United States Sees Asia's Economic Worth—Finally
The fact that East Asia accounted for more than half of American trade deficit in the first nine months of this year is enough to conclude that Washington's decision to devote a greater policy focus to the fastest-growing segment of the world economy was long overdue.
It all looks like America's increasingly negative trade balance with the East Asian economy was a matter of puzzling policy oversight. How else do you explain that American exports to the tiny Netherlands amount to nearly two-thirds of what it sells to Japan? Indeed, a country one-tenth the size of the third-largest economy in the world makes a roughly comparable contribution to economic growth and export-related job creation in the United States.
Clearly, whatever else might have been behind the original "pivot" to Asia move, issues of America's growing trade deficits with this area were bound to come back center stage. And they are triggering a policy shift toward a comprehensive engagement with East Asia to generate more sales of American goods and services to an economy representing nearly a quarter of world output and more than two-thirds of humanity.
Better Market Access and Respect of Global Trade Rules
American businesses are not newcomers to East Asia. They did not need the rebalancing to discover the economic potential of that part of the world. But they do need help of lower trade barriers and a more favorable regulatory environment to set up and run operations in most countries of that area.
How can the rebalancing solve these problems?
Free-trade agreements are part of the answer. They are the best way of providing better access to foreign markets for U.S. businesses.
Unfortunately, that instrument of trade policy is of little help to American companies in Asia-Pacific. At the moment, the U.S. has free-trade agreements with Australia, South Korea and Singapore – the three countries which take only 7 percent of American exports.
That is one of the things the rebalancing is meant to change. During his just completed visit to East Asia, President Barack Obama sought to make trade and investments the key pillar of his rebalancing campaign. He vigorously promoted the expansion of the U.S.-led Trans-Pacific Partnership (TPP) as a "21st century" free-trade agreement designed to promote global commerce, protect labor rights, restructure public sector companies and enforce the rules governing intellectual property.
The TPP currently has 11 member countries. Six of them are in the Pacific Rim (Australia, New Zealand, Singapore, Malaysia, Vietnam and Brunei), and they account for about 5 percent of total U.S. exports.
Thailand and Japan are still exploring the possibility of becoming TPP members.
The aim here is to create a huge trans-Pacific free-trade area through a web of overlapping trade relationships between the TPP and Asia's Regional Comprehensive Economic Partnership (RCEP), a group of 16 countries consisting of 10 ASEAN (Association of Southeast Asian Nations) members plus China, Japan, India, South Korea, Australia and New Zealand. RCEP is expected to become the world's largest free-trade area when the current negotiations are completed over the next few years.
Asian Economic Union and a Trans-Pacific Community
All this shows why purely economic considerations are enough to move the U.S. – a Pacific nation -- to rebalance to Asia. But economics are only part of the story. Asian leaders are modeling their deepening economic integration on the European Union in order to create an Asian paradigm for peace and prosperity. And that is a powerful motivation for the U.S. to become an integral part of the trans-Pacific community, just as it is a large trading partner and a vitally important member in the Euro–Atlantic community.
The key Asian leaders are showing that they are willing to transcend difficult historical legacies of disputed territorial claims in search of peace and more integrated markets for trade and finance.
China and India are the prime example of that. Despite shrill rhetoric of some political commentators, these two countries are constructively working on their unresolved border issues while engaging in a rapidly growing volume of trade and investments. China is by far India's most important trading partner.
While briefing the press, during the ASEAN summit in Phnom Penh, on the meeting between the Chinese Prime Minister Wen Jiabao and the Indian Prime Minister Manmohan Singh, the Indian Foreign Secretary Ranjan Mathai made the statement that Beijing and Delhi "have set in place a joint mechanism to ensure peace and tranquility on the border." And to underscore increasingly confident Sino-Indian ties, Mr. Wen described as "memorable" his many meetings with Mr. Singh who calls him "a close friend."
China – ASEAN's largest trading partner since 2009 -- has also initiated negotiations on a tri-lateral free-trade agreement with Japan and South Korea, even though these countries have unresolved territorial issues in the Sea of Japan and the East China Sea. This agreement is expected to cement the creation of the Asian Economic Union (RCEP).
Washington's determination to become part of this integration process can be gleaned from the following exchange between President Obama and the Prime Minister Wen on the margins of the ASEAN meeting in Phnom Penh.
President Obama told the Chinese leader that the "cooperative and constructive approach" was in the interest of both countries, but, apparently alluding to China's alleged trade transgressions, he emphasized that "clear rules of the road" must be observed in international trade.
Wen responded that "stronger economic cooperation (emphasis added) should be the means to tackle the difficulties we have" and a way of "resolving the differences and disagreements between us."
That is a clear opening for the trans-Pacific dialog as Asian leaders seem ready to follow the advice Winston Churchill delivered at the White House in the early years of the Cold War: "to jaw-jaw is always better than to war-war."
Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.