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Economic Liberalism and Regional Security in East Asia: A Case Study on the Impact of China’s Accession to the WTO
Frederick Choo and David A. Anderson, 2/1/2011

Introduction

On 11 December 2001, China was formally accepted as a member of the World Trade Organization (WTO). At that time, the event was hailed as “a defining moment in the history of the multilateral trading system” by then-Director General of the WTO, Mike Moore.[1] Since then, China’s rise as a political and economic power has been nothing short of meteoric. China’s annual gross domestic product (GDP) growth averaged more than 15.5 percent[2] from 2001 to 2008 and it has the distinction of owning the world’s largest foreign reserves holding of $2.4 trillion.[3] In the period since 2001, it has eclipsed Germany and Japan to become the world’s second largest economy.

In the diplomatic arena, China has become more assertive with her partners, including large developed countries and regions like the United States and the European Union. Recent evidences include China’s hawkish stance at the climate change negotiations at Copenhagen in December 2009, and strong diplomatic retaliations against the United States following the latter’s decisions to conclude an arms agreement with Taiwan as well as President Obama’s meeting with the Dalai Lama in 2010. At the global stage, China has also carefully orchestrated its “arrival” through the 2008 Beijing Olympics and the 2010 Shanghai World Expo.

In contrast, the fate of the United States seemed to have taken on a completely different trajectory. Although the United States is still undeniably the largest superpower in the world, it is similarly indisputable that its grip on the reins of global power is loosening. More than ever before, U.S. soft power, a concept popularized by Professor Joseph Nye, seems to be eroding globally, especially when set relative to the concomitant rise of several other emerging powers such China, India, Russia, and Brazil. In his book The Post-American World, Fareed Zakaria describes this phenomenon not as the decline of the United States, but rather the “rise of the rest”.[4]

What can one make of this unprecedented confluence of geopolitical developments? Nowhere in the world are these developments more closely monitored and directly felt than in East Asia. From a geographical point of view, East Asia is broadly sandwiched between China and the United States, giving rise to clear security and economic implications. In the decades following World War II, East Asian countries aligned themselves with the United States to stave off Cold War communist influences and also to capitalize from a growing economic relationship unparalleled with other parts of the world. Along the entire East Asian region, American interests and influences are evident from its involvement in the Vietnam War, its unique “one China” policy, the handling of the North Korea nuclear crisis, and Japan’s recovery following World War II. As China continues to widen its sphere and depth of influence stemming from its economic prowess, the countries in the region would need to recalibrate its relationships with China vis-à-vis the United States, especially when it involves longstanding security issues.

Against this geopolitical backdrop, the purpose of this article is to assess the impact of China’s accession to the WTO on its overall growth momentum as well as its economic interdependency with the respective East Asian states, and establish a link, if any, with the evolving security environment in the region. By extension, the analysis will address the relevance of economic liberalism in the East Asian context and to what degree it enhances peace in the region. The article employs a three-step approach:

(1) Analyzing the trade patterns in East Asia. Two aspects of trade developments (the growth trends of China’s total external trade and the growth trends of bilateral trade between China and East Asian countries) will be compared between the ten-year period before China’s accession and the period since then to 2009.

(2) Quantifying the other factors of economic interdependency in East Asia. While it is intuitive to assume that accession to the WTO would accrue direct trade benefits to a country, the second- and third-order effects of China’s reform efforts in the lead-up to, and following, its accession to the WTO, should not be overlooked. For example, the enhanced freedom and protection for investors under WTO regulations as well as significant improvements in China’s financial intermediaries had the effect of encouraging foreign investors to increase their capital inflow into new businesses. The liberalization of the financial markets in China has also led to greater financial integration in East Asia. In short, it is worthwhile to quantify these additional factors of economic interdependency, and compare them before and after China’s accession to the WTO in 2001.

(3) Evaluating the development of potential security flashpoints in East Asia. This third step is crucial in linking economic liberalism to regional security in East Asia. In particular, the findings from the previous two steps will be used to determine the degree of economic interdependency between China and the rest of East Asia, and whether it represents a significant factor in regional security dynamics. The approach will be to assess three key potential security flashpoints in East Asia. First, the security situation in the Korean peninsula with particular emphasis on South Korea’s growing economic relationship with China vis-à-vis the United States. Second, the Senkaku-Diaoyu Islands and the ongoing territorial dispute between China and Japan. Third, the unresolved dispute in the South China Sea will be analyzed, and used as a case in point for ASEAN’s security relations with China. The intent is to analyze qualitatively how these flashpoints have evolved since 2001, in tandem with the economic transformation associated with China’s accession to the WTO.

Trade Implications of WTO Accession

The belief that WTO membership accrues trade benefits is beyond reasonable doubt. This runs along the core of the WTO’s mandate, and is the key--although not the only--rationale for any country’s decision to apply for membership. However, the rate of increase in China’s external trade, or the degree by which WTO accession has cemented China’s position as the regional economic power is instructive. Three aspects of China’s trade development are therefore analyzed across the time periods before and after China’s accession to the WTO: (1) China’s overall external trade; (2) China’s bilateral trade with Japan and South Korea; and (3) China’s trade with ASEAN as a regional bloc.

China’s External Trade Skyrockets

According to figure 1, it would be an understatement to say that China’s external trade grew following its accession to the WTO in 2001. From 1990 to 2001, China’s total exports grew at an average rate of 15.3 percent, while total imports grew by 15.9 percent on average. On the other hand, total exports and imports expanded by 24.7 percent and 22.7 percent respectively on average from 2001 to 2008--astonishing figures by any measure. In less than twenty years, China’s total external trade (both exports and imports) had risen from $115.4 billion to $2.56 trillion, which represented a more than 115-fold increase!

The anomaly shown for the year 2009, when exports and imports fell by 11.8 percent and 9.6 percent year-on-year respectively, was a direct consequence of the economic fallout due to the global financial crisis--when almost all trading nations were badly hit--and should not be attributed to the policy reforms undertaken by China to gain accession to the WTO. According to the National Bureau of Statistics of China, China's total external trade had already increased by 43.1 percent year-on-year to $1.35 trillion in the first half of 2010--exports reached $705 billion, up 35.2 percent and imports totaled $650 billion, up 52.7 percent year-on-year.[5]

Figure 1

Fig 1: China’s External Trade Growth, 1990 to 2009 (in $ millions)

Source: Created by author, with data from Asian Development Bank, Key Indicators for Asia and the Pacific 2010 (Manila: Asian Development Bank, 2010), Country Table for China.

China’s Trade Dependency with East Asia Strengthens

Next, the impact of China’s accession to the WTO on its trade dependency with East Asia is analyzed. Specifically, China’s imports from, and exports to, Japan, Korea, and ASEAN were extracted and plotted over time to ascertain China’s significance as a trading partner to these countries and region.

First, figure 2 illustrates the bilateral trade between China and South Korea from 1990 to 2008. Mirroring the overall trend of China’s external trade during the same period, China’s trade with South Korea increased significantly after 2001. From 1994 to 2001, South Korea’s exports to China grew at an average of 21.3 percent, while its imports from China expanded by 21.8 percent on average. Contrast this with the period 2001 to 2008, when the exports and imports grew by 23.1 percent and 25.5 percent respectively on average, and it is demonstrable how rapidly trade dependence between China and South Korea has grown since China’s accession to the WTO. Since 2001, China’s total trade with South Korea has multiplied by more than five times--from $31.5 billion to $168.3 billion. More importantly, China has catapulted past the US and Japan to become South Korea’s top exports and imports partner, from being the second and third respectively in 2001. Exports to, and imports from, China now constitutes 21.4 percent and 17.7 percent of South Korea’s total exports and imports respectively, compared to 10.9 percent and 8.9 percent for the United States, and 6.6 percent and 14.0 percent for Japan. Translated to economic power, it can therefore be said that China now holds considerable leverage over South Korea compared to either the United States or Japan.

Figure 2

Fig 2: South Korea’s External Trade with China, 1990 to 2008 (in $ millions)

Source: Created by author, with data from Asian Development Bank, Key Indicators for Asia and the Pacific 2010 (Manila: Asian Development Bank, 2010), Country Table for South Korea.

Second, it was found that bilateral trade between China and Japan likewise grew at an impressive rate since 2001, particularly in terms of Japan’s exports to China. Figure 3 illustrates the bilateral trade between China and Japan from 1990 to 2008. Despite starting at a higher base compared to China’s trade with South Korea, Japan’s exports to China grew at an average of 9.0 percent from 1994 to 2001, and expanded at a considerably higher rate of 20.0 percent from 2001 to 2008. Japan’s import figures from China were less conclusive, growing at an average rate of 16.1 percent from 1994 to 2001 and 12.9 percent from 2001 to 2008. This has helped to reduce Japan’s trade deficit with China to 7.0 percent of total trade between China and Japan in 2008, compared to a deficit of 30.2 percent in 2001. China has also surpassed the US as Japan’s top export destination, contributing to 18.9 percent of Japan’s total exports in 2009 as compared to 7.7 percent in 2001. 

Figure 3

Fig 3: Japan’s External Trade with China, 1990 to 2008 (in $ millions)

Source: Created by author, with data from Asian Development Bank, Key Indicators for Asia and the Pacific 2010 (Manila: Asian Development Bank, 2010), Country Table for Japan.

The phenomena aforementioned was alluded to by Kuroiwa and Ozeki, who, in their study of intra-regional trade between China, Japan, and Korea, observed that following its accession to the WTO, China became a leading assembly base and hence began to import large quantities of intermediate goods from Japan and Korea. According to their research, China’s imports of intermediate goods from Korea increased from $9.2 billion to $63.1 billion while those from Japan increased from $14.3 billion to $73.4 billion.[6] In terms of consumption goods, the situation differed somewhat. With the exception of Japan’s import of consumption goods from China, which stood at $38.7 billion in 2007, intra-regional trade in such goods were low in comparison with intermediate goods.

Third, the analysis turns to China’s external trade with ASEAN as a regional trading bloc. Figure 4 depicts ASEAN’s external trade with China during the period 1995 to 2008. It was found that ASEAN’s exports to China grew at an average annual rate of 16.3 percent from 1995 to 2001, and the growth rate almost doubled to 29.4 percent annually since China’s accession to the WTO. The numbers for ASEAN’s imports from China were equally startling, growing at an annual rate of 18.6 percent from 1995 to 2001, and then 30.2 percent from 2001 to 2008. Therefore, the impact of China’s accession to the WTO appears to be significantly larger on China’s trade dependency with ASEAN, as compared to Japan and South Korea. However, unlike the cases for Japan and South Korea, ASEAN’s trade deficit with China has been widening and reached $21.4 billion in 2008.

Figure 4

Fig 4: ASEAN’s External Trade with China, 1995 to 2008 (in $ billions)

Source: Created by author, with data from ASEAN Secretariat, ASEAN Statistical Yearbook 2008 (Jakarta: ASEAN Secretariat, July 2009), 82-85.

China’s position as ASEAN’s key trading partner becomes more apparent when observed relative to the trade relations that ASEAN have with other important developed economies. Figure 5 illustrates how ASEAN’s trade “pie” was split amongst its trading partners in the world, as well as how the “cutting pattern” has evolved from 1993 to 2008. Several trends are apparent. First, China’s share of ASEAN trade increased substantially by 9.2 percent from 1993 to 2008. Second, US and Japan trade with ASEAN have been gradually reducing in relative terms since 1993. Specifically, US share of ASEAN trade went from 17.6 percent in 1993 to 10.6 percent in 2008, while Japan’s share also reduced from 20.2 percent to 12.4 percent. If this trend persists, China will soon become ASEAN’s top trading partner in East Asia.

Figure 5

Fig 5: Share of ASEAN Trade with Selected Trade Partner Countries and Regions

Source: ASEAN Secretariat, ASEAN Economic Community Chartbook 2009 (Jakarta: ASEAN Secretariat, September 2009), 22.

At the regional level, China’s burgeoning trade growth has also contributed towards East Asia’s growing regionalism. According to a recent ADB report, Emerging Asian Regionalism, the share of Asia’s total trade conducted with it has risen from around a third in the 1980s to over half in recent years. Asia is now broadly as interdependent in trade as the European Union and North America each is. In fact, Asia now trades more with itself than either the European Union or North America did at the outset of their integration efforts.[7] This is mainly due to the region’s exceptional growth and its network-based production systems. Figure 6, which compares the percentage distribution of merchandise imports in the Asia and Pacific region in 1995 and 2009, depicts China as the top importer in the region, having overtaken Japan in 2003. China’s command of overall merchandised imports in the Asia and Pacific rose from 7.1 percent in 1990, to 15.6 percent in 2001, and 27.2 percent in 2009. In a separate study by the International Monetary Fund, China’s trade with the region accounted for half of trade within Asia, up from 29 percent in 1996.[8] China, as the hub of production networks that involve components manufactured throughout East Asia, has therefore become a major force driving regional integration, contributing to both overall trade growth as well as growing intra-regional trade within the region.

Figure 6

Fig 6: Percentage Distribution of Merchandise Imports in the Asia and Pacific Region, 1995 and 2009

Source: Asian Development Bank, Key Indicators for Asia and Pacific 2010 (Manila: Asian Development Bank, 2010), 204.

The analysis of the impact of China’s accession to the WTO on its trade developments presents three observations. First, China has clearly reaped the intended economic benefits of joining the WTO through its impact on China’s external trade. It followed its already impressive trade growth prior to WTO accession--which itself could be attributable to China’s bid to join the WTO since significant market liberalization efforts needed to be completed prior to accession--with a phenomenal annual growth rate after 2001, thereby propelling China to become the world’s largest exporter and second largest importer by 2009.[9] While it is not accurate, nor is it the purpose of this study, to credit China’s trade growth entirely to its accession to WTO, there is little doubt that the economic opportunities which opened up to China following its accession, together with the economic reforms made leading up to, and after, accession, have had a marked impact on China’s external trade growth.

Second, China’s trade linkages with its East Asian neighbors have strengthened, albeit in different ways. Beginning with modest trade relations in 1990, China is now South Korea’s top export and import destination. In fact, South Korea is running a trade surplus with China--the only country to do so amongst the countries and region discussed in this study. Japan, on the other hand, has witnessed considerable export growth to China since 2001, resulting in the reduction of its trade deficit with China and the elevation of China as Japan’s top export destination. The largest impact fell on trade relations with ASEAN--the annual growth rate of China’s trade with ASEAN has almost doubled since China’s accession to the WTO. However, ASEAN’s trade deficit with China has also been steadily increasing.

Third, and based on the cumulative effects of the observations above, China has consolidated its position as East Asia’s leading trading nation. China’s comparative advantages in labor costs and availability of foreign investments have positioned it as an integral node of the regional production network and catalyzed intra-regional trade. This means that apart from extending its economic reach bilaterally, China is able to impact regional trade developments and therefore holds considerable influence in setting the pace and form of regionalism in East Asia.

Other Measures of Economic Interdependency

While intra-regional trade undoubtedly constitutes a key component of economic interdependency between China and East Asia, it would be remiss not to consider other measures of interdependency. According to Chua, an analysis of economic interdependence needs to include other important channels such as direct investment, financial flows, macroeconomic links, and personal contacts.[10] In an analysis conducted to assess the economic interdependency in Asia before and after the Asian financial crisis in 1998 (see figure 7), the ADB employed Chua’s definition and found that there has been increased economic interdependency in all aspects analyzed since the crisis, with the largest impact on macroeconomic links and the smallest for tourism.

Figure 7

Fig 7: Indicators of Economic Interdependency in Asia (Pre- and Post-Crisis)

Source: Asian Development Bank, Emerging Asian Regionalism: A Partnership for Shared Prosperity (Manila: Asian Development Bank, 2008), 43. Note: Trade policy cooperation is measured by the density of free trade agreements among integrating Asian economies. FDI is measured by the intra-regional FDI share among integrating Asian economies. Equity markets are measured by the correlation of detrended quarterly equity price changes for integrating Asian economies. Macroeconomic links are measured by the correlation of detrended quarterly growth rates of gross domestic product for integrating Asian economies. Intra-regional trade is measured by intra-regional trade share. Tourism is measured by the share of intra-regional tourist inflows and outflows.

How much of this interdependence is dominated by China? Here, it is intuitive for the reader to question the impact of China’s accession to the WTO on economic factors other than trade. After all, as the title of the institution, as well as its mandate, suggests, the WTO strives towards a world of barrier-free trade and arbitrates against members who flout the rules--but probably not much else. Yet, as China realized during its fifteen years-long journey towards accession, the domestic reforms imposed by the WTO were not contained to merely trade tariffs, but actually spanned several other areas of the Chinese economy, including the uniformity of rules that allow the establishment of foreign companies in China and the liberalization of the financial system.

Foreign Direct Investment

The FDI inflows to China are a fairly recent phenomenon. In the 1980s, FDI inflows were limited to only joint venture partnerships with Chinese firms which were essentially export-oriented. After 1990, the investment climate changed gradually and steadily, as China allowed wholly foreign-owned enterprises to manufacture and sell a wide range of goods in the Chinese domestic market or export them to the international market. Despite China’s pro-investment policies, FDI inflows to China leading up to the turn of the century were not particularly eye-catching, due in part to the Asian financial crisis which precipitated a general downturn in investment appetite in the region.

Again, China’s accession to the WTO proved pivotal in fuelling foreign investments in China. This observation was put forward by Yu, who opined that “no sooner than China and its counterparts finally sealed the deals for China’s entry into the WTO, the momentum of FDI inflows restored with a vengeance.”[11] Figure 8 illustrates the growth of FDI inflows to China from 1990 to 2008--from 1990 to 2000, FDI inflows increased gradually and then plateaued following the Asian financial crisis; from 2001 onwards, China experienced a surge in FDI inflows which grew at an average annual rate of 13.4 percent.

Figure 8

Fig 8: Annual Inward FDI Flows to China: 1990 to 2008 (in $ millions)

Source: Created by author, with data from United Nations Conference on Trade and Development, UNCTADStats, http://unctadstat.unctad.org/TableViewer/tableView.aspx (accessed 20 November 2010).

An analysis of the sources of these FDI inflows revealed a regional bias in favor of East Asia. According to the US-China Business Council, all but one of the top six countries of origin of FDI inflows in 2009 were from the East Asian region: Hong Kong (1st), Taiwan (2nd), Japan (3rd), Singapore (4th), and South Korea (6th). Only the US (5th) was external to the region. In the case of Japan, FDI in China by Japanese manufacturers increased by 68 percent over five years to 3.74 trillion yen in 2009.[12] Evidently, the rise in FDI inflows to China from its East Asian neighbors has created further economic interdependence. From China’s perspective, FDI inflows often equate to job creation, technology transfers, and a buildup of management expertise; while benefits accrued to the source countries in East Asia come in the form of corporate taxes (depending on the availability of an avoidance of double taxation agreement between China and the source country and the terms contained within) and profits for the shareholders, both public and private.

Notwithstanding the impact of the rise in FDI inflows to China, a growing and noteworthy trend is the investment flow coming from China to the rest of the world. China's outward investment in non-financial sectors in 2009 was $43.3 billion, compared to an average of $2.4 billion per year between 1990 and 2000.[13] Figure 9 illustrates the upward trajectory of China’s outward FDI flow from 2002 onwards.

Figure 9

Fig 9: China’s Outward FDI Flow: 1982 to 2006 (in $ millions)

Source: Leonard K. Cheng and Zihui Ma, “China’s Outward FDI: Past and Future,” July 2007, 33, http://www.nber.org/books_in_progress/china07/cwt07/cheng.pdf (accessed 20 September 2010).

The linkage between China’s FDI outflows and its accession to the WTO is less direct, but certainly it can be said to be a second order effect due to the successes of China’s export-led economic strategy, which has been underpinned by its status as a WTO member. For one, the lowering poverty rates and the rising affluence of the Chinese middle class, together with the growth of industries led by the FDI inflows, have brought about a huge appetite for energy resources. Increasingly, Chinese companies have had to look abroad for supplies of raw materials such as oil and natural gas to augment its domestic energy sources. For example, China invested more than $8 billion in gas, oil, and hydropower ventures in Myanmar from January to August 2010, which represents about two-thirds of the total of the previous two decades combined.[14]

Another factor, also related to the increase in personal incomes, was the rise in labor costs, particularly in the coastal regions of China. While this has led to a trend whereby Chinese companies are exploring opportunities further inland, a significant number have been evaluating options to relocate their production operations within the immediate region to take advantage of lower costs, thereby enhancing their competitiveness and promoting industrial restructuring and upgrading back in China. Lastly, China, through its export-led strategy, accumulated a vast amount of foreign reserves that could be channeled for overseas investment purposes. For these reasons, China began to encourage its national firms to “go global” in 2003, and the government not only relaxed the approval process of outward FDI, but also provided incentives for FDI in target industries.[15]

Coinciding with its accession to the WTO, China has witnessed an average annual growth in outbound investments of more than 50 percent for eight consecutive years since 2002. According to the Ministry of Commerce of China, “China is now the fifth largest investing nation worldwide, and the largest among the developing countries.”[16] Although much media attention has been devoted to China’s investments in Africa as part of its “charm offensive,” 74.1 percent of the outbound investments in 2009 were actually channeled to Asia.[17]

Specifically, ASEAN has experienced a steady rise in Chinese investments since 1995, as shown in figure 10, even though China still lags far behind ASEAN’s main investors such as the European Union and Japan. Figure 11 shows that while FDI flows were almost unidirectional towards China in 2000, Chinese reciprocity since then has resulted in China’s FDI to ASEAN amounting to more than half of ASEAN’s FDI to China. This trend looks set to continue especially following the signing of the China-ASEAN Investment Agreement in August 2009 which, together with already-signed agreements on trade in goods and services, completed the negotiation process of the ACFTA.[18]

Figure 10

Fig 10: FDI Net Inflows to ASEAN by Source Country (in $ millions)

Source: ASEAN Secretariat, ASEAN Economic Community Chartbook 2009 (Jakarta: ASEAN Secretariat, September 2009), 43.

Figure 11

Fig 11: FDI Flows between ASEAN and China, 2000 to 2009 (in $ millions)

Source: United Nations Conference on Trade and Development, World Investment Report 2010: Investing in a Low-Carbon Economy (New York and Geneva: United Nations Publication, 2010), 42.

In relative terms, the FDI landscape has shifted--while the United States played a leading role in the 1960s and 1970s, followed by Japan in the 1980s, their share of investments in ASEAN has been declining since the early 1990s.[19] Peering into the future, Fan Chunyong, executive vice president of China Industrial Overseas Development and Planning Association, said that China's outbound investments will go up to $100 billion and the accumulative capital stock overseas will reach $500 billion by 2013.[20] Policy makers of the developing countries in ASEAN will no doubt pay serious attention to this prediction, as China increasingly represents a much needed source of capital investments.

Free Trade Agreements

In the area of trade policy cooperation, China’s admission to the WTO in December 2001 provided an impetus to the negotiation and formalization of bilateral and regional FTAs. From China’s perspective, the successful quest for WTO membership freed up valuable bureaucratic resources to begin its pursuit of regionalism with selected countries. China’s WTO membership also meant that countries or regions embarking on FTA negotiations with China have a common understanding with regard to the credibility of the reform efforts undertaken by China and the adherence to WTO standards going forward. As a result, China has 10 FTAs in effect and another 12 proposed or under negotiation as of May 2010.[21]

From the viewpoint of China’s East Asian neighbors, establishing FTAs appears to be a competitive response to China’s emergence as the region’s economic powerhouse. Joining the WTO has forced China to enact many rules-based policies, open its markets, and create new opportunities for FDI and trade--thereby making China an even more effective exporter. Hence, the fear of increased competition from China has made some WTO members reluctant to over-liberalize and encouraged them to seek more limited agreements in the form of FTAs instead.[22] In 2000, only three FTAs were in effect in East Asia, including the ASEAN FTA, while another 10 were in various stages of preparation. However, in under a decade, the number of FTAs in the region has increased more than tenfold. In a study by the ADB, it was found that by May 2010, East Asia had emerged at the forefront of global FTA activity, with 45 FTAs in effect and another 84 in various stages of preparation.[23]

Yet, despite the plethora of agreements, many of them were signed with partners outside East Asia, underlining the region’s commitment to open regionalism. In the case of China, only two of its agreements in effect were with countries or regions in East Asia--that with Singapore and ASEAN.[24] The ACFTA was proposed by then-Premier Zhu Rongji at the ASEAN-China Summit in November 2000 and afforded China a first-mover advantage in cementing political-economic ties with ASEAN. Taking many by surprise at that time, China’s maneuver was ostensibly for the reasons of reassuring ASEAN states nervous about the economic consequences of China’s accession to the WTO and the potential consequences for the regional balance of power due to China’s ascendance. Certainly, the opportunity to score political points against Japan cannot be ruled out as part of Beijing’s calculations.[25]

The ACFTA has developed rapidly since then. Following the signing of the formal agreement in Phnom Penh in November 2002, where officials agreed to establish the FTA for trade in goods for the original six ASEAN countries[26] by 2010 and by 2015 for the newer ASEAN members, China made significant provisions such as the early reduction in tariffs on certain agricultural imports and food items as part of an “early harvest.” This ran in stark contrast with Japan’s reluctance to open its agricultural markets to ASEAN exporters around the same time.[27] The Agreement on Trade in Goods was signed in November 2004, while the Agreement on Trade in Services was signed in January 2007. After the Agreement on Investment was signed in August 2009, the ACFTA finally came into force on 1 January 2010.

Strategic considerations aside, an ASEAN group of experts concluded that the ACFTA when fully implemented would increase ASEAN exports to China by 48 percent and China’s exports to ASEAN by 55 percent; and it would increase ASEAN’s GDP by 0.9 percent and China’s by 0.3 percent.[28] This corroborates with the trend observed in the earlier section that analyzed ASEAN-China trade developments. Even without the introduction of the ACFTA, ASEAN’s trade with China had been growing at an annual rate of close to 30 percent since 2000. Already, the Chinese authorities have been heralding the positive effect of the ACFTA on trade relations with ASEAN. For example, it was reported that “under the background of the full launching of the ACFTA” the bilateral trade between Guangxi and ASEAN from January to April 2010 amounted to $1.75 billion, up 55.2 percent from the same period in 2009 and exceeding the levels of the same period before the financial crisis.[29]

In contrast, trade agreements, bilateral or otherwise, with Japan and South Korea remain a remote possibility for China due to a confluence of political and historical factors. In a study on China’s FTAs, Yang Jiang observed that China “is suspicious of the plausibility of a Northeast Asia FTA or East Asia FTA, even though it proposed the former to show goodwill to its neighbors,” and that this stems from “Japan’s problem on historical issues, as well as its protective stance in trade.”[30] The prospects of a China-Japan FTA are even more unlikely and remain almost a taboo subject, with the shadows of China’s historical memories of World War II and unresolved territorial disputes over the maritime areas in the East China Sea still looming. This impasse is regrettable as the economic benefits of a union are clearly immense. China continues to impose high tariffs on important Japanese exports, such as automobiles, while there is scope for higher levels of investment by Japanese firms in China.[31] Notwithstanding these obstacles, South Korea has attempted to breathe life into a possible trilateral agreement between China, Japan, and South Korea. In February 2010, South Korea announced the launch of a joint research group to study the feasibility of a FTA among China, Japan, and South Korea.[32] Although this is a notable development, and no doubt a diplomatic coup for South Korea, it remains doubtful if there will be a breakthrough in the near to medium term.

Under these circumstances, the only hope of trade policy cooperation in Northeast Asia lies in a possible agreement between China and South Korea. An “unofficial” feasibility study on a China-South Korea FTA was launched by Chinese President Hu Jintao and former South Korean President Roh Moo-Hyun in November 2004. The study, which was completed in 2006, was then “upgraded” in November 2006 to a study to be conducted jointly by the government, business and academia. After holding five joint research meetings, an announcement was made during Chinese Premier Wen Jiabao’s visit to South Korea in May 2010 to wrap up the study.[33] At the moment, the path appears to be clear for detailed bilateral negotiations to take place. Although not a foregone conclusion, China’s political commitment towards a FTA with South Korea will place it in good stead, politically and economically, especially when viewed alongside the stalling Korea-U.S. FTA.

In addition to the levels of trade dependency covered earlier, China has become more economically interdependent with its regional neighbors since 2001 via at least two proxies: the amount of FDI flows exchanged between China and East Asia, as well as the FTAs formalized and under negotiation in the region. These phenomena are not independent of the China’s dominant position as a regional trading power. The opening up of global markets afforded by WTO membership was a natural draw for multinational corporations searching for investment options, while China’s strong trade relations with East Asia served as the impetus for regional authorities to address trade inefficiencies and reap mutual economic benefits through FTAs. Therefore, to the extent that China’s WTO accession has directly contributed to the trading patterns in East Asia, it can likewise be said that the impulse it provided has transmitted into a more holistic form of economic interdependency in the region.

East Asia Since 2001: A Safer Place or Not?

This section of the analysis looks at the security developments in East Asia over the same period following China’s accession to the WTO in 2001. Specifically, three potential security flashpoints along China’s periphery--the Korean peninsula, the Senkaku-Diaoyu Islands in the East Asia Sea, and the Spratly-Paracel Islands in the South China Sea. In each case, the analysis tracked the unfolding of key events which occurred and observed the actions taken by the Chinese authorities, either unilaterally or in concert with its regional neighbors and institutions. The intent is to investigate the relation between China’s quest for uninterrupted economic growth, together with its strong economic linkages with Japan, South Korea, and ASEAN, and the overall security environment in East Asia.

Korean Peninsula: China as the Guarantor of Peace

At the turn of the century, North Korea appeared to have been contained through the actions taken by the Clinton administration. The direct dealings between Washington and Pyongyang had led to an agreement where North Korea committed to building two nuclear reactors for energy purposes in return for oil and food aid to the regime. Even though Kim Jong Il’s oppressive regime was still an eyesore to U.S. authorities, the prevalent view was that regional stability had at least been attained. East Asia had one less thing to worry about, it seemed.

However, after the September 11 attacks and the Bush administration’s focus on the global war on terror, North Korea sensed a strategic opening to achieve its unfulfilled objectives. In the summer of 2002, U.S. intelligence uncovered evidence that North Korea was procuring equipment that demonstrated an intention to create a covert nuclear program based on uranium enrichment. This threatened to unravel the Agreed Framework which Washington and Pyongyang had agreed to in October 1994 to prevent North Korea from developing nuclear weapons. According to Glaser and Wang, the United States judged that it had limited leverage to compel North Korea to abandon its nuclear programs, and therefore opted for a new multilateral strategy that “would enable regional actors with a stake in realizing a denuclearized Korean peninsula to pool their sticks and carrots.”[34] However, China was not sold on this idea for fear of being seen as rallying behind the US against its longstanding ally. It would take further provocations by North Korea before China would change its position.

In early 2003, North Korea’s provocative actions, including the reactivation of its nuclear reactor in Yongbyon, withdrawal from the Non-Proliferation Treaty and the expulsion of the International Atomic Energy Agency inspectors, led China to the conclusion that it had to intervene.[35] There were two main considerations in China’s strategic calculations. First, an attack by the United States may trigger anarchy in North Korea and result in a flood of refugees flowing into northeast China, thus placing in jeopardy the social and economic stability in that region. Second, and probably more crucial, is the likelihood of being drawn into another Korean conflict, based on the 1961 Sino-North Korean Treaty of Friendship, Cooperation, and Mutual Assistance.[36] This would mean a direct affront with the United States and can be ill afforded at a stage when China would much prefer to press on with its economic development.

There can be no doubt that China holds significant leverage over North Korea, especially since it is the supplier of approximately 90 percent of North Korea’s oil supplies. In 2003, China shut down its pipeline from the Daqing oilfield in northeastern China to North Korea for three days in early March, citing “technical maintenance” as the reason, immediately after North Korea had test-fired a missile into waters between Japan and South Korea.[37] Soon after this, North Korea agreed to return to the diplomatic table and participate in a trilateral meeting with the United States and China in Beijing in April 2003.

China continued to play a constructive role even as the talks expanded into Six-Party Talks in August 2003 with the addition of Russian, Japan, and South Korea. In fact, it was so heavily involved, which is contrary to the sage advice by Deng, that China found itself caught in an awkward position after three rounds of talks from September 2003 to July 2005 failed to yield any progress. To avoid being seen as incapable of negotiating an agreement, China had to “strong-arm” its way to a mutually agreed accord, albeit a vague one, in September 2005.[38]

The second crisis, or an extension of the first, was created in October 2006 when North Korea tested a nuclear device. China responded uncharacteristically by issuing a demarche to Pyongyang, stating that North Korea had “defied the universal opposition of international society and flagrantly conducted the nuclear test.”[39] China also, for the first time, supported the UN Security Council recommendations to impose limited trade and travel sanctions on North Korea. It continued to play a critical role leading up to the agreement reached in February 2007.

The Six-Party Talks were abruptly discontinued by North Korea in April 2009 after the UN Security Council threatened to expand sanctions against it in response to the test launch of the Taepodong-2 ballistic missile. In May 2009, North Korea conducted yet another nuclear test, presumably to demonstrate that its nuclear ambitions remain on track despite Kim Jong Il’s ailing health and the prospect of a leadership transition. Again the Chinese responded firmly, as evident from the statement released by the Ministry of Foreign Affairs, which said that “the DPRK (North Korea) ignored universal opposition of the international community and once more conducted the nuclear test. The Chinese government is resolutely opposed to it.”[40]

From these developments, it is clear that China sees it in her best interests to adopt a proactive stance towards preserving peace in the Korean peninsula. An outbreak in hostilities would force China to take a stand--most probably on the side of North Korea--and derail its economic growth trajectory. In addition, its relations with the United States would also be severely curtailed as a result of this showdown. Therefore, in the hope of maintaining the status quo in North Korea, China was willing to adapt its diplomatic strategy and involve its regional neighbors, Japan and South Korea, in the Six-Party Talks to manage the crisis. As Glaser and Wang described, the stakes of another Korean war are too high for China, so much so that its role evolved from “a passive onlooker, to a reticent host, and finally to a “chief mediator” and “honest broker.”[41]

Tensions in the Korean peninsula reached a new peak in March 2010 when the South Korean naval vessel Cheonan sank off the country's west coast near Baengnyeong Island in the Yellow Sea. Following an investigation by a team led by South Korea and comprising experts from Sweden, Australia, United Kingdom, and the United States, it was concluded that the sinking was a result of a North Korean torpedo attack. In a sharp contrast to its response to North Korea’s nuclear tests, China did not publicly agree with the findings of the report and has been cautious in its treatment of the issue. In a meeting between Chinese Premier Wen Jiabao and South Korean President Lee Myung Bak in late May 2010, the former stressed that “China will make a judgment in an "objective and fair manner" and take its stance on the basis of facts concerning the incident.” Wen also “called on all parties concerned to remain calm and exercise restraint, so as to avert an escalation of the situation.”[42] Separately, Wen was quoted as saying that “China will defend no one whatever the outcome,” according to a briefing by South Korean presidential adviser Lee Dong-Kwan after the meeting of the leaders.[43] China was neutral and non-committal in its position despite South Korean’s diplomatic efforts to gain China’s support in order to condemn or sanction North Korea through the UN Security Council. Evidently, China’s strong economic relationship with South Korea was not compelling enough a factor for China to throw its weight behind South Korea on this issue.

It is also interesting to note China’s unyielding efforts towards strengthening economic ties with its key partners, even during the midst of an uncertain security environment. In the same meeting where the Cheonan sinking was discussed, Wen pushed for the commencement of negotiations of the proposed FTA between China and South Korea in late 2010 or early 2011 upon the completion of a feasibility study. Wen also said that “China and South Korea should strive to make bilateral trade volume meet the target of 200 billion U.S. dollars by 2012 and 300 billion U.S. dollars by 2015.”[44] Therefore, it appears that China does not wish to entangle economic issues with security incidents such as the Cheonan sinking.

On South Korea’s part, it has assessed that the furtherance of economic relations with China is too important a gain to be sidelined for the sake of politicizing the Cheonan issue. Ultimately, South Korea understands that it needs the assistance of China to impose sanctions on South Korea at the UN Security Council, as well as employ its levers bilaterally on North Korea to bring the regime to the diplomatic table. Thus, using economic means to put pressure on China will not only damage its blossoming economic relations with China, but more importantly risk compromising China’s “honest broker” attitude towards Korean peninsula security matters.

Senkaku-Diaoyu Islands: Pawns of a Power Struggle

In the case of Japan, the linkage between its economic interdependence and political ties with China appears more tenuous. The reasons are mainly historical. Professor Susan Shirk, in her book Fragile Superpower, considers Japan as the foreign policy relationship, which is most difficult to handle for China’s leaders.[45] Japan is considered an “emotional issue” and requires a skillful balancing act on the part of Chinese leadership to manage public opinion. On one hand, the fanning of nationalism at the expense of Japan is beneficial for the longevity of the Chinese regime; on the other, such nationalist movements run the risk of morphing into a push towards democracy--the case in point being South Korea in the 1960s.

Public opinion features significantly in Japan’s calculations, too. As a consequence of the Japan-bashing that has been prevalent in China, the Japanese public began to view China as a threat and support political leaders like Koizumi who were willing to adopt an assertive stance towards China. As of 2006, only 28 percent of the Japanese and 21 percent of the Chinese had positive views of each other.[46] Therefore, it can be said that China-Japan relations are often shaped by domestic politics more than any other factor, including economics.

The largest security flashpoint between China and Japan lies in a set of islands in the East China Sea referred to as the Diaoyu Islands by the Chinese and Senkakus by the Japanese.[47] Between July 2004 and June 2005, it was reported that China deployed naval surveillance aircraft 146 times and patrol boats 18 times to the disputed maritime area. At the same time, the Japanese air force has been scrambled approximately 30 times in the six months before February 2006 to intercept Chinese aircraft in the vicinity of the islands.[48]

In September 2010, tensions were escalated after a Chinese fishing trawler apparently collided with two Japanese Coast Guard patrol boats near the islands. The Japanese then boarded the Chinese vessel and arrested the Chinese captain. While in New York for the UN General Assembly meetings, Wen told reporters that “it is totally illegal and irrational that Japan seized the Chinese fishermen and fishing boat in waters off the Diaoyu Islands and still detains the Chinese captain.” Wen went on to demand the immediate and unconditional release of the Chinese captain, failing to which “China will take further actions and Japan must bear all the consequences.”[49]

According to the New York Times, the Chinese customs authorities began halting the export of rare earth elements to Japan after Wen’s unequivocal demands.[50] Although this action was denied by officials from the Chinese Ministry of Commerce, industry sources have revealed that the major export companies were told to withhold major exports of these elements, which are crucial for Japan’s automotive and electronics industry, to Japan with a clear indication that their export quotas would be affected otherwise.[51] On 24 September, the Chinese captain was released by Japanese authorities.

At around the time of Wen’s remarks in New York, Chinese authorities arrested four Japanese employees of Tokyo-based Fujita construction company for illegally videotaping a military installation.[52] After the Chinese captain was released on 24 September, China released three of the Japanese, but continued to detain the fourth--the sequence of events bearing a similarity with the Japanese detention of the Chinese captain for a week after the other crew members were released.[53] This bilateral spat continues unabated, as China remains steadfast in demanding an apology from Japan while Japan is asking China to pay for damages inflicted on the coast guard vessels.

Despite claims by Japanese Foreign Minister Seiji Maehara that the decision to release the captain was made independently by local prosecutors in Okinawa, this action was widely seen as a result of Japan buckling under the economic pressures exerted by China. Instead of exploiting the strong bilateral economic relations as an avenue to diffuse tensions with regards to the disputed islands, China has in fact employed its economic might, in this case its dominance in the production of rare earth elements, to “arm-twist” Japan. This is another clear example yet of how China can be unwavering in its position when the issue pertains to its territorial integrity, to the extent that economic considerations take second place.

Another perspective to adopt is the destabilizing effect on China-Japan relations, and therefore on regional stability, brought about by China’s rapid economic growth vis-à-vis that of Japan following its accession to the WTO. China’s overtaking of Japan as the world’s second largest economy in 2010 using absolute GDP represents the most significant power shift between regional neighbors in the 21st century. China new position as East Asia’s top economy has helped fuel a nationalistic wave in which the Chinese populace regards China as having regained its rightful position in the region. That the position was achieved at the expense of Japan is made more satisfying due to the common conviction that Japan’s expansionist policy and occupation of China from 1931 to 1945 was what set China back in the international order in the first place.

From Japan’s viewpoint, the domestic forces are similar but act in a different direction. Although Japan recognizes that China’s ascendency is only a matter of time, its political leadership cannot afford to be perceived by the populace as the generation that has freely handed over the reign on the throne to China. After all, Japan has held on to this position since the 1960s. Therefore, the period of transition is likely to be one fraud with instability and uncertainty, as both countries continue to assert its position as the regional power. Shirk quotes a young Ph.D. in finance as saying “Right now there is close competition between China and Japan for leadership in Asia. When China is clearly number one then Japan will accept the situation and relations will be better.”[54]

Spratly-Paracel Islands: A Region in Need of Regionalism

The dispute over the ownership of the Spratly-Paracel Islands in the South China Sea is perhaps the only outstanding security issue that could lead to an armed conflict between China and members of the ASEAN bloc. Beginning in the 1970s, there have been competing claims by Vietnam, the Philippines, Malaysia, Brunei as well as Indonesia. In fact, there have been outbreaks in hostilities as a result of these claims in 1974 and 1988. In January 1974, China conducted an amphibious operation against South Vietnam and landed 600 assault troops on the Paracel (Xisha to the Chinese) Islands[55], while the Chinese Navy sank three Vietnamese supply vessels in March 1988 off the Spratly (Nansha) Islands in a bid to assert China’s claim to the area.[56]

China has been consistent in its efforts to gain territorial control over the islands--beginning with the publication of a white paper in January 1980 which claimed “indisputable sovereignty over the Xisha (Paracel) and Nansha (Spratly) Islands,” and a statement issued by the Chinese embassy in Manila in 1994 that stressed Beijing’s “indisputable sovereignty” over the Nansha Islands and the adjacent waters.[57] While some observers have pointed to these statements as evidence of China’s hegemonic tendencies, David Kang opined that the ongoing dispute is “primarily one of “boundary setting” and the resolution of previously undemarcated borders among all the Southeast Asian states, rather than a case of Chinese expansionism.”[58] Admittedly, however, the presence of oil and gas deposits in the disputed area, the airspace that it affords the claimant, as well as historical baggage form a compelling case for China’s dogged stance.

Nevertheless, there was a discernable change in China’s approach--in parallel with its economic spurt--heading into the turn of the century. A landmark development concerning the territorial dispute occurred in November 2002 when China signed the Declaration on the Conduct of Parties in the South China Sea, a memorandum that prohibits the use of force to settle rival claims over the islands. Since then, military overtures gave way to greater technical and scientific cooperation in the South China Sea. For example, in March 2005, China participated in a resource-sharing agreement whereby it would join the Philippines and Vietnam to jointly explore oil exploration in the South China Sea.[59] At the same time, China must have observed the rising economic exchanges with ASEAN, discussed earlier in this chapter, and assessed that taking unilateral actions on the islands are not worth disrupting the economic relations with ASEAN.

However, no progress has been made on the adoption of a code of conduct in the South China Sea, an objective which was agreed upon and stated within the 2002 declaration. Since 2007, tensions over competing sovereignty claims began to rise again as China undertook several initiatives which alarmed its ASEAN neighbors, including the increased frequency of naval exercises, the threatening of multinational oil companies operating in Vietnamese waters, the detention of Vietnamese fishermen and the construction of a new submarine base on Hainan Island.[60] In 2009, China declared a unilateral moratorium on fishing in the South China Sea from May to August, coinciding with the Vietnamese fishing season; and enforced it when Chinese authorities seized the catches of Vietnamese fishing boats on more than one occasion. During a visit by US Deputy Secretary of State James Steinberg in March 2010, the Chinese authorities apparently claimed that the South China Sea ranks as a “core interest”--a status assigned previously only to Tibet and Taiwan.[61]

The issue came to a diplomatic boil at the ASEAN Regional Forum held in Hanoi in July 2010, when U.S. Secretary of State Hillary Clinton made several remarks regarding the South China Sea dispute. The United States had until then stayed on the sidelines of the dispute by emphasizing freedom of navigation, the non-use of force, and a peaceful resolution of the issue. According to Clinton,

“The United States, like every nation, has a national interest in freedom of navigation, open access to Asia’s maritime commons, and respect for international law in the South China Sea . . . the United States supports a collaborative diplomatic process by all claimants for resolving the various territorial disputes without coercion . . . the U.S. is prepared to facilitate initiatives and confidence building measures consistent with the declaration.”[62]

This was received negatively by the Chinese authorities, who had all along preferred a bilateral approach to addressing the dispute instead of a multilateral one as supported by the United States. In response, Chinese Foreign Minister Yang Jiechi issued an uncharacteristically bellicose statement on 26 July 2010, stating that “The seemingly impartial remarks were in effect an attack on China . . . those disputes should not be viewed as ones between China and ASEAN as a whole just because the countries involved are ASEAN members . . . it (turning the issue into an international or multilateral one) will only make matters worse and the resolution more difficult.”[63] Despite this retort, early indications suggest that the United States has emerged from this diplomatic showdown as the victor. China recognizes that a refusal to demonstrate goodwill on this issue would only further incentivize the ASEAN states to bandwagon with the United States -- an outcome which China clearly wishes to avoid. It has also acknowledged the signal sent out by the United States -- that the United States is now fully vested in East Asian diplomacy and will not stand idle while China continues to demonstrate its military prowess to bully the respective claimants to the islands into submission.

During the ASEAN-China Summit in Hanoi in October 2010, Chinese Premier Wen Jiabao was reportedly open to the development of a legally-binding code of conduct on the South China Sea territorial dispute. According to Philippine Finance Secretary Cesar Purisima, “Wen made a comment that China is serious about the implementation of the declaration on the code of conduct in reaction to some of the comments of the ASEAN leaders.”[64] Earlier, Secretary-General of the ASEAN Secretariat Surin Pitsuwan had informed reporters after a working dinner of the ASEAN foreign ministers that a working group meeting between ASEAN and China would be launched in December 2010 to prepare for a code of conduct for resolving territorial disputes in the South China Sea.[65] It therefore appears that China is starting to make concessions on this matter to assuage the concerns of the ASEAN members who are claimants to the South China Sea and thereby limit the opportunity for the United States to deepen its involvement in the region.

At the same time, this matter has a huge bearing on how regional diplomacy is conducted in East Asia. Although not all ASEAN members are claimants to the islands, it is nonetheless in the interests of the respective ASEAN claimants to adopt a multilateral approach to this issue, as ASEAN’s collective weight and voice would surely be more effective in dealing with China. It is also at the ASEAN-centric summits and meetings where the United States and other partner countries are represented and can provide further diplomatic muscles to counter a more assertive China. Despite its preference towards a bilateral approach, China has realized that it cannot maintain its international credibility by choosing to pursue further economic cooperation with ASEAN multilaterally when it meets China’s interests, and yet preferring to go the bilateral route when it does not. Therein lies the dilemma of subscribing to regionalism -- collective benefits can transform into collective pressure at any time.

At the moment, the benefits of cooperation with ASEAN seem to weigh more favorably than a stubborn insistence on the control of the South China Sea. In what is now a common trend in China’s approach to regional diplomacy, China’s focus on maintaining the momentum of growing economic relations in spite of the ongoing territorial disputes is paramount. In the official statement at the ASEAN-China Summit, the first proposal made by Premier Wen was to strive towards increasing ASEAN-China trade to $500 billion by 2015 and to establish a FTA with each of the ASEAN member states within five years.[66]

Conclusion

The results of the comparative quantitative analysis of the trading patterns in East Asia before and after China’s WTO accession in 2001 demonstrated unequivocally that WTO accession has played a pivotal role in catalyzing trade growth in China, and that between China and the rest of East Asia. Asia’s total exports and imports expanded by an average of 24.7 percent and 22.7 percent respectively from 2001 to 2008 while its bilateral trade with Japan, South Korea, and ASEAN also exhibited similar growth trajectories, albeit with slight distinctions.

Beginning from a low base, China’s total trade with South Korea has increased more than five-fold since 2001. South Korea continued to run a trade surplus with China, who became South Korea’s top import and export partner in the process. As for Japan, its imports from China grew at a less impressive rate than exports, thereby helping to reduce its longstanding trade deficit with China. China’s trade growth with ASEAN was most pronounced as both ASEAN exports to, and imports from, China grew annually by approximately 30 percent since 2001. Although China still lagged behind the US and the European Union as ASEAN’s top trading partner in 2008, the gap is closing quickly.

In the analysis of two other factors of economic interdependency--FDI flows and FTAs--it was found that China’s WTO accession likewise had a significant impact. FDI inflows grew at an annual rate of 21.5 percent since 2001, while FDI outflows, previously non-existent, also increased noticeably. In particular, China’s FDI outflows to ASEAN have been steadily rising and the trend is set to continue following the formalization of the ACFTA. In terms of FTAs, China has concluded agreements with Singapore and ASEAN, while negotiations are underway for a FTA with Korea. In sum, the political economy in East Asia has evolved to become more China-centric and integrated in nature as a result of China’s accession to the WTO in 2001.

The analysis of the three security flashpoints in East Asia showed that despite the unprecedented growth in economic relations between China and its neighbors since 2001, security fault lines still remain and appear to be intractable in the near term. There are a whole host of factors at play for the respective security issue which means that economic considerations alone, while certainly gaining in importance, will not be sufficient to produce an amicable outcome. In the case of North Korea, China’s main preoccupation was to prevent a political implosion in Pyongyang as well as any outbreak in hostilities involving the US. Therefore, its strong economic ties with South Korea and Japan did not feature as an effective leverage in a “third party” issue such as North Korea. However, economic factors were found to play a larger role in terms of South Korea’s determination of who to partner with to maintain peace in the Korean peninsula--China’s economic proposition, and its leverage over North Korea, makes it an increasingly more compelling partner than the United States.

Economic interdependency was found to be an even smaller factor when analyzing the Senkaku-Diaoyu Islands dispute. At its core, historical and nationalistic sentiments dominate the issue more than the actual value of sovereignty over the islands. Any attempt by China to yield on economic grounds would undermine domestic political and social stability, the exact outcomes which economic development in China sought to avoid in the first place. Lastly, the recent conflagration in the South China Sea dispute between China and the respective ASEAN claimants has raised alarms in the region concerning China’s growing militarism and possible expansionistic tendencies. Nevertheless, the apparent willingness of China to resolve the matter multilaterally and jointly develop a code of conduct with ASEAN have validated the pacifying effects of economic regionalism--China’s active participation in ASEAN-centric platforms and the conclusion of the ACFTA have lent much institutional credence to ASEAN, thus making it more difficult for China to deal with the issue outside of ASEAN. China has displaced the United States as the top trading partner for Japan and South Korea, while it is quickly closing the gap on the US as ASEAN’s top trading partner. In the other aspects of economic interdependency considered in this study, the results have also been conclusive. The domestic economic reforms have borne fruit as FDI inflows to China continue to increase, while reciprocal FDI outflows from China to East Asia is becoming a trend that bears watching. The regional trade architecture has likewise evolved since 2001, underpinned by the ACFTA alongside concurrent exploratory efforts by APEC and the East Asia Summit to promote regional economic integration. China’s accession to WTO, and the catalytic effects it created, has firmly cemented its position as the economic powerhouse in East Asia early in this century. Building on already substantive trade links with its economic partners, China’s symbiotic economic interdependency with its regional neighbors today has become a key feature of the East Asian political economy.

Next, there are strong indications to support the thesis that the growing economic interdependency in East Asia has contributed to more stability and predictability in the region. Despite the fundamental causes of conflict present in the three outstanding security concerns in the region, a cause for optimism is the fact that these differences have not yet led to a full-scale conflict over the last decade. Until 2009, multilateral dialogue has been the preferred method of diffusing the North Korea nuclear issue, while China’s economic leverage over South Korea has meant that South Korea has been more willing to work in concert with China to identify and pursue peaceful outcomes to the issue. China also appears to be open to working towards a legally-binding code of conduct in the South China Sea based on its vested economic interests in ASEAN and in order to invalidate the United States’ offer to mediate such a development. While it is certainly a stretch to attribute the relative peace that has been maintained in East Asia solely to China’s accession to the WTO, it is nonetheless accurate to state that the costs of entering a conflict in 2010 are much higher than in 2001 due to the economic benefits brought about by China’s WTO accession. Although critics point to a similar juncture prior to the outbreak of World War I as evidence that economic costs alone are insufficient to deny the forces of realist interests, the difference today is the relative sophistication of active diplomacy and the maturity of multilateralism--both of which are to a large extent a result of enhanced regional economic cooperation.

In the case of China, costs can be measured in terms of how far a regional military conflict would set China back away from its strategic objectives. Despite all the attention on China’s position as the world’s second largest economy and predictions that China will overtake the United States by 2025 or 2030, China is still a relatively poor country plagued by several social challenges. One of them is China’s rapidly aging population, a consequence of its “one child” policy, which will affect China’s overall productivity in a few decades. Therefore, Chinese leaders rightly view this period as a “strategic opportunity” to maximize its economic gains and improve the living standards of its population before the onset of the aging problem. From this angle, then, it is understandable why China has been hesitant to overplay its hand and disturb the security equilibrium by too much. Undermining the peaceful security environment in East Asia would disrupt China’s quest for sustained economic growth which in turn is imperative for the sustained legitimacy of the CCP. In Premier Wen’s words, “For China to continue its economic development and become a power to be reckoned with in Northeast Asia, it will need a secure, peaceful neighborhood and a peaceful world … Anything that threatens our prospects for development is worrisome.”[67]

Notwithstanding the above, maintaining its territorial integrity continues to be a strategic imperative for China--one which even economic development cannot override. This is in part a legacy of the “century of humiliation” where foreign powers violated China’s territorial integrity at will, and also a shield against the “domino effect” as any signs of weaknesses where it pertains to territorial disputes may embolden dissidents in other parts like Tibet and Xinjiang to do likewise. Therefore, finding the right balance between these two conflicting imperatives will be the main challenge for China going forward. Quite clearly, the Chinese leadership has recognized the limit to which they could assert their claims, either diplomatically or militarily, without causing a backlash in global opinions.

This is evident in the analysis of the tussle over the South China Sea, when the United States, having devoted much more attention to the region in recent years, entered the fray after observing China’s bellicose behavior. An expansion of the U.S. presence in the region works against the interests of China, and China’s insistence on its territorial claims will only create the outcome which it is trying to avoid. Worse still, a miscalculation may risk a military faceoff with the United States and negate all the social and economic progress it has made thus far. As Professor Mahbubani alluded to, “China’s decision to browbeat the Japanese into submission over the fishing trawler suggests that China may be throwing Deng’s geopolitical caution out of the window … the geopolitical cards could turn out in Japan’s favor if China overplays its hand.”[68]

Implications for the United States

How can the findings of this study serve to inform U.S. policy towards China and the East Asian region at large? First, China’s relative success in its conduct of trade diplomacy, precipitated by its WTO accession, in East Asia is a clear reminder to the United States regarding the important role which trade plays when cultivating strategic relations in East Asia. After all, the United States had itself attained the status of a regional power in East Asia in the 1960s and 1970s largely due to its strong economic linkages with the region. At the moment, notwithstanding the important private investment role played by U.S. multinational corporations in the region, a coherent trade policy in East Asia is sorely absent in the Obama administration at the same time when China is getting a firmer foothold by the day. Of immediate concern is the need to conclude the re-negotiations of the Korea-U.S. FTA[69] (originally agreed upon in 2007) so as to pave the way for ratification and implementation. Otherwise, the risk of being beaten to the post by China, who has began negotiations with South Korea on a bilateral FTA, cannot be discounted.

To make matters worse, the global financial crisis had made East Asian leaders more wary of an over-reliance on U.S. consumption habits. Therefore, despite the surge in diplomatic activity in the region--Secretary Clinton has made six visits to Asia since January 2010--the United States needs to demonstrate its commitment to reengage East Asia in the economic realm to avoid being squeezed out of the region. Its recent announcement to join negotiations to join the Trans-Pacific Partnership[70] is a step in the right direction, but substantive political capital needs to be spent to navigate the U.S. Congress.

Second, it is in the interests of the United States to strengthen regionalism in East Asia. This study has shown that an effective way to contain China in the various security issues is to employ a multilateral approach instead of portraying the United States as the intervening “savior”. As discussed earlier, the introduction of the United States in security matters in East Asia has often been met with much apprehension and suspicion on the part of China, and repeated threats by the United States to intervene would only lead to the detriment of regional security. Rather, leveraging on the weight of regional institutions like ASEAN is likely to be less threatening and stands a higher chance of placating the concerns of China. Besides, China’s pursuit of economic regionalism has had the effect of building up diplomatic capital with its East Asian partners, and this capital would be best employed in a multilateral context. This is not to suggest that the United States should then stay out of security issues in East Asia altogether, as they indirectly affect the national interests of the United States. Instead, as far as diplomacy goes, form can be more important than substance at times, and therefore the style of U.S. involvement needs to be calibrated according to the regional context.

About the Authors

Frederick Choo is a Lieutenant Colonel in the Singapore Armed Forces. He is a recent graduate of the U.S. Army Command and General Staff College (CGSC), Fort Leavenworth, Kansas, where earned a master’s degree in Military Arts and Sciences. He also holds both a Master’s in Engineering and a B.A.degree from the University of Cambridge, United Kingdom.

Dr. David A. Anderson is a retired U.S. Marine Corps officer. He is now a professor of Strategic Studies and Odom Chair of Joint, Interagency and Multinational Operations at the U.S. Army Command and General Staff College, Fort Leavenworth, Kansas, where he teaches strategic and operational studies, as well as economics. He is also an adjunct professor for Webster University, where he teaches various international relations courses including, International Political Economy and Globalization. He has published numerous articles on military, economics, and international relations related topics. 

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11. Yongding Yu, “FDI in China,” http://www.joho-fukuoka.or.jp/kigyo/asif-fko/third/YongdingYu.pdf (accessed 23 July 2010).

12. Tony D’Altorio, “Japan and China Sitting in a Tree,” Investment U Research, 26 August 2010, http://www.investmentu.com/2010/August/japan-and-china-sitting-in-a-tree.html (accessed 29 September 2010).

13. Michael J. Enright, W. John Hoffman, and Peter Wood, “Get Ready, Here China Inc. Comes,” Wall Street Journal, 24 February 2010, http://online.wsj.com/article/SB10001424052748704140104575056641551276982.html (accessed 30 September 2010).

14. “China’s Relations with Myanmar: Welcome, Neighbor,” The Economist, 9 September 2010, http://www.economist.com/node/16996935?story_id=16996935 (accessed 20 October 2010).

15. Leonard K. Cheng and Zihui Ma, “China’s Outward FDI: Past and Future,” July 2007, 6, http://www.nber.org/books_in_progress/china07/cwt07/cheng.pdf (accessed 20 September 2010).

16. Besta Shankar, “China stands fifth in outbound investments globally,” International Business Times, 6 September 2010, http://www.ibtimes.com/articles/59772/20100906/fdi-odi-protectionism-asean-emerging-markets.htm (accessed 30 September 2010).

17. Reuters, “China inbound and outbound investment still on rise,” Reuters, 6 September 2010, http://in.reuters.com/article/idINIndia-51302420100906 (accessed 30 September 2010).

18. Chris, “China-ASEAN Investment Agreement Signed,” Xinhua News, 15 August 2009, http://news.xinhuanet.com/english/2009-08/15/content_11885891.htm (accessed 30 September 2010).

19. United Nations Conference on Trade and Development, World Investment Report 2010: Investing in a Low-Carbon Economy (New York and Geneva: United Nations Publication, 2010), 40-42.

20. Ministry of Commerce, China, “China’s Direct Investment Abroad Expected to Breakthrough USD100b by 2013,” 3 September 2010, http://english.mofcom.gov.cn/aarticle/newsrelease/commonnews/201009/20100907117824.html (accessed 30 September 2010).

21. Masahiro Kawai and Ganeshan Wignaraja, “Free Trade Agreements in East Asia: A Way Toward Trade Liberalization?” ADB Briefs no. 1, June 2010, www.adb.org/documents/.../ADB-Briefs-2010-1-Free-Trade-Agreements.pdf (accessed 15 July 2010): 3.

22. Asian Development Bank, Emerging Asian Regionalism, 86.

23. Masahiro Kawai and Ganeshan Wignaraja, “Free Trade Agreements in East Asia: A Way Toward Trade Liberalization?” ADB Briefs no. 1, June 2010, www.adb.org/documents/.../ADB-Briefs-2010-1-Free-Trade-Agreements.pdf (accessed 15 July 2010):2-3.

24. Ministry of Commerce, China, “China FTA Network,” http://fta.mofcom.gov.cn/english/fta_qianshu.shtml (accessed 1 October 2010). China has agreements with Hong Kong and Macau, but these are discounted in this analysis as Hong Kong and Macau are sovereign to China. The other agreements in effect are those signed with Pakistan, Chile, New Zealand, Peru, and Costa Rica.

25. John Ravenhill, “The New Trade Bilateralism in East Asia,” in East Asian Multilateralism: Prospects for Regional Stability, ed. Kent E. Calder and Francis Fukuyama (Baltimore: John Hopkins University Press, 2008), 96.

26. Thailand, Singapore, Malaysia, Indonesia, Brunei, and Philippines.

27. Sutter, Robert G. “China’s Rise and the Durability of U.S Leadership in Asia.” In China and the United States: Cooperation and Competition in Northeast Asia, edited by Suisheng Zhao, 33-60. New York, NY: Palgrave Macmillan, 2008: 182-183.

28. John Wong and Sarah Chan, “China-ASEAN Free Trade Agreement – Shaping Future Economic Relations,” Asian Survey 43, no. 3 (May 2003): 508.

29. Ministry of Commerce, China, “FTA Helps Trade between Guangxi and ASEAN in the First 4 Months Hit a New Record High over the Same Period,” 19 May 2010, http://fta.mofcom.gov.cn/enarticle/enasean/chianaseannews/201006/2803_1.html (accessed 1 October 2010).

30. Jiang Yang, “China’s Free Trade Agreements and Implications for the WTO,” presentation at the ISA 49th Annual Convention: Bridging Multiple Divides, 26 March 2008, www.allacademic.com/meta/p250869_index.html (accessed 2 October 2010), 12.

31. Hale, David. “The Outlook for Economic Integration in East Asia.” In East Asian Multilateralism: Prospects for Regional Stability, edited by Kent E. Calder and Francis Fukuyama, 58-77. Baltimore: John Hopkins University Press, 2008: 65.

32. Xianzhi Li, “China, S Korea, Japan to launch joint study on trilateral free trade deal,” Xinhua News, 17 February 2010, http://news.xinhuanet.com/english2010/business/2010-02/17/c_13177870.htm (accessed 2 October 2010).

33. Ministry of Commerce, China, “China and ROK Wrapped Up Government-Industry-University Joint Study in FTA,” 4 June 2010, http://fta.mofcom.gov.cn/enarticle/enkorea/enkoreanews/201006/2805_1.html (accessed 3 October 2010).

34. Bonnie S. Glaser and Liang Wang, “The North Korea Nuclear Crisis and U.S.-China Cooperation,” in China and the United States: Cooperation and Competition in Northeast Asia, ed. Suisheng Zhao (New York, NY: Palgrave Macmillan, 2008), 147.

35. Ibid., 148.

36. Ibid., 157.

37. Ibid., 150.

38. Ibid., 153.

39. Ministry of Foreign Affairs, China, “China Strongly Opposes North Korea Nuclear Test,” 9 October 2006, http://news.xinhuanet.com/world/2006-10/09/content_5180207.htm (accessed 17 October 2010).

40. Ministry of Foreign Affairs, China, “Chinese government "resolutely opposes" DPRK's nuclear test,” 25 May 2010, http://news.xinhuanet.com/english/2009-05/25/content_11433096.htm (accessed 20 October 2010).

41. Glaser and Wang, “The North Korea Nuclear Crisis and U.S.-China Cooperation,” 144.

42. Xuequan Mu, “Chinese premier promotes cooperation, good neighborliness in South Korea tour,” Xinhua News, 29 May 2010, http://news.xinhuanet.com/english2010/china/2010-05/29/c_13321834_3.htm (accessed 20 October 2010).

43. Kelly Olsen, “China tells S. Korea it will 'defend no one',” The China Post, 29 May 2010, http://www.chinapost.com.tw/asia/korea/2010/05/29/258613/China-tells.htm (accessed 20 October 2010).

44. Mu, “Chinese premier promotes cooperation, good neighborliness in South Korea tour.”

45. Susan L. Shirk, China: Fragile Superpower (New York, NY: Oxford University Press, 2007), 144.

46. Ibid., 146.

47. Japan took control of the islands in 1895 following the first Sino-Japanese war, together with Taiwan and Korea. After the end of World War II, the US administered the islands until 1972 when it returned them to Japan. Since then, China has been disputing the ownership of the islands based on historical grounds.

48. Shirk, Fragile Superpower, 147.

49. Ministry of Foreign Affairs, China, “Wen Jiabao Urges Japan to Release Chinese Captain Immediately and Unconditionally,” 22 September 2010, http://www.mfa.gov.cn/eng/wjb/zzjg/yzs/xwlb/t755599.htm (accessed 21 October 2010).

50. Keith Bradshaw, “Amid Tension, China Blocks Crucial Exports to Japan,” The New York Times, 23 September 2010, http://www.nytimes.com/2010/09/24/business/global/24rare.html?pagewanted=1&src=busln (accessed 23 October 2010).

51. Theunis Bates, “Did China Ban Rare Mineral Exports to Japan?” AolNews, 23 September, http://www.aolnews.com/world/article/did-china-ban-rare-mineral-exports-to-japan/19645461 (accessed 23 October 2010).

52. Ian Johnson, “China Arrests Four Japanese Amid Tensions,” The New York Times, 23 September 2010, http://www.nytimes.com/2010/09/24/world/asia/24chinajapan.html (accessed 22 October 2010).

53. Chico Harlan, “China releases three Japanese citizens,” The Washington Post, 30 September 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/09/30/AR2010093002350.html (accessed 22 October 2010).

54. Shirk, Fragile Superpower, 180.

55. Larry M. Wortzel, “China’s Foreign Conflicts since 1949,” in A Military History of China, ed. David A. Graff and Robin Higram (Boulder, CO: Westview Press, 2002), 278.

56. Ibid., 281.

57. Ibid.

58. Kang, David C. China Rising: Peace, Power, and Order in East Asia. New York, NY: Columbia University Press, 2007:136.

59. Ibid., 137.

60. Wendell Minnick, “China is Checkmated at ASEAN,” DefenseNews, 2 August 2010.

61. The Mainichi Daily News, “China retracts policy on S. China Sea, tells U.S.,” 23 October 2010, http://mdn.mainichi.jp/mdnnews/international/archive/news/2010/10/23/20101023p2g00m0in007000c.html (accessed 28 October 2010).

62. U.S. Department of State, “Secretary of State’s Remarks at Press Availability,” National Convention Center, Hanoi, Vietnam, 23 July 2010, http://www.state.gov/secretary/rm/2010/07/145095.htm (accessed 28 October 2010).

63. Ministry of Foreign Affairs, China, “Foreign Minister Yang Jiechi Refutes Fallacies in the South China Sea Issue,” 26 July 2010, http://www.mfa.gov.cn/eng/zxxx/t719460.htm (accessed 1 August 2010).

64. Channel News Asia, “China warms to code of conduct on South China Sea dispute,” 30 October 2010, http://www.channelnewsasia.com/stories/afp_asiapacific/view/1090299/1/.html (accessed 30 October 2010).

65. The Mainichi Daily News, “ASEAN, China to meet on S. China Sea code of conduct in December,” 28 October 2010, http://mdn.mainichi.jp/mdnnews/news/20101028p2g00m0in006000c.html (accessed 30 October 2010).

66. Ministry of Foreign Affairs, China, “Premier Wen Attends 13th ASEAN-China Leaders Summit and Delivers Address,” 29 October 2010, http://www.mfa.gov.cn/chn/gxh/tyb/zyxw/t765220.htm (accessed 30 October 2010).

67. Glaser and Wang, “The North Korea Nuclear Crisis and U.S.-China Cooperation,” 158.

68. Kishore Mahbubani, “The Paradox of Blinking,” The Japan Times, 20 October 2010, http://search.japantimes.co.jp/cgi-bin/eo20101020a2.html (accessed 1 November 2010).

69. Despite widespread anticipation of a breakthrough at the Seoul G20 Summit in November 2010, the FTA remains in limbo due to issues relating to the automotive and beef industry.

70. Office of the US Trade Representative, “Trans-Pacific Announcement,” December 2009, http://www.ustr.gov/about-us/press-office/press-releases/2009/december/trans-pacific-partnership-announcement (accessed 17 November 2010). This multilateral FTA currently comprises Singapore, New Zealand, Chile, and Brunei; while the US, Peru, Australia, Malaysia, and Vietnam are negotiating to participate.

 


 
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