The Economic Crisis Facing the Asia Pacific
The countries of the Asia Pacific region face a series of major economic problems. First, the region’s two largest economies, China and the United States, are headed toward a major clash as early as this fall. China’s soaring global current account surplus will probably approach $150 billion and 7½ percent of its GDP this year, becoming the largest single counterpart to the US global current account deficit of about $800 billion or almost 7 percent of its GDP. Unless China promptly revalues the renminbi by at least 10 to15 percent, and preferably 20–25 percent, the Treasury Department will almost certainly and justifiably label China as a “currency manipulator” in October and be compelled by US law to institute strong measures to induce it to act.
Absent a substantial Chinese revaluation, the Senate is likely to pass the Schumer Amendment, which would impose an across-the-board surcharge of 27.5 percent on all imports from China. The House of Representatives already passed anti-China trade legislation in July. Chinese retaliation against such new restrictions by the United States, were they ever to become law, would be both probable and justified. The result would be a trade war between the two chief locomotives of the world economy.
But China-United States economic relations are on a collision course even if the current impasse over exchange rates can be resolved. Bilateral imbalances are economically irrelevant but politically explosive and China’s trade surplus with the United States now exceeds an annual rate of $200 billion. US imports from China are six times as large as US exports to that country so the imbalance will almost certainly continue to grow. The United States has already imposed substantial new barriers to Chinese exports in six sectors and more such restrictions are coming. Moreover, there are widespread fears in the United States that China is moving rapidly up the technology ladder and strong emotional reactions to China’s scramble to secure dedicated supplies of energy, as dramatized by the recent de facto Congressional rejection of CNOOC’s bid for Unocal. Numerous political and security problems, most sensitively of course relating to Taiwan, add to this worrisome picture.
Second, when President Bush visits Seoul after this year’s APEC summit, the United States and Korea are likely to initiate negotiations for a bilateral free trade agreement. This would be the first bilateral FTA between the United States and any Northeast Asian, or indeed any large Asian, economy. I strongly support such an agreement and our Institute for International Economics, at the request of Deputy Prime Minister Han-Duck Soo when he was Minister of Trade in 2000, prepared one of the first analyses of its effects.
But Japan, in light of the trade diversion it would suffer from a US-Korea FTA, and even more importantly the broad foreign policy implications of such a step, will then almost certainly seek and receive an FTA negotiation of its own with the United States.5 The United States may simultaneously be launching FTA talks with one or more Southeast Asian countries, most likely Indonesia and/or Malaysia. China is likely to perceive such a series of US initiatives as a “surround China” or even “containment” strategy in the economic domain, intensifying its concerns over the “surround China” strategy that the United States is already pursuing in the security domain, raising fundamental problems for trans-Pacific relations and exacerbating the more immediate United States–China conflict already noted.
Third, the evolution toward an East Asian Free Trade Area, whether it is ever called that or not, has accelerated with the further proliferation of FTAs in the region. Virtually every possible combination of countries in East Asia, with the exception of Taiwan for obvious political reasons, is engaged in FTA negotiations or preliminary talks or at least officially sponsored studies. The huge trade (and perhaps monetary) bloc that could result would discriminate sharply against outsiders, costing the United States alone at least $25 billion in lost exports immediately and much more over time. This process could receive a strong political push from the Asian summit that will be held in Malaysia later this year.
