CHAPTER SIXTEEN

The Pacific Rim and the World Economy

THE NEXT FEW YEARS—the years between now and the year 2000—will decide how Asia’s Pacific Rim will integrate itself into a rapidly changing world economy. Will it be as a number of independent countries and economies fiercely competing with one another? Will it be through a number of regional trade blocs, as the prime minister of Malaysia has suggested? Or will it be as one—and by far the biggest—of the new superblocs such as those into which the West is now organizing itself, each free trade inside but heavily protectionist outside? Whichever way the decision goes, it will profoundly change Asia as well as world economy and world politics. And the decision is being forced on the Asian countries of the Pacific Rim both by developments outside, that is, in the West, and by their own economic growth.

The rapid reshaping of the West into regional superblocs was triggered by the completion of the European Economic Community—arguably the most important economic development of the nineteen eighties. Now North America is in the process of turning itself into a similar superbloc. In fact, both Canada and Mexico are already so firmly integrated into the U.S. economy that it is no longer too important that the North American Free Trade Agreement (that is, the agreement between the governments of the United States, Canada, and Mexico) became law or not. The only question now is whether other Latin American countries—Chile first, then perhaps Argentina, and eventually Brazil—will be pulled into the North American superbloc, the way all of Europe, beginning with Great Britain, was pulled into the European Community.

These superblocs into which the West is organizing its economy are creating the largest and richest free-trade areas the world has ever seen. But at the same time, both the European Union and the North American economic bloc are being inexorably pushed away from free trade with the world outside and toward a new protectionism. They will aggressively push exports, while at the same time fiercely protecting their domestic industries. And the main reason is not economic. It is far more compelling: it is social. The social priority for both Western Europe and the United States will have to be manufacturing jobs in Eastern Europe and Mexico, respectively. The alternative is to be inundated by a mass immigration of unskilled or low-skilled people for whom there are no jobs at home. And as events in Germany (but also in Los Angeles) show only too clearly, such immigration already exceeds what is socially and politically manageable. But the only industries in which such people can possibly be employed in their home countries—whether Slovakia, the Ukraine, or Mexico—are traditional, labor-intensive industries: textiles, toys, footwear, automobiles, steel, shipbuilding, and consumer electronics. These, however, are the very industries on whose exports the growing Asian countries of the Pacific Rim would have to depend—the same industries on whose exports yesterday’s Asian “miracles” based their early growth: Japan in the sixties and seventies, and the “Four Tigers” later on. They are, of course, also the industries on which today’s growth-economies—coastal China, Thailand, and Indonesia—largely expect to base their growth.

But equally as important as what is happening in the West—in fact more important than the events there—is what is happening in Asia itself. China faces enormous problems during the next few years—beginning with the threat of disastrous inflation and reaching all the way to the threat of wrenching political instability. Yet the coastal areas of the country, with 300 million to 400 million competent and ambitious people, should be one of the world’s great economic powers by the year 2000. Per capita production and per capita income will still be those of a “developing” rather than those of a “developed” country. But total industrial production in coastal China might be so large within ten years as to make it a contender for the number two spot in world industry—the place now contested by Japan and Germany.

Like Japan and the Four Tigers, coastal China will be “export-led” in its economic development. But the main export market for its products is politically a domestic market: the 800 million largely rural people in the country’s vast interior, people who are after all quite distinct economically, socially, and culturally from the people of the coastal areas. Like Japan forty years ago, coastal China will not need large investments such as Western Europe needed for its reconstruction after World War II. Coastal China has one of the world’s highest savings rates (if only because there was so little to buy until recently). And now that investment decisions are largely being made by individuals and in the market—rather than by bureaucrats indulging in central planning—capital productivity seems to be quite high (though still lower than it was in Japan in the 1960s and 1970s). Still, coastal China will need enormous amounts of foreign exchange. My guess is that within a few years, the exports coastal China needs to cover its foreign exchange requirements will be larger than the combined exports of all other Pacific Rim countries in Asia, excluding Japan.

But who will take these exports? Practically all of them will be in industries in which there is already substantial overcapacity in the developed world. The developed countries of Pacific Rim Asia, with Singapore in the lead, are rapidly moving out of traditional labor-intensive industries. By the year 2000 even Japan will have stopped exporting automobiles to the West’s developed countries and will instead produce there. But developing countries—especially rapidly developing countries—have no choice. Thailand and Indonesia face pretty much the same problem. But coastal China, because of its huge population and its explosive growth, is the place where the problem will come to a head. Indeed, for the Clinton administration, eliminating the trade deficit with China is already a top priority. And the European Union has no intention at all of letting in Chinese goods that are in competition with the products of depressed European industries.

This calls for something totally new: Asian leadership in trade policy. So far Asian countries have reacted to the trade policies of the developed countries. Even Japan’s trade policy so far has been in large measure skillful exploitation of America’s trade policy (or of the absence of any such thing). Now Asian action is needed. For only Asians can integrate a rapidly developing Asia into the world economy. But where will this leadership be coming from?

1993