Opportunities in China, Japan, SKorea trade tie-up with ASEAN

What does the South China Sea mean to China?

You could imagine China, Japan and South Korea (about 70 percent of Asian economy and 23 percent of the world GDP) as three great solo players who just can't function together as an instrumental ensemble.

I am reminded of a famous case like that in musical history. Arguably some of the best musicians of the past century – Arthur Rubinstein (piano), Jascha Heifetz (violin) and Gregor Piatigorsky (cello) – performed so well together for a while that (to Rubinstein's great displeasure) they were called "The Million Dollar Trio." But then the whole thing fell apart as Rubinstein and Heifetz engaged in irreconcilable personality clashes disguised as artistic disagreements.

Well, the three Northeast Asian neighbors had great hopes of establishing a very close trilateral trading relationship and held regular annual meetings between 2008 and 2012 to make that happen. And then, just like the famous trio, this promising regional economic partnership hit the wall as its members resumed feuding three years ago about territorial claims, wars of aggression and war crimes.

Some efforts at reconciliation were made recently, after they realized that enormous damage was done to regional trade and investment flows. But, amid smiles and photo opportunities, they all refused to make any concessions on irritants that led to renewed hostilities. So, the best they could do at the three countries' summit meeting on November 1, 2015 in Seoul, South Korea, was to agree to keep the dialogue alive, and to facilitate people-to-people contacts in an attempt to dispel old enmities.

Will a small chamber orchestra do?

It looks like they are hoping that time will do its part, and that the serious Sino-Korean clash with Japan will be somehow diffused in a web of free-trade relationships that would link them up in a 10+3 formation with the ten countries of the ASEAN (Association of Southeast Asian Nations) – a way station to the Regional Comprehensive Economic Partnership (RCEP) and a genuine East Asian Economic Community.

That may not be a very ambitious reconciliation agenda, but it is possible that this broader Asian multilateral framework will provide auspicious opportunities for healing and cooperation.

One of the most suitable such events was probably the 27th ASEAN Summit in Kuala Lumpur, Malaysia, on November 18-22, 2015. That is where these new trading arrangements have been addressed as a matter of great priority. China, in particular, is apparently pushing for an early completion of ongoing negotiations. In fact, media reports have it that ASEAN's current chairman, the Malaysian Prime Minister Najib Razak, and China's President Xi Jinping agreed last Tuesday during the APEC meeting in Manila, Philippines, that the RCEP should be created by the end of 2016.

China's economic and political heft and its growing regional influence make that scenario more likely than most Western observers seem to expect. During the just completed 18th China-ASEAN meeting in Kuala Lumpur, Beijing offered $10 billion in development loans, and called for a speedy upgrading of its 2004 free-trade agreement with that ten-member group in order to bring their bilateral trade to $1 trillion over the next four years.

Malaysian summit hosts appear to have given it a nod, as the Prime Minister Razak lauded China's "substantial regional initiatives" as a "testament to its commitment" to ASEAN countries.

Japan as a concertmaster?

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I believe these new integration arrangements offer a great opportunity to Japan's formidable and highly sophisticated service and manufacturing industries. This broader market access should help Japan's trade balance at a time when its monetary policy is hitting diminishing returns, and when its fiscal policy has a very limited scope to really make a difference to the country's growth outlook.

One can clearly see that in Japan's latest GDP numbers. In spite of the fact that the loose monetary policy led to the yen's 6 percent decline against the dollar over the past twelve months, net exports still shaved off nearly an entire percentage point from the growth of Japan's domestic demand in the first three quarters of this year.

And here are also some numbers to show how much Japan's growth prospects may have been affected by its declining trade with Asia, which takes 54 percent of Japan's total exports. That is nearly double the Japanese exports to Europe and North America taken together.

During the January-October interval, Japan's exports to China and South Korea were in virtual stagnation, increasing only 0.5 percent and 1 percent respectively. Tokyo's business with all of Asia was a bit better as its exports to the region grew 4.6 percent, but that marked no improvement compared with Japan's Asian export business for 2014 as a whole.

By contrast, so far this year Japan's exports to the U.S. and Europe rose 14.5 percent and 5 percent respectively.

This may lead one to believe that Japan has given up on Asia. But does it really make sense for Japan to see its lackluster exports to the fastest-growing segment of the world economy?

Tokyo should not blame this on the U.S. Washington's frictions with China regarding the South China Sea may be forcing Japan to take a harder line with Beijing, but that should not kill its trade with the Middle Kingdom. After all, China is South Korea's main trading partner despite some 30,000 combat-ready U.S. troops and impressive military hardware in China's neighborhood on the Korean Peninsula.

Japan, therefore, may wish to play along in this new 10+3 Asian setting. It can take a cue from the 14-member "Eight Seasons" Slovak Chamber Orchestra, which opened the Japan's cultural season two years ago. The orchestra plays without a conductor, in case Japan is afraid that its big neighbor might grab that role. And, who knows, with its great economic, industrial and cultural strengths, Japan could even play as a concertmaster (a.k.a. the first fiddle) tuning up the orchestra.

Investment thoughts

East Asia's broad-based integration will boost the regional growth. The China-sponsored Belt and Road Initiative, and its link-up with the Eurasian Economic Community, will extend this integration process to Central Asia and beyond. At some point in the near future, that may also include free-trade arrangements with the EU.

In spite of that, it remains to be seen to what extent these greater opportunities for economic, political and cultural interaction will alleviate the existing tensions in Northeast Asia.

I believe, however, that the recent history of regional development offers reasons to think that the stage is being set for East Asia's productive and peaceful future.