap
labor sites in East and Southeast Asia.

In the period 1985 to 1994, some $51 billion worth of Japanese investment
swirled through the Asia-Pacific region in one of the most massive and
swiftest movements of capital to the developing world in recent history.  By
the end of the period, Japanese conglomerates had created an impressive
array of complementary manufacturing facilities producing components for one
end product in different parts of ther region.  Toyota, for instance,
produces gasoline engines and stamped parts in Indonesia, steering links and
electrical equipment in Malaysia, transmissions in the Philippines, and
diesel engines, stamped parts, and electrical equipment in Thailand.  The
cars assembled from these components are then exported to Japan, the United
States, or to the Asian market itself.

This "horizontal integration" of the region via component specialization by
subsidiaries of the same conglomerate was accompanied by "vertical
integration," whereby the big electronic and car assemblers were followed to
their new East Asian and Southeast Asian sites by the smaller companies that
supplied them with parts and components.  A third phase of
Japanese-sponsored industrial deepening may be about to begin, consisting of
the migration of selected heavy and chemical industries that provide steel
and petrochemical inputs to the assemblers and their suppliers, as well as
selected knowledge-intensive firms specializing in high tech products and
production processes. 

Japan's current recession has hardly blunted this process; while investments
in Europe and the U.S. have slowed considerably, the movement of capital to
the Asia-Pacific continues at a brisk pace: Japan's investment in the region
rose from $5.9 billion in FY 1991 to $6.4 billion in FY 1993, while its
investment in Europe fell from $9.4 billion to $7.0 billion, and its
investment in the U.S.   from $18.8 to $14.6 billion.  Moreover, in 1993,
profits from Japan's operations in Asia exceeded those from the U.S. for the
first time, an astonishing development when considered against the fact that
as recently as 1980, only two percent of Japan's corporate profits
originated in Asia.

Interestingly enough, then, Japan's recession has accelerated the
regionalization of the Japanese economy, as pressures have built up on more
firms to save on labor costs by moving their operations to China and
Southeast Asia.   This paradoxical phenomenon was captured by one commentary
which asserted that "'the hollowing out' [of Japanese industry] is
tantamount to an increased 'interdependence' [with Asia]."

This process of corporate-driven horizontal and vertical integration has
resulted, over the last decade,  in the creation not of a regional economy
with plural centers but in the regionalization of the Japanese economy.
In the candid words of Hisahiko Okazaki, Japan's former ambassador to
Thailand, "Japan is creating an exclusive Japanese market in which
Asia-Pacific nations are incorporated in the so-called keirestsu
[financial/industrial] bloc system."  The essential relationship between
Japan and Southeast Asia, he contends, is one of trading "captive imports,
such as products from plants in which the Japanese have invested," in return
for "captive exports, such as necessary equipment and materials."     

This de facto trading and investment bloc has been created without formal
free trade agreements.  As a US Congressional Research Service report noted,
discussion on whether a Japanese-dominated regional bloc would arise in
reponse to NAFTA and the European Union "is somewhat immaterial because a de
facto trading bloc is already emerging.  It is arising out of economic
necessity, and, barring draconian barriers, will continue to grow regardless
of whether or not free trade among the various economies develops."  It
concluded, with undisguised envy: "Japan's business executives do not need
free trade to operate."

Free Trade as Geoeconomic Counter-Strategy

For the US, indeed, the figures were a source of alarm.  By the end of 1993,
total Japanese investment in East and Southeast Asia came to over $67
billion, while US investment totalled $40 billion.  In the view of
geoeconomic strategists in Washington, such as APEC advocate and Clinton
adviser Paula Stern, these figures indicate that "US economic power and
influence in East Asia are declining in relative terms" at the same time
that the region is becoming the engine of the world economy.

Tokyo realizes that, in terms of geoeconomics, Washington's agenda in
pushing APEC is to create a bloc uniting the Western and Eastern Pacific to
prevent the Western side from moving in its "natural direction" of becoming
a Japan-centered trade and investment bloc-a trend indicated by the fact
that intra-Asian trade as a proportion of total Asian trade has risen from
an already high 47 per cent in 1990 to 53 per cent in 1995.  By dismantling
the trade and investment practices by which the Japanese have built a trade
and investment area through written rules that facilitate the flow of goods
and capital, Washington, Canberra, Wellington, and Ottawa--the "Anglo-Saxon"
periphery, as some Asian economists have tagged them collectively--hope to
integrate their economies, trade and investment-wise, more solidly to the
dynamic Western wing of the Pacific.

In this sense, APEC is, even in Tokyo's eyes, a brilliant strategy in the
ongoing geoeconomic competition.

Japan and Asia's Economic Elites

The Asian industrial economic elites themselves are ambivalent about the
massive Japanese presence, and complaints about Japanese hesitation to
transfer technology are rife in the region.  Nevertheless, most of them see
themselves as having a more strategic relationship with Japan than the
United States in economic terms.  For one, as Okazaki has noted, "Few
domestic entrepreneurs in Asian countries have had to develop in direct
competition with Japan.  The majority of these companies received capital
and technology from Japan."  In this regard, unlike western companies that
prefer directly owned subsidiaries, Japanese firms have been much more
receptive to joint venture arrangements with Asian firms.  Thus, Japanese
corporate prosperity has translated into benefits for Japan's Asian
corporate appendages (or as the Japanese are fond of saying, "co-prosperity").

Related to this is the fact that whereas the United States and US
corporations demand that host economies accommodate themselves to foreign
investment and foreign trade by rewriting their trade and investment
regimes, the Japanese have largely accommodated and adjusted themselves to
the rules of the host economy, with little complaint.

Third, Asian elites find that they have more negotiating leverage with the
Japanese on a whole host of economic and political issues, compared to
superpower Washington behind whose economic power lies a whole structure of
political and military power that dwarfs Japan's.

Finally and perhaps most important for their subtle closing of ranks against
the United States is the fact that, in varying degrees, the structures of
their economies are similar to Japan.  The "Japanese model" has, in the last
few decades, been universalized into the "Asian way of capitalism."  As in
the case of Japan, protectionism, mercantilism, the use of trade policy to
pursue high-speed industrialization, and other state interventionist tools
have been used by activist Asian governments to create "economic miracles"
or near-miracles from Korea to Malaysia.  And this is the reason that, with
the exception of Singapore and Hong Kong and naive Philippine technocrats,
most of the Asian governments have largely united behind the Japanese
geoeconomic counterstrategy strategy of talking up free trade and free
markets but in practice, blunting and eventually killing the move towards an
APEC free trade area. This strategy of attrition, with its smokescreen of
free trade verbiage and its emphasis on consensus,  is presented, so as to
disarm the "Anglo-Saxon" competition, as the "Asian way."

A Third Way?

In conclusion, it might be noted that to many other Asian groups, including
the NGO's, people's organizations, and many local communities,  a
Japanese-dominated de facto trading and investment bloc is just as
problematic as a US-dominated APEC free trade bloc.  In their view, both are
guided by the pursuit of elite interests that diverge from that of the
majority of the peoples of the region.  Thus, as the Subic Summit
approaches, many groups throughout the region are talking about coming up
with alternative ways of regional cooperation to both APEC and the Japan-NIC
bloc.  Elaboration of these strategies will be the focus of the coming
Manila People's Forum on APEC, just as it was that of the Kyoto NGO Forum in
November 1995.
     
*Dr. Walden Bello is co-director of the Bangkok-based Focus on the Global
South and professor of sociology and public administration at the University
of the Philippines.  He is the author of numerous articles and books on East
Asian economics and politics. 

**This article came out in Focus-on-APEC.  

     

     
     

     
      

          
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