FPRI Dokumen

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Free Trade Areas: Legal Aspects and the

Politics of U.S., PRC and TaiwanParticipation

by Jacques deLisle

November 10, 2006

http://www.fpri.org/pubs/20061110.asia.delisle.freetradeareas

usprctaiwan.html

China and the Politics of FTAs with East Asia

For China, as for the U.S., there are several powerful and durable reasons for pursuing someFTAs and broader integration in a liberal international economic order-and for being wary of FTAs and other liberalization measures-that are not rooted in the simple liberal economic logicof the WTO’s international law of FTAs. Compared to the U.S., the political dimension is evenlarger for Beijing and the commitment to the relatively radical economic liberalism ideals behindFTAs (or of the broader international trade regime) less established and robust.

First, a broadly liberal international trading order that includes China serves the nationaleconomic interests that reform-era Chinese leaders have defined. For nearly thirty years,economic development has been the predominant goal, pursued through market-oriented reformat home and openness to the international economy. Especially in the early years but alsocontinuing today, Beijing has pursued a Chinese variation on the venerable East Asiandevelopment strategy of export-led growth and attendant specialization according to China’sevolving comparative economic advantage. On almost every assessment, trade and foreigninvestment have made disproportionately large contributions to China’s growth. Foreigninvestment-especially in the early years but continuing to some degree today-has been skewedtoward export sectors. Thus, the link between foreign investment liberalization and seeking a

liberal external environment for trade came early-and has stayed long-for reform-era China.

Especially during the final pre-accession period, China’s zealous and protracted pursuit of membership in the WTO-the key global institution for trade liberalization and the treaty-basedregime that defines the fundamental international legal framework for FTAs-reflected the closeconnection between the PRC’s integration in a liberalizing international trade regime anddomestic economic reform. A quite plausible and widespread view-reportedly embraced by noless than then-Premier Zhu Rongji-held that WTO membership and the resulting openness to



international trade and investment would prod necessary reforms of domestic enterprises bysubjecting them to competition from-and transformative partnerships with-foreign firms.

In recent years, the link between trade and investment has added another dimension. As Chinesefirms have heeded the government’s call to "go out," their early and prospective investments

abroad include a significant share in ventures that focus on exporting inputs or goods to China or marketing Chinese-made goods abroad.

Further, Beijing has stressed that there is no significant tension between its interests in the high politics of international security affairs and these low politics of economic integration with theoutside world. From the early days of the reform era, economic development and, thus, theengagement with a liberal international trading order that helped fuel such development was seenas indispensably providing the material preconditions for national strength, including militarymodernization. In more recent years, key PRC foreign policy doctrines such as China’s "peacefulrise" or China’s "new security concept" assert the lasting compatibility between the PRC’sstrategic interests and China’s ongoing integration with the international economy.

Second, on the other hand and as the asymmetrically non-free-trade quality of real-world FTAsfacilitates and reflects, PRC ideology and practice have stopped well short of establishingsignificant FTAs or even providing much support for trade liberalization beyond the extantinternational norms. When seeking WTO entry and since becoming a member, China hasremained largely a "regime taker"-accepting the existing rules, including the basic MFN/NTR principles, and pledging to abide by them. For a time during its protracted pursuit of accession,Beijing had sought to benefit from many of the special exceptions that permit developing or post-socialist transitional countries to employ limited protectionist policies or to benefit fromspecial preferences allowing asymmetrical access to foreign markets. In the end, China receivedfew concessions on this score, consisting mostly of limited phase-in periods for meeting standard

WTO obligations and implementing particular pledges of access to Chinese markets (particularlythrough foreign investment) that were incorporated in China’s protocol of accession.

Since joining the WTO, the PRC’s few departures from mainstream positions have consistedmostly of fairly tepid support for a developing countries’ agenda that has included moderatelyilliberal elements. And Beijing’s creation of FTAs or FTA-like arrangements has been limited,with Closer Economic Partnership Agreements for the already-deeply-integrated Hong Kong andMacao SARs, a significant but long-term effort focusing only on the ASEAN group, morespeculative or rhetorical talk of FTAs with Japan and Korea or with the members of the ShanghaiCooperation Organization, and a complicated discourse over a CEPA or FTA-like arrangementwith Taiwan for which Beijing insists conditions are not yet ripe.



Seperti AS, China juga berada pada posisi yang juga menginginkan perolehan dariilliberalism asimetris dan selektif yang datang dari partner dagang yang tidak seimbang dan lebih besar dalam negosiasi bilateral atau multilateral terbatas yang dihasilkan dalam FTA yangmenjadi fitur umum dalam kerangka ekonomi internasional. ACFTA merupakan diplomasiChina dimana sebelumnya tahap principal perennial dari China dalam hubungan

internasionalnya dan banyak Negara ASEAN mengenai sengketa Laut China Selatan dengan Negara ASEAN.

Rejim WTO dan Politik China dan struktur regulator mengijinkan apa yang disebut semi-

sneaky protectionism, dan divergensi liberalism lebih banyak disbanding (much less) prinsipFTA dalam perdagangan international. Rejim yang berpusat pada WTO kekuatannya relativeterletak pada kebijakan hukum nasional dan kebijakan yang, ketika diimplementasikan, impede

or distort perdagangan dengan cara transgress kewajiban WTO. Mekanisme The WTO’s

formidable formal dispute resolution dan politik multilateral dari non-keanggotaan (compliance)yang menantang farless efektif ketika hambatan perdagangan mengambil banyak overlapping

bentuk yang utama dalam daftar complain mengenai perilaku China. Bentuk tumpang-tindih ini

sulit dideteksi dan berhubungan dengan otoritas pusat, sulit untuk dibuktikan dan diukur, dantidak langsung terhubung pada perdagangan: proteksionisme local; kolaborasi berbayang antaraotoritas local dan pemerintah-pengusaha; keputusan bisnis yang berhubungan dengan perdagangan berdasar pada pertimbangan disamping penawaran senjata atas harga dan kualitas;implementasi yang buruk bagi WTO_conforming atau investasi asing trade-affecting dan aplikasimereka terhadap proyek spesifik; dan kebijakan nilai tukar tetap yang confers keuntungan perdagangan yang tidak jelas fungsinya atas renminbi’s much-disputed degree atas devaluasi;dan selanjutnya.

These overlapping issues include those that are difficult to detect and to attribute to centralauthorities, those that are hard to prove and measure, and those that are not immediately related

to trade: local protectionism; shadowy collaboration between local authorities and government-linked enterprises; trade-affecting business decisions that are based on considerations other thanarm’s-length bargaining over price and quality; poor implementation of WTO-conforming or WTO-mandated national laws and policies; opaque de facto subsidies to state-owned companies;trade-affecting foreign investment rules and their application to specific projects; and a fixedexchange rate policy that confers trade advantages that are an uncertain function of therenminbi’s much-disputed degree of undervaluation; and so on.

Third, as this list of complaints suggests, China’s uneven and ambivalent approach to tradeliberalization generally-and, by extension, the deep if narrow liberalization that each FTA would bring-can be partly explained in terms of something like interest group politics with Chinesecharacteristics. The PRC’s sharply expanded engagement with the generally and increasinglyliberal international trade order has notoriously delivered unevenly distributed benefits (andexpectations of benefits) within China. The well-known, simple story has been one of support for trade liberalization from the "winners"-central and southern coastal provinces, internationallycompetitive sectors (initially, light industry and export-oriented enterprises), ministriesassociated with those sectors and with foreign trade and investment, and elite leaders (includingthe so-called "Shanghai gang") whose political careers were rooted among the winning areas. Itwas, of course, former Shanghai chief Jiang Zemin who, as president and general secretary, led



China through its accession to the WTO, closer economic integration with Hong Kong andTaiwan, the genesis of the ASEAN-China FTA proposal, and the adoption of the "threerepresents" as an ideological embrace of the rising, largely coastal urban and ofteninternationally engaged stratum of entrepreneurs.

On the other side of the story, there has been growing discontent and resistance focusing on thecosts of WTO-mandated changes, trade liberalization more generally, and reform and openingstill more generally among the "losers"-inland and northeastern provinces, unreconstructed stateenterprises, inefficient industrial sectors, ministries associated with them, and an increasinglyrestive laid-off or poorly paid collection of factory workers, dispossessed farmers (their land-userights often lost to development projects), and rural-to-urban economic migrants. Amid growingconcern about resulting threats to political and social stability, President and Party GeneralSecretary Hu Jintao and Premier Wen Jiabao have paid more attention, and given greater voice,to these constituencies’ concerns and views amid the Hu-Wen leadership’s largely successfuldrive to increase its power at the expense of Jiang’s acolytes among the PRC’s top elite.

The implications for Beijing’s approach to FTAs, and trade liberalism more broadly, are morecomplex than the simple story might seem to suggest. Even some of those who have been"winners" in China’s long era of reform and opening might not be interested in, or be sure to benefit from, a series of true FTAs. A coalition in which some members thrive because of limited protectionism would fragment in a shift to a genuine free trade regime. Moreover, FTAs in practice are forged with specific partners. The contemplated FTA with ASEAN would involve partners with a very different profile of complementarities with China’s economy than has beenthe case with the industrialized nations of the West and Northeast Asia that have been mainstaysof China’s export- and foreign investment-led growth strategy to date. The CEPA with HongKong and arrangements that might increase economic integration with Taiwan also wouldchange the relevant composition of China’s trade, though mostly by building upon established

trends. Floated ideas of Japan-Korea-China or SCO FTAs would have still other distributiveeffects (indeed, with especially striking contrasts likely between these two).

More broadly, trade liberalization and related undertakings that are well short of FTAs face potentially growing resistance and opposition. For some initial losers, the WTO era has meantsuccessful adaptation, reduction of influence or simple disappearance. And many initial winnerscontinue to face a bright future. As WTO obligations have come fully on line, and if thecurrently stalled WTO process resumes its prior "mission creep" toward greater liberalization,however, even former "winners" in China face the prospect of becoming "losers" and manylosers may face more severe losses. Newly vulnerable sectors include banking and financialservices (despite a rush of joint venture arrangements with foreign partners and substantialimprovements to domestic entities), agriculture (which is losing prior protection fromcompetition from imports), intellectual property-pirating enterprises (though enforcement andimplementation have lagged) and other sectors that have been the object of specific WTO-relatedliberalization commitments (such as telecommunications and autos as well as financial services).While any prediction of a significant reorientation from the venerable policies of reform andopening is, at best, wildly premature, the rising protests among workers, migrants, and peasantssuggest the possibility that some substance-perhaps most likely in the undramatic form of poor implementation and foot-dragging-may follow the Hu-Wen leadership’s so-far largely rhetorical



shift to concern for the less well-off and an emphasis of equity and "human development" alongside economic development and "GDP-ism."

Fourth and finally, in the cases in which China has engaged the question of FTAs, politicalconsiderations seem undeniably to loom large. And, in China, the phenomena akin to interest

group politics still do relatively little to constrain the leadership’s pursuit of what it sees as thenational interest. The CEPA with Hong Kong is perhaps a symbolically important step in theSAR’s long-evolving and pervasive economic integration with the core PRC area, but it was, byall accounts, of little economic significance, given the impending phase in of FTA-like traderules between the SAR and the PRC under the WTO, given the already-extensive investment presence of Hong Kong firms on the PRC prior to the new openness promised by CEPA, andgiven skepticism about how thoroughly the mainland would implement its CEPA commitments.Tellingly, the CEPA seemed politically timed, coming at a moment when Beijing would want to buoy Hong Kong’s often-troubled post-reversion administration. The possibly empty but stillmuch-played claim that CEPA would boost the economy, along with the signal of politicalsupport CEPA conveyed, arrived amid significant local discontent with Hong Kong’s Beijing-

mandated Chief Executive’s government over the floundering economy and massive protestsagainst civil liberties-threatening legislation to implement a provision of the Hong Kong BasicLaw that Beijing, at least upon reflection, decided it could wait to see implemented. (The MacaoCEPA, like almost everything else Beijing does with respect to Macao, was a delayed copy of the Hong Kong model and of far less economic and political import.)

The most significant PRC FTA proposal to date-the ASEAN-China Free Trade Area, envisionedas a roughly decade-long project-closely entwines politics with its economics. If the adoption-and even the pursuit-of this FTA achieves the intended and expected effect of increasingeconomic ties between China and Southeast Asia states, the FTA can be expectedcorrespondingly to raise China’s political influence in an area that is vital to its ambitions to be a

major power in the region.

Well before such economic effects-or even an FTA agreement-arrive, Beijing’s ACFTA gambit provides a means for the PRC to pursue key political ends. This includes trying to sootheregional states’ fears about the implications for them of China’s rise. The ostensibly economicagenda of the ACFTA provides a focused and concrete way of presenting and selling the"peaceful rise" argument to these suspicious neighbors. The FTA gambit came amid concerted broader efforts by PRC leaders to assure China’s near-neighbors to the south that a more rich and powerful China posed no threat, would remain focused on economic development, wascommitted to a stable and calm environment to facilitate that developmentalist agenda, would notuse its growing clout and leverage to coerce smaller regional states, and would cooperate-and not just compete-with ASEAN states economically.

The relevant background also included the PRC’s having sought to cast itself as a responsibleand, indeed, burden-bearing power in the international economic order and especially towardEast and Southeast Asian states. The most notable move here was the PRC’s pointedly proclaimed decision not to devalue the renminbi amid the massive declines in many regionalcurrencies and despite the threat such falling exchange rates posed to China’s crucial exportsectors. This Beijing-touted past sign of good faith was ripe for packaging as reassurance about



the benign nature of growing economic dependence on China that would come with China’sinexorable ascension and, more rapidly, with an ACFTA. The relevant context also includedChina’s broader pursuit of engagement in multilateral regional fora to address a host of economicand non-economic issues. Significant examples include the various "ASEAN-plus" groupings,the ASEAN Regional Forum, and the multilateral process that produced a code of conduct to

govern the often tension-ridden (and occasionally armed skirmish-producing) issue of competingterritorial claims in the South China Sea.

In this ACFTA (and broader) approach to Southeast Asia, there also are elements of PRC rivalrywith the U.S. and Japan for regional influence, in part using FTAs to counter other dimensions of American and Japanese influence in the region and in part to anticipate the political gains thatWashington and Tokyo have begun to seek through their stepped-up pursuit of FTAs withregional states. Even the purely economic dimensions of an ACFTA have some purchase here. Itserves Beijing’s interests in diversifying its trade dependence away from the often-troublesomeand meddlesome U.S. and its closest regional ally. Beijing’s efforts to woo and reassureSoutheast Asian states surely addresses the concern that those states might otherwise be more

inclined to balance China through strengthened ties with the U.S. or Japan. Notably, Beijing’smoves to sell the ACFTA and closer economic ties more generally to ASEAN states and other regional states have emphasized contrasts with Washington’s unappealing war on terrorismagenda-one that leads to frictions with and potentially trouble for Southeast Asian governments(especially in states with significant Muslim populations) and that distracts from the trade anddevelopment agendas that such governments have preferred to place at the center of their external relations. While the impetus behind anti-Japanese sentiments in China lies elsewhere,recurrent Chinese invocations of the history do resonate with-and may thereby exploit toBeijing’s advantage-lingering resentments in the region over past Japanese aggression andimperialism. Japan’s growing pursuit of FTAs in the region and the U.S.’s foray into a SingaporeFTA provide further defensive or responsive reasons for Beijing to press for the ACFTA and to

oppose Japanese or U.S. FTAs with regional states.

Beijing’s ACFTA strategy may be less promising or fruitful than it appears. Among the several possible reasons for this is the possibility that the political gains are front-loaded while theeconomic costs for China are yet to accrue. That is, the PRC has already been reaping some of the diplomatic benefits from its reassurance, engagement, and economics-over-politics tactics.But, with the details of FTAs still in the works and their implementation still farther off, itremains an unsettled question how much China will be willing to open its economy-and,specifically, vulnerable sectors-to the threats that true FTAs or arrangements close to them will pose, and how disappointed and discontented China’s ACFTA partners will be if they see Chinaas being recalcitrant or unfair in this regard. It is, of course, possible that the Chinese economywill have become sufficiently robust and competitive and the Chinese leadership sufficientlyconfident in the Chinese economy that Beijing will be willing and able to satisfy ACFTA partners’ demands and expectations. But that cannot be securely assumed. The same concernslikely will apply to other Chinese FTA proposals if they go forward.

The appeal to China of a Japan-Korea-China FTA or an SCO FTA is broadly parallel to that of the ACFTA but a good deal less achievable. With Japan and Korea already among China’s keytrading and investment partners, an FTA would have significant economic potential-and peril.



With deepened economic ties (of whatever net or distributive economic impact), China couldreasonably hope for increased political influence. The result could be an acceleration of whatcritics fear could be an asymmetric economic interdependence-driven Finlandization of Japanand Korea. While such worries and any such trilateral FTA remain speculative, Beijing’s effortsin that direction can provide, first, some counter-pressure to what the PRC sees as the tightening

of the U.S.-Japan security relationship (driven in no small part by China’s growing militarycapacity and the poor state of Sino-Japanese relations) and, second, some capitalizing on recentlyincreased Anti-Americanism in South Korea (fueled by generational transition in South Koreaand friction over Washington’s approach to North Korea). Here too, U.S. consideration of anFTA with Korea provides an additional, defensive or responsive element to PRC reasons for floating an FTA that includes the ROK.

An SCO FTA remains a less serious pursuit. Its economic appeal for China is relativelystraightforward. But even talk of it could enhance the economic leg of the broader diplomaticeffort of China to build cooperation among central and northern Asian mainland states (includingespecially Russia, which chafes at its diminished global political influence) to balance and check

U.S. hegemony in a one-superpower world.

The most political aspect of Beijing’s approach to FTAs, however, has lain elsewhere. As in somany areas of China’s foreign policy, the most volatile politics involve Taiwan-here, thequestion of its exclusion from Beijing-centered FTAs and its possible inclusion in an FTA withthe United States.

U.S. FTAs Including, and PRC FTAs Excluding, Taiwan

While calculations of international political interests play a major role in FTA consideration for the U.S. and China (and surely their potential partners and others as well), the political element

looms especially large with respect to Taiwan. There are significant economic interests at stakein potential moves that would bring Taiwan into an FTA or exclude it from one.

Taiwan is, on economic grounds, an obvious FTA candidate. It has a quite open economy, onethat has moved far from its more protectionist and otherwise illiberal past (which included alarge role for state- or party-owned enterprises, poor intellectual property protection and thelike), and one that has the high trade to GDP ratios that one would expect from a small,developed and internationally integrated economy. It is a major trading partner for both Chinaand the U.S. As with FTAs generally, membership in FTAs with major trading partners wouldexpand trade among the partners and increase each partner’s total trade and gains from trade.Failure or refusal to enter into an FTA with Taiwan, of course, would mean foregoing those

effects. While these economic effects likely would not be large (especially in the case of U.S.-Taiwan FTA), that does not distinguish Taiwan-including FTAs from many others that are on thetable (including some currently pursued U.S. FTAs).

Any given FTA, of course, would also skew Taiwan’s trade toward its FTA partners and awayfrom the broader group of fellow WTO members (and, for that matter, non-WTO-member trading partners). A U.S.-Taiwan FTA could be expected to have these typical diverting effectsof a bilateral FTA of increasing each partner’s share in the other’s trade (and, as with many



FTAs, this diversion effect is predicted to be larger than any trade-creation effect). An ACFTAexcluding Taiwan likely would divert some of the ASEAN states’ trade from Taiwan to the PRC(though this would be limited given the very different economies and patterns of traded goodsand services that characterize the entities on opposite sides of the Strait). It would also encouragethe substitution of ASEAN-produced goods for some of China’s imports from Taiwan, cutting

into the growth cross-Strait trade that has become important to Taiwan. The more inchoate ideasof a Japan-Korea-China FTA or SCO FTA-both excluding Taiwan-would have broadly similar effects, with the economic impact for Taiwan, of course, being a good deal more significant withrespect to its important trading partners in Northeast Asia than with the Asian mainland statesother than China.

For Taiwan, even the seemingly economic is fraught with security implications, however. Thegreat concern for Taiwan of a Taiwan-excluding ACFTA is that it will achieve precisely theeconomic dependence-increasing and political ties-promoting effect between the ASEAN statesand China that Beijing apparently and presumably seeks. Already relatively to thoroughlyunsupportive of Taipei on issues of Taiwan’s autonomy and international status, China’s ACFTA

partners would be even more reluctant to roil relations with the PRC and more likely to fear Beijing’s use of economic leverage if they were to be too "soft" on the Taiwan issue. The realfear from Taipei is that an ACFTA would represent another potent tool, firmly rooted in China’s burgeoning international trade prowess, in Beijing’s diplomatic kit for marginalizing the ROC.Much the same would apply if the PRC’s notion of a China-Japan-Korea FTA were to gain muchtraction. The potential political loss for Taiwan would be especially great in the case of Japan,which remains the principal regional state that has the will and the capacity to work to balanceChina and that has recently and controversially articulated an interest in Taiwan’s security. AnSCO FTA, of course, would be less significant, given the SCO states’ more limited economicrelations with and lack of diplomatic support for Taiwan.

Here there is perhaps some minor solace for Taiwan in the ambivalence of Chinese strategy. Tothe extent that the economics of an ACFTA (or a China-Japan-Korea FTA or even perhaps anSCO FTA) serves Beijing’s agenda of isolating Taiwan politically (and perhaps marginallyweakening it economically), it is hard to square with the PRC’s parallel effort to increaseTaiwan’s economic dependence on the mainland and, thus, its political pliability onunification/independence issues. True, there is no logical contradiction between the floatedTaiwan-excluding ACFTA and an even more hypothetical cross-Strait FTA or CEPA. Incombination, they would pull consistently in the direction of turning Taiwan’s trade ties andeconomic interdependence away from Southeast Asia and toward the mainland. (Notably, theTaiwan government’s "go south" investment policy, indeed, had sought to promote trade andinvestment redirection from the mainland and toward ASEAN and other regional states tocounter precisely this trend.) Moreover, a cross-Strait FTA would have another significant political benefit for Beijing: it likely would take PRC-Taiwan trade relations out of the ordinaryWTO framework, wherein Taiwan has sought, and Beijing has sought to avoid, occasions tomake use of consultation and dispute resolution mechanisms that would cast the two as equal parties.

Nonetheless, the politics would be exceedingly messy. China’s then-minister of MOFTEC, ShiGuangsheng (and others) have declared that circumstances are not yet ripe for a cross-Strait free



trade zone, partly to press Taiwan on other interim measures (including the three links), partlysurely in recognition of the Taiwanese administration’s clearly expressed rejection of the idea.Whatever prospect there might be for selling a cross-Strait FTA or CEPA in Taiwan (or, morerealistically, more incremental moves to reduce trade barriers and increase economicintegration), those are surely diminished by the backdrop of a pointedly Taiwan-shunning

ACFTA and the suspicions about Beijing’s intent that that engenders. At the same time,Beijing’s urgings of ACFTA governments (and governments of other East Asian states,including Japan) to eschew political connections with or signs of support for Taiwan-in partthrough arrangements that include foregoing what might be appealing economic gains that mightcome from an FTA that extended Taiwan-would risk ringing a bit hollow if the PRC established(or even pursued or purported to pursue) an FTA with Taiwan. Broadly similar dynamics applyto any China-Japan-Korea FTA and, to a lesser extent, to an SCO FTA.

The politics of a U.S.-Taiwan FTA are simpler fare. For Taiwan, U.S. willingness to enter intoan FTA would be an affirmation of the broader U.S. commitment to Taiwan. President Chen andothers have phrased it as such. So too have congressional supporters of a U.S.-Taiwan FTA.

While it of course formally implies nothing about statehood or state-like status, Taiwan’s statusas a partner in an FTA-or even being under serious contemplation as an FTA partner-wouldimply standing with the U.S. akin to that of Canada, Mexico, Singapore, and Korea. Chinesesources have made this basic argument, suggesting that an FTA would be a step along the road toTaiwan independence. Moreover, Taiwanese sources and American supporters have played thedemocracy and human rights card, linking a U.S.-Taiwan FTA to support for those values, asthey are embodied in Taiwan-and thereby invoking principles that also are relevant to claimingstate- or state-like status in the post-Cold War international order.

For precisely such reasons, Beijing does not welcome the prospect and has (albeit a bit morequietly) been no less chilly to the prospect U.S.-Taiwan FTA than it was to the more easily

deterred prospects of a Japan-Taiwan or Singapore-Taiwan FTA . Partly because much of Washington does not want such diplomatic frictions with Beijing, the Taiwan FTA faces anuphill fight and, at best, a place in the queue behind others. The steepness of the hill is further increased by the waning of the influence of the Taiwan caucus and Taiwan lobbying in Congressand by the increasing tendency in Washington to regard Taiwan as a subordinate issue in the broader universe of U.S.-PRC relations.

Here, the problem is largely structural, reflecting the rising relative power and importance of China. But, in additions, some of the tactics that Taiwan and its friends in Washington have pursued have contributed to the problem. This is not to say that those tactics are clearly wrong-headed. Rather, those who have used them have suffered from their encounter with a commonconundrum that faces ostensibly status-unrelated moves from Taipei. The argument that aTaiwan-U.S. FTA is purely about trade and economics (and that the impediments to it are merelyeconomic ones, such as the complaints about Taiwanese IPR protection, implementation of WTOcommitments and the like) inevitably-and rightly-sounds disingenuous. Because there isundeniably a component that is political and that does have implications for Taiwan’sinternational status and standing, there is an understandable temptation to engage in argumentsthat address that-making the claims about security commitments and recognition of Taiwan’sdemocracy or even not subjecting Taiwan to the indignity of a "CEPA" label rather than the



ordinary "FTA" label for any agreement. Indeed, it may be almost necessary to do so, givenTaiwan’s economic unimportance relative to the PRC and given that Beijing has politicized theissue. But once these political elements are fully on the table, the useful claim that an FTA isreally just about economic interests and principles becomes unsustainable and Taiwan and itsWashington allies are problematically cast in the role of engaging in "status politics" and being at

fault in any resulting roiling of cross-Strait and U.S.-PRC relations.

There are, of course, genuine international economic issues and domestic interest group issuesfor the U.S. with a Taiwan FTA. Some are relatively generic to FTAs and some are specific tothe Taiwan case (including concerns over IPR, telecommunications, agriculture and pharmaceuticals). But what remains most distinctive about the case of a possible U.S. FTA withTaiwan is that, like all matters involving Taiwan, it is deeply entangled with the politics of theSino-American bilateral relationship and the politics of Taiwan’s international status as a state or state-like entity.

Power in East Asia: A Conference ReportBy Jacques deLisle, rapporteur

March 2010

Jacques deLisle is Director of FPRI’s Asia Program and the Stephen A. Cozen Professor of Lawand Director of the Center for East Asian Studies at the University of Pennsylvania.

On January 25, 2010, FPRI held a conference, co-sponsored with the Reserve OfficersAssociation, examining power in East Asia and shifts in its distribution and meaning. This report

summarizes that conference. Video of the conference is available atwww.fpri.org/research/asia/powereastasia. Conference papers will appear in Orbis.

Who has power, how much and what kind have become pressing questions for foreign policy inand toward East Asia. The relative importance of various types of power—hard, soft, smart and perhaps others—and the relationships among them have become significant concerns amonginternational relations scholars and foreign policymakers. Perceptions of a relative decline inU.S. power and a precipitous fall in the U.S.’s international image have prompted debates abouttheir implications for the U.S.’s long-term role and influence in East Asia and the prospects for Obama administration moves that some characterize as re-engagement with the region and thatseek to rebuild the U.S.’s stature and reputation. China’s sustained rapid economic growth has

been underwriting an ambitious increase in military capabilities. The PRC’s economic successand Chinese diplomatic initiatives that have combined a “charm offensive” with sharp oppositionto U.S. and European “interference” in the sovereign affairs of other states have prompted claims —albeit much-disputed ones—that China enjoys formidable soft power.

Assessments of how much clout Japan holds as the region’s third-greatest power and how it willwield its influence have been complicated by Japan’s ongoing economic difficulties and theadvent of a Democratic Party of Japan-led government. Still-unresolved issues in security

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relations with the U.S., chronic crises over North Korea’s weapons programs, and perennialquestions about the limits imposed by the pacifist provision in Japan’s constitution add to theuncertainty. For East Asia’s smaller actors, including the two Koreas, Mongolia and Taiwan, power and foreign policy involve other, distinctive challenges. Constrained by their comparatively modest power resources, they face difficulties and opportunities in cultivating

alternative sources of security and influence while maneuvering within space created by rivalryand stability among greater powers.

Rising China and Implications for the U.S. and East Asia

Robert Ross (Boston College) argued that, while three decades of double-digit growth havesharply increased China’s economic power and military capability, China’s ascension in EastAsia and China’s accretion of influence—relative to the U.S.—has been uneven across theregion. China’s gains have been greatest on the Korean peninsula. By the beginning of the 1990s,the collapse of the Soviet Union and China’s expanding economic and military resourcestransformed North Korea into a secure Chinese buffer state, as well as an often-troubling

dependency. Over a longer period, Chinese power and influence over South Korea has developedthrough: burgeoning trade and investment relations; professionalization and other major improvements in PLA ground forces; and Seoul’s adjustment to greater prospects for Koreanunification and its transformative implications for China-Korea relations. Among the visibleindications are South Korea’s backing down in a potential trade war with China in 2000 and,more significantly, Seoul’s shift toward a North Korea policy and security policy more generally(including U.S. troop deployment levels) that depart from prior patterns of one-sided alliance andcooperation with the United States. China’s relative rise has compelled South Korea toaccommodate China’s interest in avoiding threats to its security form great power capabilities onthe peninsula. Seoul also increasingly seeks security through good relations with China. Still,South Korea will remain a U.S. security partner, limiting China’s gains.

China made substantial gains in cross-Strait relations during the 2000s. This reflected themainland’s absolute and relative rise as a trade and investment partner for Taiwan. That trendwas enhanced by Beijing’s ability to use its international economic and political clout to limitTaiwan’s cultivation of—and Taiwan’s enjoyment of reliable support from—other economic partners. It also reflects a long-growing shift in the military balance, born of PRC missiledeployments targeting Taiwan, broader PLA modernization and the U.S.’s declining ability to protect the island from a devastating initial Chinese assault. Among the reflections of thesechanges are: the Ma Ying-jeou administration’s pursuit of a free trade area-like agreement withBeijing; Taiwan’s declining interest in purchasing weapons systems from the U.S.; Taiwan’sshift to an asymmetric strategy of defense (eschewing the increasingly futile attempt to meet

rising PLA capabilities); and the political demise of Taiwan’s independence movement. Yet,more than on the Korean peninsula, across the Taiwan Strait, China’s gains remain limited.Although China’s overwhelming economic leverage may provide a partial substitute, China’sability to coerce Taiwan through military threat is still comparatively modest because an air andsea assault on Taiwan would be extremely difficult and likely would bring a very costly conflictwith the United States. Beijing’s increased leverage has moved Taiwan toward a policy of greater accommodation (giving Beijing greater confidence and, in turn, patience in pursuit of its



reunification agenda), Taiwan remains—and will remain—committed to buying arms from theU.S. and preserving U.S. security support.

In maritime East Asia, China’s rise has been more limited and more lop-sidedly economic. For Japan and the ASEAN states, China fast-growing and geographically proximate economy has

meant a vast increase in the importance of China, relative to the U.S., as a trade and investment partner. The ASEAN-China Free Trade Agreement and talk of an East Asian free trade areareflect and reinforce these trends. On the military side, China has enjoyed no such ascension.Although the PLA has developed greater capacity to deny access to, and inflict damage on, U.S.forces, China is still far short of the force projection capability needed to erode U.S. military preeminence in maritime East Asia. Japan and several states in Southeast Asia have beenincreasing cooperation or consolidating security relations with the U.S. even as their economicentanglement with China has spiraled upward.

Commentators Drew Thompson (Nixon Center) and Robert Sutter (Georgetown) and panelchair Jacques deLisle (FPRI / University of Pennsylvania) agreed with much of Ross’s analysis

but argued that Ross’s account was overly deterministic and could overestimate China’s power and influence. First, China’s economic strength may be less than it appears. Although Chinaseems to have weathered the global economic crisis well (so well that its apparent success hasfueled new self-confidence and assertiveness in Beijing’s foreign policy), potentially seriousweaknesses persist in China’s economy and growth model. China’s trade relations with East Asiahave grown rapidly, but they remain a relatively small percentage of most regional states’ trade.For many of these states, the focus is exports, including relatively high-end goods, the marketsfor which are concentrated in the U.S., Europe and other developed economies. Much of China’sexport juggernaut relies on products that are assembled from imported components. Thus, rawtrade numbers may overstate China’s trade prowess and the political influence it creates. Wary of dependence that breeds vulnerability, many East Asian states pursue trade diversification and

balancing strategies, as illustrated by Korea’s and Taiwan’s pursuit of free trade agreements withthe United States. China’s international investment relations remain dominated by inboundinvestments while many of its outbound investments focus on natural resources. The influenceafforded by outbound investment in higher value-added industries and less enclave-like sectors —characteristic of U.S. and Japanese investment in East Asia—is accordingly lacking for China.Panelists differed about the credibility of potential Chinese threats to hold foreign investmenthostage and the leverage such threats could generate. Some argued that China’s investment policies and practices manifested and supported Beijing’s interests in not disrupting internationaleconomic relations and the status quo. Some added that China’s outbound investment has been amixed blessing for Beijing’s foreign policy. It has produced: popular resentment in hostcountries; conflicts between the regime’s agenda and large Chinese state-linked enterprises’interests abroad; and the diplomatic headaches that come with new vulnerability for Chinesenationals and assets overseas.

Second, some participants cautioned against overestimating China’s military capability. They pointed to the PLA’s relative technological backwardness (despite impressive recent gains) and persisting ambiguities in Chinese civil-military relations that may limit the leadership’s ability tomake effective use of China’s augmented hard power.



Third, panelists argued that politics, policy choices and political will matter more than Ross’scapability-focused and generally zero-sum account allowed. Chinese policy’s emphasis ondomestic stability and economic development limits China’s use of its power to challenge theUnited States. China’s increased capacity, including naval power, was partly compatible withU.S. interests in sharing burdens of addressing natural disasters, piracy and other problems. U.S.

accommodation of China was partly a matter of policy choice, and not simply an inexorable power shift. This could see significant reversal if Beijing proved uncooperative in dealing withissues ranging from North Korea to the global economy to climate change. The U.S.’s ability tocounterbalance China’s rise has improved with recent shifts in U.S. foreign policy that havereemphasized comprehensive and positive relations with other states in the region. AlthoughChina has shown impressive and improving diplomatic skills, mistrust of Beijing’s aims, China’sincreasingly aggressive nationalism, persisting territorial disputes and questions left over fromthe region’s bloody recent history limit China’s potential for regional influence. East Asian states —in which governments enjoy considerable autonomy from society–have much policydiscretion, and inclination, to balance or hedge against a rising China (and not just to bandwagonwith it), or to improve relations simultaneously with both the U.S. and China. These tendencies

are reinforced in many of these states by electorates who are wary of China’s rise and itsimplications. Regional governments seek a stable external environment that they know remainsdependent on a robust U.S. economic and military presence. Ross countered that an analysis of power in East Asia must remain focused on relative capacity, and thus was appropriately zero-sum, because political intentions were often opaque and always vulnerable to change.

Japan: a Problematic Fascination with Soft Power

Thomas Berger (Boston University) argued that Japanese foreign policy has been fascinatedwith soft power, with mixed and increasingly troubled results. This focus is hardly surprising,given the limits on Japanese military power that have been an enduring legacy of the Second

World War and the relatively robust soft power resources that Japan has enjoyed in recentdecades. The idea of soft power in Japanese foreign policy has made a virtue of necessity, providing a rationale for Japan’s inability or unwillingness to devote more resources todeveloping hard power. It neatly dovetailed with prevalent notions in Japan of “comprehensivenational power” and “Japan as a trading power.” It seized upon the “soft power” concept thatJoseph Nye formulated to influence U.S. foreign policy debates and that gained salience for Japan as Nye took a role in Clinton administration policy toward Japan and the region.

Berger concluded that, while soft power is a flawed concept, Japanese foreign policy’s use of itdid enjoy successes. Those, however, have been limited and more recently, Japan’s soft power resources have seriously declined. Berger assessed three aspects: First, Japan’s economic success

and the economic model that seemed to underpin it were long major sources of soft power,eliciting admiration and emulation throughout the region. This power waned in the 1990s and beyond as Japan’s share of the regional economy, trade and outbound investment fell sharply andas the Asian Financial Crisis and the Japanese economy’s lost decade tarnished the Japan-basedEast Asian Model. Declining Japanese development assistance and increasingly prosperousregional states’ lessened dependence on Japanese development assistance further eroded Tokyo’scapabilities. Although the Hatoyama government has favored soft power and, rapprochement



with China and creating an East Asia Community, prospects for success are diminished byJapan’s decline.

Second, and looking to European examples, Japan has engaged international institutions as anarena where states’ interests can be reshaped as well as reflected and where soft power can be

generated and deployed. Post-Cold War developments in East Asia have offered increased hopefor such an approach, with the relative flourishing of APEC, various ASEAN-plus groupings, theASEAN Regional Forum and a prospective East Asian Community. There is significant supportin Japan for a policy of building regional institutions. Yet, the contrasts with Europe are dauntingand discouraging: East Asian elites and publics remain more post-colonial, more nationalistic,more protective of sovereignty, more committed to norms of non-interference and less post-Westphalian; the East Asian region is more internally diverse culturally, economically and politically; and East Asian institution-building has been more multi-cephalic, lacking theEuropean Union’s and European Community’s Franco-German anchor internally and clear pro-U.S. and anti-Soviet alliance structure externally.

Third, Japan’s broader national image in East Asia has been a significant source of both soft power and trouble. At first, in the Meiji era, Japan emerged as an envied and imitated model of material and popular culture and Asian modernity. The pattern continued into Japan’s imperial period when Japan embraced a “civilizing mission” toward other peoples in Asia. But other aspects of Japanese imperial rule in Northeast Asia and Japanese actions in East and SoutheastAsia during the Second World War severely damaged this soft power, creating “history problems” that still plague Japanese foreign policy and fostering congenitally anti-Japanesenationalism in Korea and China. The Postwar period brought a partial recovery as Japanredefined its image as a “peace nation,” a democracy and a newly pacifist victim of the horrorsof nuclear warfare. While this recasting worked well in Japanese domestic politics and boostedJapan’s stature in the West, it worked less well in East Asia, where diverse and formidable

obstacles loomed: states’ strategic calculations often weighed against close association withJapan; democratization in Korea, Taiwan and elsewhere closed the soft power gap andsometimes reinvigorated anti-Japanese nationalism; receptivity to emergent international humanrights norms legitimated East Asians’ calls for revisiting the history question; and deepeningregional economic integration gave new force to demands for reparations for Japan’s pastwrongs.

Berger concluded that it is sensible for Japan to continue to promote and deploy soft power, butthat Japanese policymakers must take care not to overestimate its impact and to address liabilities(including the history questions and neighboring states’ nationalism) that remain large andintractable impediments. U.S. policy similarly should not overestimate the likely consequencesof Japan’s recent fascination with an East Asian community and rapprochement with China.While those pursuits might produce striking symbolic moments (such as a visit by JapanesePrime Minister Hatoyama to Nanjing or, more incongruously, Chinese President Hu Jintao toHiroshima), the challenges for U.S. policy were just as likely to come from failures, as fromsuccess, of any Japanese attempt to turn more to Asia. U.S. policy must also cope with the fact of Japan’s continuing belief in the efficacy and importance of soft power. Long-running predictionsthat Japan is reluctantly becoming realist in its approach to foreign policy have provedexaggerated. They have been dealt a further setback with the DPJ’s ascension to power (the



significance of which has been widely overstated) and the broader democratization of foreign policymaking in a society that is sympathetic to soft power views.

Michael Auslin (American Enterprise Institute) argued that Japan’s soft power and its utility inforeign policy are very limited. Japan’s formidable—but declining—economic prowess

translated poorly into usable influence. Japan’s participation in numerous internationalinstitutions had not conferred a leadership role in those institutions, which lacked the stature andsignificance of their European counterparts and which served more to restrain than to enablerelatively powerful states in the region. In the nineteenth and early twentieth centuries, the statusand influence of Japanese high culture arguably enhanced Japan’s power, but that did little towin converts to Japan’s aims during the Second World War and the postwar impact of Japanese popular culture has done little to help Japan pursue its foreign policy aims. A policy of creatingsoft power was even more difficult than a policy of using soft power. Japanese belief in itsefficacy has been declining since its heyday in the 1990s.

Paul Giarra (Global Strategies and Transformation) saw soft power as an important element in

Japan’s international stature and the U.S.-Japan alliance, but he focused on dangers posed byinadequate attention to hard power issues by both partners. Japan’s preference for soft power approaches and constitutional and broader political constraints impose significant limits onJapan’s development of military capabilities and missions, but those restrictions are notimmutable. U.S. policy increasingly has fallen short in ways that undermine the effectiveness of the bilateral alliance that is vital for the regional security infrastructure. Washington has failed toarticulate a strategic vision to guide the alliance, relying on empty platitudes (for example, thatthe U.S.-Japan alliance is “the most important” in East Asia), focusing on small issues (such asthe controversy over relocating U.S. forces stationed at Futenma Base in Okinawa), andunderemphasizing the mundane but vital issues of cooperation, experience and trust atoperational and interagency levels. Giarra expressed confidence that if and when Washington

turned to the task of formulating a strategic approach, it would choose an appropriate one thatTokyo would support. Several panelists agreed that hope for more effective bilateral securitycooperation stemmed mostly from hard power factors: the deterrent power of Japan’s substantialand high-tech (albeit nonnuclear) military capabilities; Japan’s strategic location (along withother U.S. friends in the region) astride the routes of potential Chinese expansion that couldthreaten U.S. interests; and the alliance-reinforcing power of North Korean threats and longer term challenges posed by China.

Smaller States: Finding Room for Maneuver and Cultivating

Alternative Sources of Power

David Kang (University of Southern California), Alan Wachman (Fletcher School, TuftsUniversity) and commentators Nancy Bernkopf Tucker (Georgetown University) and Katy

Kondgan Oh (Institute for Defense Analyses) addressed the constraints, opportunities andstrategies of smaller states in East Asia.

Participants generally agreed the use of military force was unlikely, even in long-standing potential flashpoints such as the Taiwan Strait and the Korean Peninsula, but that traditionalforms of power remained important features in East Asian international relations. Smaller states



in the region must operate in the shadow of the U.S., China and, in some cases, Japan andRussia. But they do not live entirely in a Thucydidean world where the weak suffer what theymust while the strong do what they can. The distribution of power, alignments and conflicts of interest, and relations among the region’s greater powers give smaller states some security androom for maneuver. They have protected their autonomy and enhanced their influence by

exploiting this room for maneuver. They have coped with a rising China through expandingeconomic ties, accommodating China’s security interests and hedging against Chinese power through maintaining or strengthening security and “values” ties with the United States. Theyhave cultivated, with varying success, non-traditional types of power.

On the Korean peninsula, the interests and agendas of the U.S., China and, to some extent, Japanhave created a security environment that generally supports a tense status quo or, at least, resistssudden, radical changes in the existing order. Within this context, Kang argued, South Korea hasderived, and sought to develop, “international social status” as a source of power. Generallyunderappreciated in international relations discourse, this type of power is complex and difficultto cultivate. Compared to other, more conventional forms of power, it is more purely given by

other actors in the international system, is inherently hierarchical, and is especially dependent ona state’s ability to articulate its claim to such power. South Korea has been strikingly focused onits international social status, as is reflected in near-obsessive discussions of its “national brand,”zeal for public diplomacy and cultural ambassadors, and concern over image-damagingembarrassments (such as globally televised fistfights erupting in the legislature). Such concernsare superficial reflections of South Korea’s more diffuse anxiety about its international socialstatus and where it fits in East Asia’s frustratingly unsettled status hierarchy.

South Korea’s quest for international social status and its articulation of a claim to high statushave had mixed records. South Korea has tapped into and benefited from its successes as amarket economy, consolidated democracy, and, recently, cooperator on climate change issues. In

more hard power-related aspects of international social status, however, South Koreanconceptions have vacillated among “balancing power,” “middle power” and “leader on on-security issues.” International social status questions also have pervaded and complicated key bilateral relationships. Controversies over U.S. military deployment and command cooperation,U.S. slowness in passing the Korea-U.S. Free Trade Agreement, and Washington’s and Seoul’ssometimes differing approaches to the North Korean problem all have implications—oftenrankling ones—for South Korea’s status vis-à-vis the United States. In dealing with Japan,genuine desires for a fresh start have foundered on the history question and unresolved territorialclaims. Both are largely questions about who can claim the higher status: the conflict is over which side’s version of the story will be the mutually accepted one. Rapidly growing economicand social ties with China (including students studying abroad) have complicated South Korea’squest for status, shifting Korean perspectives somewhat from the U.S. and toward China. Thishas eroded somewhat the alignment with the U.S. that has been South Korea’s principal claim tostatus (particularly its association with global market democracy norms).

For North Korea, a fundamental goal has been international social status in the minimal form of acceptance as a nation state (with the greater claim to security and a right to survival such statusimplies). Many of North Korea’s outlandish or provocative actions reflect this quest for status:museums that display artifacts memorializing other states’ acceptance of North Korea’s state



status; ceremonies that with great pomp and cost assert or reflect such claims; and the convictionand sentencing of two U.S. journalists for entering North Korea illegally. The last of theseimplicitly asserted North Korea’s claim to be a state with borders to be respected like those of other states and with sovereign authority to adopt and apply rules to punish those who enter without permission. Efforts to cast former President Clinton’s trip to secure their release as a

near-head-of-state visit showed the same mentality. This quest for status has been so importantfor North Korea that Pyongyang has been willing to incur significant economic costs of isolation, painful to its impoverished economy, in order to make its points about status.

Oh was skeptical about whether international social status was a measurable or coherent concept,and whether national brand or image or culture meaningfully enhanced South Korea’sinternational security and influence. She argued for a sharper distinction between the types of status the two Koreas sought, concluding that the North’s quest for survival was fundamentallydifferent from the South’s quest for some form of regional leadership role greater than the one itseconomic or military power would confer.

Wachman analyzed Mongolia’s ability to maintain autonomy despite its seemingly dire positionas a small state surrounded by two great powers. Mongolia has benefited from factors beyond itscontrol, including the space created by the distribution of power among China, Russia and theU.S. in its immediate region, the relatively good and stable relations among those three great powers during the Post-Cold War period, and the significant difficulty—also evident elsewherein East Asia—that China faces in using its expanded economic power to political ends.Mongolia’s success also comes from its own wise policy. It has managed through carefuldiplomacy to keep both of its giant neighbors reasonably content. More strikingly, it has balanced both by making the United States a “third neighbor.” Mongolia has achieved this, andimproved its stature, by stressing its commitment to and realization of widely shared democraticvalues and by becoming an active, cooperative participant in the international system.

Several participants, including Wachman, Tucker and deLisle, pointed to a broadly similar pattern for Taiwan. Despite its vulnerable location close to a great power that seeks to reassertsovereignty over the island, Taiwan has enjoyed relatively high levels of security and autonomy.It has benefited from a hard power balance between China and the U.S. that has not yet shifteddecisively against the U.S. and from Japan’s stake—episodically and unevenly articulated—insupporting the status quo. Taiwan also has benefited from generally positive and stable U.S.-China relations over three decades. (Tellingly, moments of relatively high friction in U.S.-Chinarelations generally have not been good for Taiwan.) Taiwan’s success has depended on finding ashifting middle path between acquiescing in Beijing’s pressure for closer integration andasserting independence to an extent that crosses Beijing’s red line. (Significantly, the mostdangerous moments for Taiwan have come when Beijing has seen, or claimed, that Taiwan hasapproached that line.) Taiwan’s success has been no less dependent on its democratictransformation, which has become a principal basis for U.S. support and a key point of contrastwith the mainland. (Conversely, periodic signs of weakness or instability in Taiwan’s democraticinstitutions and processes have weakened Taiwan’s security.) Finally, because of Beijing’ssovereignty claims, Taiwan has had to focus on asserting state or state-like status—a quest for formal stature and acceptance that, among other entities in the region, only North Korea has hadto undertake.



Tucker addressed threats to this status quo, including: concern in Taiwan that the U.S. mightacquiesce in its Finlandization as China rises; belief or speculation in China that the U.S. is indecline and thus decreasingly able and willing to support the status quo; the risk of significantlyrising friction in U.S.-PRC relations, particularly over the issue of arms sales to Taiwan; andTaiwan’s declining ability (or skill) in influencing U.S. policy toward Taiwan and China. Tucker

then assessed the implications, especially for U.S. interests, of a fundamental shift in Taiwan’sstatus toward reintegration with the mainland. On the positive side, the risk of military conflict between two nuclear-armed great powers would decline. A perennial source of tension in U.S.-China relations would be greatly reduced. Chinese nationalism, long fueled by the Taiwan issue,might become less virulent. U.S. security policy and commitments in the region could focus onother challenges. U.S. relations with allies and others in the region could improve with the easingof fears of a U.S.-China conflict and related hard choices and threatened interests for regionalstates. A more closely integrated Taiwan could be a stronger catalyst for democratic andliberalizing change inside China, which generally would serve U.S. aims and interests.

On the other hand, likely negative consequences of China’s gaining control, significant

dominion, or much greater influence over Taiwan are serious. U.S.-Taiwan security cooperationwould decline sharply, whether because the U.S. (and perhaps Taiwan) would see cooperation asno longer necessary given a radical reduction in the risk of a cross-Strait clash, or because theU.S. would see continued cooperation as too risky given the prospect that military technologyand other secrets would pass to China. The U.S. would lose the strategic and intelligencegathering advantages that Taiwan has provided against the main potential rival in the region.China would be able to redirect military resources that would no longer be needed for a Taiwanscenario, and could redeploy them in ways adverse to U.S. strategic interests. Greater economicintegration of Taiwan could further enhance China’s economic power and the resources availablefor building military capabilities. Fundamental changes in the cross-Strait status quo, withoutforce and with U.S. acquiescence, would accelerate China’s rising confidence, and arrogance, in

foreign policy and would sew doubts among the U.S.’s East Asian allies and friends, perhapseven driving Japan to develop nuclear arms. Such developments could lead to miscalculation andincreased regional instability. Prospects for vibrant and stable liberal democracy would dim inTaiwan, whether due to PRC pressure, Taiwanese self-censorship, or increased polarization of Taiwanese politics. Such developments also could have an adverse effect on democracyelsewhere in the region.

Kurt Campbell (Assistant Secretary of State for East Asian and Pacific Affairs) delivered anoff-the-record keynote address on current U.S. policy toward East Asia.



Southwest Economyhttp://www.dallasfed.org/research/swe/2005/swe0506e.html

Issue 6, November/December 2005

Federal Reserve Bank of Dallas

Beyond the Border Yuan Diplomacy: China, Taiwan Vie in Latin American Trade Arena

In recent years, much of the talk in Central America’s business communities has revolved aroundcompetition with China in the garment trade. In the early 1990s, Chinese apparel exports to theUnited States were more than twice those of the countries that would become part of the CentralAmerican Free Trade Agreement (DR-CAFTA)—Costa Rica, the Dominican Republic,Guatemala, Honduras, Nicaragua and El Salvador. By 1994, these countries had begun to captureU.S. apparel market share from China and, by 1998, had overtaken China.

The DR-CAFTA countries’ competitive advantages included trade openings with the U.S. thatChina did not share. The U.S. has encouraged the apparel industry in Central America and theCaribbean islands through trade arrangements in the Caribbean Basin Initiative (1985) andrelated acts and agreements in 2000 and 2002. However, China’s 2001 entry into the WorldTrade Organization increased its competitive opportunities in textiles and apparel. The followingyear, China’s U.S. apparel sales pushed past DR-CAFTA’s.

The competition remains intense. China’s apparel production costs are only 75 percent of Nicaragua’s and 62 percent of Guatemala’s. But the average time required for transportingtextiles and apparel to the U.S. from DR-CAFTA countries is less than one-third China’s.

Overall, the average turnaround between receipt of an order and delivery to the U.S. is about four weeks for DR-CAFTA nations and 10 weeks for China.[1]

Although the DR-CAFTA countries are going head to head with China in economic competition,there is reason to think that China may seek ways to buy their diplomatic cooperation. China has been devoting considerable effort to economic diplomacy in Latin America. In 2004, PresidentHu Jintao visited Argentina, Brazil, Chile and Cuba. China’s vice president, Zeng Qinghong,visited Mexico, Venezuela and Peru. Chinese investment projects in those countries were



announced in conjunction with the visits. These investments seem designed largely to createstable supply sources to China and to allow Chinese firms to profit on the supply end. Many of the announced investment plans involve raw materials production, metal smelting andtransportation infrastructure. Another Chinese initiative appears to be textile investments inMexico—another significant, though waning, apparel exporter to the U.S.

China’s investments in Latin America have been small by U.S. standards. But in Brazil alone,some 50 Chinese firms have already directly invested. In 2004, 46 percent of total Chineseforeign direct investment went to Latin American and Caribbean countries. The new projects aresaid to be dominated by the Chinese equivalents of Japanese keiretsu —large businessconglomerates with strong government ties.

China’s Latin American diplomatic forays and investments may well have political implicationsfor its future involvement in Central America. It is no secret that China wants Latin Americannations to break their diplomatic ties with Taiwan. Twelve of the 25 nations that still recognizeTaiwan are in Latin America and the Caribbean. Six of the 12 are in DR-CAFTA.

In some countries, China has already announced investment and aid plans substantially larger than Taiwan’s. Last year, Taiwanese newspapers complained that the new prime minister of theCaribbean island country of Dominica asked Taiwan for $58 million in aid and then accepted a package from China for double that amount. In response, Dominica dropped its diplomaticrecognition of Taiwan. The Taiwanese argue that China’s financial program for Dominica is partof an ongoing attempt to discredit Taiwan’s unusually independence-focused president, ChenShui-bian. Since Chen took office in 2000, not only Dominica but also Macedonia, Nauru,Liberia and Grenada have all dropped diplomatic recognition of Taiwan.

Taiwan’s ties to the DR-CAFTA countries include announcements of investment plans in

Guatemala and other DR-CAFTA countries. Not to be outdone by Chinese diplomacy, Taiwan’sChen made a 12-day tour of Central American and Caribbean countries in September. TaiwaneseVice President Annette Lu also made a diplomatic tour of Central America.

But President Chen’s term of office ends in 2008, leaving plenty of time for more Chinesediplomatic efforts at reducing world support for Taiwan during his administration. It would not be surprising to see China attempt to make the DR-CAFTA countries adopt its political perspective. There are already reports that China plans textile investments in Central America.

The DR-CAFTA accord includes duty-free benefits on fibers, fabrics, yarns and apparel made inmember countries, giving DR-CAFTA countries an advantage over China in selling to the U.S.

The tariff savings might offset some of China’s lower production costs. Coupled with thesefactors, political incentives might be more reason for Chinese textile operations in CentralAmerica.

It is conceivable that the Chinese might realize a price advantage from the region’s “spaghetti bowl” of free trade agreements, perhaps by producing textiles in Mexico for manufacture intoapparel in Central America. This, however, ignores the Taiwan issue. Investments, whether in



textiles or other industries, could turn up as carrots for DR-CAFTA countries that consider playing the mainland China side of the street.

—William C. Gruben

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