As Europe fights terror, East Asia makes strides on trade, peace initiatives

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Seoul, South Korea

At about the same time when Munich's railway stations were cleared on threats of terrorist attacks, the beautiful Grand-Place in Brussels blanketed by storm-troopers and some 100,000 police and army personnel patrolled the French cities, the people in the Land of the Rising Sun were serenely praying on New Year's sunrise to the celestial sun goddess Amaterasu Omikami.

Starting with New Zealand's cheerful celebrations and spectacular firework displays in the breathtaking Sydney Harbour, East Asia was ushering in a New Year with song and dance in its public squares, millions of revelers in its streets and contemplative moments in its temples of warship.

They had many things to celebrate.

This fastest-growing segment of the world economy is lifting millions of its people out of poverty, and its rapidly expanding middle class is expected to provide a new source of support to struggling developed economies.

With more than $700 billion in excess savings, East Asia can do that: It is by far the world's largest capital exporter and the main hope of non-inflationary finance to the deeply indebted countries.

East Asia is also ending the year on a high note of peace and economic cooperation.

Koreans are talking (nicely)

Japan and South Korea reached recently an agreement on one of the most contentious issues in their history.

Yes, the critics are finding things to fault in the way Tokyo and Seoul came together in their deal on WWII "comfort women," but I believe this agreement is just the first step of many that the two countries will undertake to narrow disagreements on their past and to build closer economic, social and political ties.

Relations between the north and south parts of the Korean Peninsula are also discussed in a more positive key than has been the case in recent years. Conciliatory initiatives are now coming from both sides.

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The New Year's message of the North Korean leader, calling for unification talks, was promptly and positively answered by Seoul.

An active dialog between Japan and South Korea would greatly help inter-Korean relations.

Chances are, that might happen because Tokyo wants a less hostile neighborhood and open channels for trade and investments.

At the moment, Japan's exports to South Korea are virtually stagnant.

That would radically change for the better if the two Koreas could establish a degree of détente that would facilitate commerce and gradually bring Pyongyang into the Asian community.

China is an even more important party to the resolution of the Korean problem because it has close links with the North and a booming bilateral trade with the South.

China takes about 26 percent of Seoul's exports; it is the largest market for Korean goods and services.

And these trade ties will continue to strengthen as the two countries move towards a full implementation of their free-trade agreement.

Chinese companies are also acquiring record numbers of Korean businesses in healthcare, high-tech, insurance and consumer sectors.

China's direct investments in South Korea are estimated to have reached $2 billion last year, more than double the amount recorded in 2015.

The demand for quality health-care and consumer products of China's rapidly growing middle class will open up huge new markets for these Korean companies.

Japan must be watching all this with great concern at a time when its exports to China are going nowhere: In the first ten months of last year, they rose only 0.5 percent from the year earlier.

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Pressure from Japanese businesses on their government to resolve contested territorial claims in the South China Sea are getting more intense as the economy remains highly dependent on exports to spur investments, employment creation and household spending.

Tokyo will also be piqued to see that the Philippines, one of Asia's most forceful opponents to China's territorial claims, agreed to join the 57 countries as a founding member of the Beijing-led Asian Infrastructure Investment Bank (AIIB).

That is a step Japan refused to take. But Manila just did.

The Philippines ambassador to China signed the AIIB's Articles of Agreement on December 31, while the government issued a statement that the AIIB was "a promising institution" that could help to finance the country's estimated $127 billion in infrastructure investments over the next five years.

Modi and Sharif are hugging

Going further south, theleaders of India and Pakistan hugged and walked hand-in-hand in Lahore on Christmas Day.

The caught-out media fulminated about an "unannounced, impromptu … publicity stunt," even though they were watching an apparently carefully prepared summit on India Prime Minister Modi's way back home from his two-days visit to Moscow.

India experts believe that this is simply Modi's attempt to appeal to large Muslim populations in the run-up to crucial regional elections in Assam, West Bengal and Uttar Pradesh over the next 18 months.

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Strangely, though, they fail to see this meeting as part of an active negotiating process India and Pakistan are now conducting in order to join the Shanghai Cooperation Organization (SCO).

I don't know what exactly is going on in the accession talks, but it is obvious that Indo-Pakistani hostilities, verging on military confrontation, are incompatible with the SCO membership.

So, chalk this one up as possibly an epochal peace initiative in the making, despite Modi's growing criticism at home and the two countries' seemingly irreconcilable claims over Kashmir.

Investment thoughts

East Asia's large excess savings (i.e., trade surpluses), small or moderate budget deficits (except for Japan), low inflation and its free-trade agreements offer plenty of room for policies to support the region's demand, output and employment.

The only thing missing is a decision to generate more growth from domestic demand.

Asians have to wean themselves off their age-old inertia of relying on export sales - i.e., counting on the fickle external demand they cannot control.

China has all it needs to (a) reach its growth objectives, (b) implement its structural reforms and (c) operate the desired changes in the composition of its aggregate demand.

But China's real problem is its financial system and an apparent rush to open up capital account transactions.

Its recent equity market debacle was an example of that.

Beijing might wish to take a closer look at the regulatory and supervisory problems affecting its young and growing financial services industry.

The unfolding inter-Korean dialog, improving Japanese-Korean relations, the inevitable Sino-Japanese rapprochement and a hopeful warming of Indo-Pakistani ties bode well for the region's peace and increasing flows of trade and investments.