A United States Policy for the Changing Realities of East Asia: Toward A New Consensus

Daniel I. Okimoto, Henry S. Rowen, Michel Oksenberg, James H. Raphael, Thomas P. Rohlen, Donald K. Emmerson, Michael H. Armacost, Bill Bradley and George Shultz

Asia Pacific Research Center

1996

PREFACE

In recent decades, the people and countries of East Asia have transformed themselves and now live in a region of profound economic, political, and military power. Even more critical is the vast potential of the countries in this region -- a potential that will enable them as a group to be one of the foremost influences throughout the next century. At the same time, we remain cognizant of the enormous security, political, economic, and environmental challenges that this region faces, not the least of which include long-standing and seemingly intractable tensions involving Taiwan and the Korean peninsula. How East Asia develops--with its 1.9 billion people, its dynamically expanding markets and exports, its volatile politics and nuclear capability -- will shape the world order into the next millennium.

As important as the changes within East Asia are, they cannot be viewed in a vacuum. The end of the Cold War has irrevocably altered the entire world power structure and broadened the U.S. perspective. With the Soviet Union no longer in existence, the focus of U.S. security concerns has changed, causing many policymakers, scholars, and the American public to reassess the United States' role in the world, including its military presence in East Asia. As well, the end of the Cold War has opened the door for new relationships among the countries of East Asia, and between East Asian nations and those in other regions. Although a fundamental shift in alliances is unlikely to occur quickly, the recent testing of the waters between Russia and China represents just one prominent example of how significant these transformations might be.

Global markets have also exploded, adding over 3 billion people as consumers and competitors. East Asia is at the forefront in taking advantage of those new opportunities. Fearful of such increasing economic power, some policymakers and business interests have placed economic relations between the United States and East Asia as a priority, overshadowing national security and other vital concerns.

The information revolution is also bringing another wave of change. Sophisticated communications will make it almost impossible to keep people isolated, no matter how hard certain countries may try. Such exposure to the outside world will do at least as much to foster democratic and market-oriented reforms in countries such as China and the Democratic People's Republic of Korea as all government-to-government negotiations combined.

These and other transformations both within East Asia and throughout the world are catapulting East Asian countries into a powerful position on a global scale. For the United States in particular, East Asia's development and realization of its potential will have a central impact on U.S. national security, economic, environmental, and other interests for the foreseeable future and throughout the next century.

U.S. foreign policy has yet to redefine itself in the face of these changing realities. The vital importance of this region to U.S. interests has not been fully recognized. More often than not, security, economic issues, and other concerns are divorced from each other, with U.S. policymakers treating economic and trading relations as the United States' primary concern. On occasion, U.S. policy seems to be made on a crisis-by-crisis basis, undermining U.S. credibility with its allies as well as the United States' ability to act as a stabilizing influence. Despite its historical influence in this region, the United States is finding that its traditional unilateral strategies for influencing these countries no longer guarantees success.

We believe it is time to think anew about the United States' relationship with the countries of East Asia. We must consider the transformations which East Asia, the United States, and the world are undergoing and proceed to develop a more coherent foreign policy that will actually further U.S. and global interests.

To this end, we participated in a project with a group of distinguished scholars at Stanford University's Asia/Pacific Research Center to study the changes sweeping East Asia and their implications for U.S. foreign policy. The result of their project is the following report, "A United States Policy for the New Realities of East Asia: Toward A New Consensus."

We believe that this report represents an extremely important step towards redefining U.S. foreign policy with respect to East Asia. It addresses the key challenges facing the United States in the context of the transformations shaping East Asia and the rest of the world. It recognizes the multi-faceted nature of our interests in East Asia, while understanding that we must set priorities in order to develop a cohesive and effective policy. The approach advocated by this report rests squarely on a realistic appreciation of the United States' strengths and its limitations in fostering U.S. interests in this region.

We have learned a lot from out participation in this project. and we hope that this report will promote greater understanding and improvements in the conduct of U.S.-East Asian relations.

Senator Bill Bradley

former Secretary of State George P. Shultz

Report Summary

Since the end of the Cold War, the power and prestige of the United States in East Asia have suffered a worrisome degree of erosion. The erosion is, in part, the by-product of long-run secular trends, such as structural shifts in the balance of power caused by the pacesetting growth of East Asian economies. But the decline has been aggravated by shortcomings in U.S. policy toward East Asia, particularly the lack of a coherent strategy and a clear-cut set of policy priorities for the post-Cold War environment. If these shortcomings are not corrected, the United States runs the risk of being marginalized in East Asia--precisely at a time when our stakes in the region are as essential as those in any area of the world. What is needed, above all, is a sound, consistent, and publicly articulated strategy, one which holds forth the prospect of serving as the basis for a sustainable, nonpartisan domestic consensus. The elements of an emerging national consensus can be identified as follows:

1. America's overriding interest is in a peaceful, open, and prosperous East Asia. This requires the United States to play an active role in concert with Asian allies and friends. Nurturing Asian confidence in and understanding of American intentions and strategies also requires constant high-level attention and ongoing dialogue with Asia's leaders.

2. The main political challenge is to encourage constructive and discourage aggressive Chinese behavior. There are grounds for optimism about China's future political orientation and external behavior, but there are also large uncertainties that have to be taken into account. Positive engagement through expanding ties of interdependence should be our primary approach--coupled with a healthy dose of realism. The United States should welcome China's participation in all international forums, such as the G-7, WTO, and MTCR, on terms that protect the purposes of these organizations. Chinese economic development should be treated positively, for only that holds the promise of a stable and eventually democratic China. America and its key allies, especially Japan, need to work closely together and with China to try to achieve these goals. We will not always agree on particulars, but a concerted strategy promises a much better chance of success than separate and divergent approaches.

3. The U.S. security treaties with Japan and Korea remain the principal means for promoting regional peace and stability. But the treaties have to be adjusted to accommodate changing circumstances. Although the timing and circumstances are uncertain, a likely development is the reunification of the Korean peninsula. It is not too early to consider its implications for our security role in Northeast Asia. Another needed change is to promote closer direct ties between Japan and Korea--while recognizing that the bilateral treaties will continue to be the cornerstone of East Asia's security system for a long time to come.

4. In responding to nations that deviate from important international conventions, such as those involving the protection of intellectual property rights or the transfer of nuclear weapons-related technology, the United States should respond with appropriate measures targeted to areas closely related to those in which the violation occurred--that is, economic sanctions for violations in the realm of economic activities and political-military countermeasures for irresponsible behavior in the security domain. Although it may not always be easy to keep the various issue areas clearly separated, a conscious effort needs to be made to adhere to the notion of appropriate, targeted responses. Thus, the temptation to use MFN as an all-purpose instrument to punish China for human rights infringements ought to be resisted. Indeed, to keep China policy from being held hostage to the pressures of particularistic interest groups, the MFN review should be extended from an annual review to one that takes place on a more periodic basis.

5. The United States has two economic priorities in Asia: (1) making sure that the region is open for trade and investment, including on a non-discriminatory basis for American firms; and (2) encouraging American businesses to take full advantage of the opportunities presented by rapid growth, especially through foreign direct investment. The former means following policies consistent with the WTO, rather than pursuing managed trade. Reducing America's overall current account deficit, an essential step toward restoring our macroeconomic health and reducing large deficits in international trade, requires doing something about the low private savings rate and federal government dissavings.

6. The shift in global wealth and power requires the United States to be more accommodating to how Asians define their interests and more willing to work in concert with our Asian friends. At the same time, the countries of Asia will have to assume a larger role in providing public goods, such as support for scientific research, from which they benefit handsomely. America needs to coordinate with East Asians in addressing the correlates of growth, such as environmental pollution and increasing resource constraints.

7. Long-term stability and East Asia's capacity to manage the consequences of economic development depend largely on the effectiveness of domestic institutions. In many countries, these institutions have much room for improvement. Open, democratic political systems and the rule of law are the natural, long-run outcomes of prosperity; they are at the same time the best assurance of lasting peace.

If key members of the administration, the Congress, the press, and the policymaking community find these points generally acceptable, the essential framework for a broadly based, nonpartisan consensus can take shape. The impact of such a consensus would be enormously beneficial, providing coherence, stability, and steadfastness of purpose to America's foreign policies in East Asia. This would contribute, in turn, to peace, prosperity, openness, and accountability in the world's fastest growing region.

I The New Realities of East Asia

East Asia has become essential to all aspects of America's long-term interests. Dynamic economic growth across this vast region is moving East Asia to center stage. It has been growing faster than any other area of the world, expanding at the pacesetting rate of 7.5 percent per annum between 1974 and 1993. As a result, East Asia is now the primary source of new global output. It leads the world in rates of savings and investment, trade expansion, and increases in per capita income. The region's economic performance over the past quarter century has been so robust that many observers, including the usually staid World Bank, have been moved to use such adjectives as "path-breaking" and "miraculous" to describe the economic transformation.

Some skeptics question whether East Asia's phenomenal rate of growth can be sustained. They point out that the "Asian miracle" may be the artifact of latecomer catch-up; and even if it is not, Asia's economic buoyancy might be punctured by a variety of unforeseen developments: slow technological progress, declining savings rates, infrastructural bottlenecks, political instability, ethnic conflicts, environmental pollution, or a major crisis involving Taiwan or the Korean peninsula.

While acknowledging the possibility of an economic slowdown, most economic forecasters see East Asia's future looking a lot like its recent past--that is, a sustained period of uninterrupted growth. One half of the newly generated $7.5 trillion in world production expected by the year 2000 will come from East Asia. By the year 2020, four of the world's ten largest economies will be East Asian: China, Japan, Korea, and Indonesia. The United States and China will be closely matched in terms of aggregate Gross Domestic Product, and Japan will probably have the highest per capita income among the large, advanced industrial countries.

The correlate of rapid industrialization is the expansion of national power. Greater wealth means a greater capacity to influence the course of world affairs. Asian nations are rapidly gaining the confidence and capacity to engage the West as equals and to chart their own directions in world affairs. China's rise to superpower status, in particular, is a historic development, comparable in global significance to the demise of the Soviet empire. Its emergence as a superpower is bound to lead to a restructuring of the world system.

East Asia's social and cultural transformation is no less dramatic. Metropolises throughout Asia are bustling with commerce and trade, and the manufacturing and service sectors have displaced agriculture as the economic backbone of all but the slowest of the region's developing states. Families and villages are changing; education is spreading; and the human resource base is expanding. Increasingly urbane, informed, and technically literate, many East Asians are willing participants in the information revolution reshaping the world. Modern East Asian cultures increasingly reflect global influences, and in turn affect global cultural trends. A variety of difficulties come with industrialization: urban congestion, environmental pollution, crime, corruption, and the erosion of traditional institutions like the family. But such problems have not slowed the frenetic pace of industrialization.

The scope of change is impressive. East Asia is undergoing the same sweeping transformation that the West underwent over the course of the eighteenth, nineteenth, and early twentieth centuries. But East Asia's transformation is proceeding at higher speeds. It is taking decades, not centuries, and it is being driven by integrated circuits, not steamships. Furthermore, the 1.9 billion people in East Asia (excluding the South Asian subcontinent) are double the population of Latin America and Africa. China's population alone, at 1.2 billion, is larger than that of the United States, Europe, and Russia combined. With an enormous population base enjoying rising per capita income, East Asia is turning into a center of world power.

Core American Interests

America's core interests in East Asia naturally flow from these considerations. American policy in East Asia must be designed to help achieve the following goals:

• Preserve peace and stability.

• Prevent an arms race and the spread of weapons of mass destruction.

• Encourage the long-term development of democratic societies.

• Ensure that Americans share in and benefit from East Asia's growth through investments and trade.

• Enable a richer East Asia to assume more of the burdens of global responsibility.

To obtain these objectives, the United States must:

• Adapt and consolidate long-standing partnerships with Japan, South Korea, Australia, and New Zealand.

• Strengthen ties with the states in the Association of Southeast Asian Nations (ASEAN).

• Encourage China's emergence as an open, stable, prosperous, and democratic nation that contributes to global and regional stability.

• Help foster the humane and effective governance of Asian countries.

These core interests are interrelated. Each is a means as well as an end. Peace in East Asia is clearly the precondition for continued economic growth. But there are lingering dangers from the past that require careful management. Few developments could be more destructive to the region's economic health than simmering hostilities or the outbreak of war. America's relationship with Japan is critical, for these two nations share the challenge of maintaining stability in East Asia. Similarly, a stable and cooperative China is essential to the region's peace. And if East Asia is going to shoulder its share of global responsibilities, the United States will have to shore up its flagging credibility and learn to share leadership with the region's other powers.

History shapes long-run trends. Modern history suggests that economic development leads eventually to greater openness and accountability, expanded rights for individuals, and greater political participation and democracy. The course may vary and progress is of course uneven, but the forward thrust is hard to reverse. This means that the United States should continue to welcome and facilitate East Asian economic and political development, for this constitutes the best bet for long-term peace. Democratic states are less apt go to war with one another than nondemocratic nations are.

Finally, from a historical, security, economic, and political perspective, the United States must continue playing a leadership role in East Asia if it wishes to protect its core interests. This means being engaged, present, credible, and consistent. Pursuing a farsighted, coherent strategy based on core interests has turned out to be more difficult than expected. Since the end of the Cold War, the United States has failed to come up with an effective strategic doctrine and to stay a consistent course in East Asia.

Asia in the U.S. Domestic Context

An enlightened Asian policy requires an informed American public, executive branch, and Congress. The challenge of reinvigorating U.S. influence in the region, cultivating the appropriate security relations, and ensuring full American participation in Asia's economic prosperity begins at home.

A coherent strategy will mean very little if domestic forces prevent the policy from being carried out. We therefore begin this report with a discussion of American public opinion and domestic politics as they potentially affect Asia policy. We fear that the American public is woefully unprepared to sustain the policy that we recommend, for the following reasons:

Distorted public image. Poll data show that the average American knows little about East Asia, and most popular images are a distortion of current realities. For a millennium, Asia has consisted of peasants and rice-based economies, despotic rulers, bureaucratic empires, and cultures that alternately fascinated and repelled Westerners. Many Americans still see it as a world of peasant villages, mystical religions, exotic cultures, and pre-modern technology--ancient, distant, and inscrutable. Europe and Latin America, by contrast, seem close and familiar. The divide between America and Asia is vast--a seeming clash of divergent civilizations.

Americans also have little appreciation of the diversity and richness of East Asian civilizations. Even within Japan, Korea, and China, many varied, often conflicting intellectual traditions coexist. An American public that does not understand East Asia's complexities is prone to relying on stereotypes and, worse yet, to thinking only within the framework of Western values and ethnocentric assumptions.

A misunderstanding of the sources of Asia's dynamism. Without adequate appreciation of Asian cultures, Americans tend to see the region's dynamism as a by-product of cheap labor, imitation, massive government subsidies, closed markets, and "free riding." This stereotype contains some truth, but it overlooks some of the key sources of East Asia's vitality--intelligence, thrift, achievement orientation, the emphasis on education, hard work, discipline, self-denial, a spirit of cooperation, technological competence, and astute public policies. The failure to appreciate East Asia's achievements perpetuates the dangerous illusion that the world must always adapt to the United States and become more like us.

An underlying fear of Asia. Misunderstanding is mingled with fear of Asia. There are deeply ingrained concerns that cheap Asian labor will displace jobs and undermine American living standards; that unfair trade practices will decimate U.S. industries; that an anti-Western form of pan-Asianism will emerge; or that China or Japan may become the next threat to American security. Such notions, though largely unfounded, cannot be dismissed out of hand because they are widespread and therefore have political salience.

An inadequate sense of America's stake in Asia. Many Americans feel their lives are affected by East Asia's economic growth, but they have yet to understand the strategic and economic implications. In the past half century, the United States has fought three long and costly wars in Asia, sustaining higher casualty rates there than in any other part of the world. Yet most Americans do not understand what strategic interests drove the nation to pay such an enormous price. Unlike Western Europe, which became the U.S. bulwark against the Soviet Union's "evil empire," American sacrifices in East Asia did not produce clear-cut political victories. Japanese capitalism is often viewed as the embodiment of unfair economic competition; the Korean peninsula remains divided; and China and Vietnam are still communist. Americans lack appreciation of what U.S. foreign policy has achieved in Asia: the region is at peace, is thriving, is economically intertwined, and is becoming democratic.

Nor are most Americans aware of the growing centrality to global affairs of our Asian friends. If the United States expects to continue playing a leadership role in the world, it will have to rely increasingly on the cooperation of Japan, Korea, China, and ASEAN--not to mention Australia and New Zealand. While the majority of Americans want the United States to remain a Pacific power and to maintain a military presence in the Western Pacific, the stationing of American troops in South Korea and Japan has been justified in terms of the threats posed by the Soviet Union and North Korea. As long as the regime in Pyongyang remains a danger, this rationale is unlikely to change. But events such as the reunification of Korea or mass protests against U.S. military bases in Okinawa could affect U.S. attitudes and lead to calls for revision of the security treaties with Japan and Korea, with insufficient public understanding of the importance of continuing a credible American presence.

Ambivalent feelings about the major Asian powers. Complex and ambivalent American attitudes exist toward Japan. Americans admire Japan's success, but are frustrated when it appears that America must bear the costs of this success--notably those symbolized by trade deficits. Americans are supportive of U.S.-Japan relations, yet anxious about the domestic implications of expanding economic interdependence and frequently critical of Japanese practices. Japan's financial contributions to the United Nations and its role in other international organizations go largely unnoticed. Feelings of goodwill toward Japan, once very high, are slowly eroding.

China ranks behind Japan and Western Europe yet ahead of Russia in the minds of Americans as a candidate for future world leadership. But China ranks low in U.S. opinion polls as a country contributing to a stable and peaceful Asia and relatively high (after North Korea and Iraq) as posing a threat to U.S. security interests. Human rights is a continuing concern. A coercive population control program, domineering behavior in Tibet, nuclear testing, weapons trade with rogue regimes in the Middle East, illegal immigration to the United States, and the piracy of intellectual property are damaging China's image in the United States.

Media coverage. Coverage of the region in the news media is expanding. Articles on Asia in weekly magazines have approximately doubled each decade since 1970; the number of articles on China in leading newspapers almost tripled in less than a decade. Yet no clear-cut message is coming through as a consequence of--or perhaps precisely because of--the increased flow of information. The media focus on immediate issues of significance: trade disputes, North Korean nuclear activities, tensions in the Taiwan Strait, human rights violations in China, anti-U.S. base demonstrations in Okinawa, or Singapore's authoritarianism. But coverage tends to be superficial and does not capture the region's underlying dynamics or East Asia's ultimate importance to America's future.

A Mixed Record

The end of the Cold War and the fast-changing realities of East Asia demand that America rethink the fundamentals of its Asia policy. The United States needs to take the lead in adapting the security system to changing conditions in East Asia in order to ensure that America's core interests are preserved for another generation. Lasting regional institutions, trade and investment liberalization, stabilizing ties of interdependence, pluralistic competition, and political accountability are all within reach. But if we do not act, the outlook for East Asia--so promising today--may suddenly turn ominous; indeed, the current window of opportunity may close unexpectedly.

Since the collapse of the Soviet Union and the end of the Cold War, U.S. foreign policy in East Asia has recorded some significant successes. These have included the ratification of the WTO (World Trade Organization), the elevation of the annual APEC (Asia-Pacific Economic Cooperation forum) meetings into a summit for heads of state, steady progress toward the liberalization of trade and investments in East Asia, the decoupling of MFN (Most Favored Nation status) from the issue of human rights in China, the handling of the North Korea nuclear weapons problem, strong resolve in the 1996 Taiwan crisis, and the recent reaffirmation of the U.S.-Japan security alliance.

At the same time, however, U.S. Asia policy has experienced its share of setbacks and missed opportunities to adapt to the changing realities of the region. To cite only a few of the most significant: the simultaneous deterioration of America's relations with China and Japan since 1989; a significant drop-off in high-level attention to East Asia during the Bush administration; the mistake of taking business leaders along on President Bush's trip through Asia in 1992; the high costs of pursuing a strategy of managed trade, particularly the resulting severe tensions with Japan (starting with the breakdown of the Clinton-Hosokawa summit in 1994 and ending in 1995 with Japan calling America on its threat to impose Super 301 sanctions and proposing instead to bring the auto deadlock before the WTO); the clumsy handling by the administration and Congress of Taiwan President Lee Tung-hui's visit to the United States in 1995 and the resulting setback to America's relations with China; and the failure to consult and coordinate regularly with Japan on a range of issues, especially those involving China. Of these, three warrant further discussion.

U.S.-Japan relations in jeopardy. At times it appears as if the United States has lost sight of the centrality of the U.S.-Japan alliance as the structural cement for long-term peace, prosperity, and stability in Asia. In 1995, U.S.-Japan trade negotiations were allowed to become so acrimonious that the cumulative stock of goodwill and mutual trust was seriously depleted, leaving wounds that might take years to heal. U.S.-Japan relations are a complex blend of cooperation, competition, and conflict; but bare-knuckles diplomacy is a costly way of managing an alliance so essential to America's core interests in Asia. The costs are evident when the U.S.-Japan relationship is considered against the background of China's rise to power and the uncertainties looming on the Korean peninsula.

On the positive side, the deft handling of the recent Okinawa problem, the Clinton-Hashimoto talks in the spring of 1996 on the bilateral security treaty, and the conclusion of the Acquisition and Cross-Servicing Agreement setting forth concrete plans for logisitical support have pulled U.S.-Japan relations back from what looked like the brink of potential crisis. The task now is to act quickly on the breakthrough, especially while there is a political window of opportunity open and Japan's prime minister is in a position to exercise strong leadership.

Simultaneous conflicts with China and Japan. By recently subjecting relations with both China and Japan to substantial strain, the American government has violated one of the cardinal principles of modern diplomacy in Asia--namely, avoid antagonizing China and Japan simultaneously. Alienating both China and Japan runs the risk of driving them, unwittingly, into each other's arms and of leaving the United States in the untenable position of being the odd man out in the region.

Vortex of big-power conflicts. The difficulties of dealing with China and Japan raise deep-seated concerns about the long-term viability of the security system in East Asia. Does the decline of U.S. hegemony mean that the region is turning into a vortex of naked power struggles, continually shifting alliances, and an ever unstable balance of power? A free-for-all among the major powers would constitute the worst-case scenario in Asia, a nightmare for all countries, especially for the small and medium-sized states (such as Taiwan, Australia, New Zealand, and the members of ASEAN) which would have a hard time navigating between the great powers. Unless the United States exercises farsighted leadership, it may be hard to prevent East Asia from falling into a state of greater instability.

In sum, since 1989, U.S. Asia policy has lacked clear direction and steadfastness of purpose and resolve. It has moved in reactive fits and ad hoc starts to periodic crises in the region and to political exigencies at home. If U.S. policy is allowed to muddle along, America's capacity to influence the course of events and to preserve its core interests in East Asia is sure to erode. Fortunately, there appears to be a moment of opportunity, as of the summer of 1996, to develop a mainstream, centrist consensus in the United States on Asia policy, and especially on how to deal constructively with both China and Japan. Whether or not the administration takes advantage of this opportunity and manages to galvanize a centrist consensus remains to be seen.

Difficulties in Dealing with Asian Governments

Although U.S. policy has had its share of shortcomings, the countries of East Asia also have shown, time and again, that they are not easy to deal with. The difficulties caused by their nationalistic behavior, by their myopia and recalcitrant attitudes, and by the historical legacy of rivalries and animosities should not be underestimated. While everyone recognizes the need for the United States to coordinate policies with the nations of East Asia, genuine cooperation remains problematic. The behavior of a number of East Asian states, especially that of North Korea and China, can be described as sometimes obdurate, often vexing, and almost always self-centered.

North Korea

This is the world's most isolated, unpredictable, and incorrigible communist dictatorship. Over the past thirty years, the Democratic People's Republic of Korea (DPRK) has engaged in various acts of belligerent behavior--terrorism and subversion, intimidation, coercion, blackmail, manipulation, deception, surreptitious development of a nuclear weapons capability, and willful neglect of international rules, norms, and treaty commitments. The predictable aspects of North Korea's international behavior are its unswerving dedication to the goals of overthrowing the South Korean government, terminating the U.S.-Republic of Korea (ROK) Security Treaty, and eliciting formal recognition by the United States, the other Western powers, and Japan. In short, the rogue regime in Pyongyang is the most immediate threat to peace in East Asia.

The DPRK is in a position to test and perhaps undercut America's bilateral structure of security in Northeast Asia. If North Korea withdraws unilaterally from the Kuala Lumpur accord, for example, that act would place immediate strains on U.S.-ROK-China-Japan relations; it would also test the operational viability of the U.S.-ROK and U.S.-Japan security alliances. Would Japan go along with the United States in the imposition of economic sanctions (with or without a UN imprimatur)? Would Japan permit American forces to use bases in Japan to carry out military missions near the Korean peninsula? If not, public response in the United States is apt to be overwhelmingly negative, leading to questions about Japan's reliability as an ally.

China

In recent years, the Chinese state has conducted nuclear tests, sold missiles and transferred magnetic ring technology to Pakistan, laid claim to the Spratly Islands, built up its military arsenal, sold weapons of mass destruction to the Middle East, bullied Hong Kong and Taiwan, and violated the human rights of political dissidents. Notwithstanding this vexing record, Beijing has not received credit for its contributions to peace in Cambodia, cooperating on the Korean peninsula, and acquiescing as a permanent member of the Security Council to UN peacekeeping operations that it viewed skeptically.

Behind the problems of the moment lurks a much larger challenge. As were Japan, Germany, and Russia during the past century, China is a rising power in world and regional affairs. And history shows that the leading powers always find it difficult to accommodate the interests of the rising powers because these interests are often aimed at altering the status quo.

Twice in this century, China contributed to the cause of the Western democracies in war, and on both occasions China was slighted in the making of the postwar peace. During World War I, China assisted the allied cause by contributing many laborers to work in factories in France, but at the Versailles Peace Conference, Germany's treaty ports in China were transferred to Japan. During World War II, China's resistance was crucial to Japan's defeat; according to most estimates, China suffered more deaths from the Japanese invasion than any nation endured during the war. Yet a weak and divided China could not fully participate in the building of the new postwar East Asian order. China played a central role in halting subsequent Soviet expansionism, but it is not being centrally involved in the creation of the post-Cold War order. It is not a member of the WTO or the Missile Technology Control Regime (MTCR); it does not attend the Group of Seven (G-7) meetings. The danger is that the feeling of exclusion will breed in China a sense of betrayal and lead to a rejection of indigenous liberal and cosmopolitan values. This is precisely what happened in China after World War I and World War II.

It is necessary both to understand China's objectives and likely capabilities in the decades ahead, and to respond to its strategies with an appropriate mix of flexibility and firmness. No matter who China's rulers might be, they are likely to pursue the following objectives: (1) to protect the nation's sovereignty and unity; (2) to seek access to foreign technology, capital, and markets in order to maintain high growth rates; (3) to demand a voice in international and regional affairs commensurate with their views of China's greatness; and (4) to seek to be treated with a dignity and respect that enhances their legitimacy at home. Chinese foreign policy will be driven by several deep-seated fears: renewed Russian expansionism, Japanese remilitarization, American hostility to the rise of a China not under its aegis, and Taiwan separatism. China's rulers will continue to look upon Korea, Taiwan, the Indochina peninsula, Myanmar, Tibet, Xinjiang and the Central Asian republics, Mongolia, and the Russian Far East as areas vital to Chinese interests. Those are the bases which hostile forces have historically used to weaken, penetrate, and divide China.

In search of greater security, China will seek to acquire the most modern military equipment as swiftly as its economy, technology, and external relations permit. It will continue to be willing to apply carefully controlled and limited force and to engage in "coercive diplomacy" in order to give credibility to its threats. It will use access to its markets as a means of extracting concessions from others. It will trade upon the expectations of its future greatness in order to gain favor now. It will play upon and seek to intensify competition, tension, and rivalries among its neighbors, such as between Japan and the United States or between Russia and the United States. And it will seek to be a free rider, avoiding the burdens of its major power status for as long as possible. These and other age-old stratagems in Chinese foreign policy are likely to persist.

Nor will China's domestic condition make it an easy partner in world and regional affairs. Its internal politics will remain unsettled for many years. Creation of the political and economic institutions necessary to yield the rule of law and a well-regulated economy will take decades. Yet its economy is likely to continue to grow rapidly. In short, China is likely to be economically dynamic, politically unsettled, and socially somewhat unstable.

China's economic rise implies more assertiveness. We are already seeing evidence of this. But these challenges need not lead to an adversarial or hostile relationship. No fundamental conflicts divide the United States and China. Both need the other to achieve their international and regional objectives. Moreover, sober projections of Chinese military power reveal that it will be many years, indeed decades, before China acquires major force projection capabilities. Furthermore, the webs of economic interdependence that increasingly link China to the outside world will limit its latitude in foreign affairs. Its leaders seek assistance to develop those institutions that will help make China a more effective international partner: a modern banking system and financial institutions, a strengthened judiciary, the rule of law, stronger representative assemblies, improved telecommunications and transportation facilities, and so on. Finally, there is clear evidence of political liberalization at the grass roots, which holds out the long-run prospect that China might evolve as a participatory democracy.

To seize the opportunities China's rise represents will require patience, persistence, and consistency by the United States. China must become a priority in American foreign policy. Without the personal commitment of the president, the secretary of state, or the national security advisor, this is unlikely to happen. Herein lies one of the biggest challenges in formulating and implementing China policy--to ensure it receives the attention that its importance merits.

Japan and South Korea

These are America's most vital allies in East Asia. It is hard to imagine what might have happened to the military balance of power in the region if the United States had not acted on the opportunity to put security treaties in place with Japan and Korea. But bilateral relations have not always been smooth. This is evident in periodic flare-ups over such events as Japan's contributions to the Persian Gulf War.

Where the United States has locked horns regularly with Japan and Korea is in the economic arena. The overtly nationalistic and semi-mercantilist policies practiced by both Japan and Korea have posed nettlesome problems. Both countries have sought to limit foreign access to their own markets while moving aggressively into the United States and other foreign markets. From America's standpoint, the root of the problem lies in the early decisions by both the Japanese and Korean governments to impose stringent limits on the inflow of foreign direct investments (FDI). As there is a clear correlation between foreign direct investments and foreign shares of local markets, limiting FDI almost guaranteed that there would be serious trade friction. The cumulative costs of these trade conflicts have been high. And while the anchor of the security treaties has helped to offset the trade tug-of-wars, the danger that we face now (and probably increasingly with the passage of time) is the simultaneous occurrence of economic and political-military tensions.

In sum, the challenges in East Asia are daunting and will overwhelm America's capacity to deal with them if Americans do not chart their future course wisely--with a sense of purpose, commitment, and sustained attention to the world's fastest changing region. As the relative power of Asian countries rises, drift and equivocation on America's part will only mean that the problems we face as a direct result of Asian intransigence will intensify.

Potential Dangers Ahead

If the United States fails to adapt to the changing dynamics of East Asia, where might this lead? How will relations with key Asian states be affected? The dangers that lie ahead include the following potentially adverse outcomes:

Tense Sino-American relations, perhaps even a major rupture; intense conflicts over trade, infringement of intellectual property rights, and the usual bones of contention--Taiwan, the Spratly Islands, the South China Sea, Hong Kong, nuclear testing, military hardware sales and nuclear technology transfers to South Asia and to rogue regimes in the Middle East, the Tibet issue, the environment, and human rights. Japanese leaders have expressed anxieties about the prospect of Sino-American condominium (referred to as the "bypassing" of Japan), but it is precisely the opposite scenario--Sino-American conflict--that is of far greater likelihood.

A more nationalistic Japan, weighing the full range of its military options and relying less on the U.S.-Japan security pact. If, for example, there is a rupture in Sino-American relations over Taiwan, or if Korea is unified and no longer militarily linked with the United States, Japan might feel compelled to upgrade its own military capabilities and to pursue a more independent course. Fissures in the U.S.-Japan alliance might also appear through the confluence of several developments--regional tensions generated by big-power jockeying, political paralysis in Japan, the long-term failure within Japan to engage in a realistic discussion of the country's own security, the historic volatility of Japanese relations with China and Korea, the spread of isolationist sentiments in the United States, and the inability of both the United States and Japan to fine-tune the security treaty to ever changing circumstances in Asia.

Grave tensions on the Korean peninsula created by a truculent DPRK in dire economic straits, trying desperately to deflect attention from the country's slow and ineluctable economic implosion. Pyongyang will be undeterred in its quest to acquire the "great equalizer"--nuclear weapons--despite explicit commitments under the Kuala Lumpur accord. The DPRK has learned that pernicious behavior often begets what it wants: America's attention, divisions among the major powers in Northeast Asia, and a bushel of concessions, such as rice, food, oil, light-water reactors, technology, debt forgiveness, diplomatic recognition, and foreign aid.

A significant slowdown in robust growth rates, resulting from political-military tensions, an arms race, domestic political and/or social bottlenecks, territorial struggles, periodic crises, and armed clashes.

The marginalization of the United States and its role in the region, a by-product of the above trends.

In short, without strong American leadership, East Asia may become a more dangerous place and lose much of its economic dynamism. No local power in East Asia is capable of stepping in to assume the stabilizing role that the United States plays. Neither China, Japan, nor Russia has shown that it possesses the breadth of interests, the power and prestige, or the enlightened ideals and universally appealing values that are necessary to lead. These powers define their national interests too narrowly to make a positive confluence of national and regional interests easily achievable. None seems willing to assume the costs of promoting region-wide interests; each is prone to operate as a free rider. What China, Japan, and Russia see as their national interests is not likely to be seen by the weaker countries in Asia as advancing their interests or promoting the region's welfare.

II A Security Strategy for Asia

Preserving peace and stability is America's top priority in East Asia. It is the requisite condition for every goal that one hopes to see happen in the region--prosperity, openness, durable ties of interdependence, and the development of genuine democracy. In order to preserve peace and stability in East Asia, the United States must choose between two courses of action:

Continued engagement: Maintain and fine-tune the network of bilateral security alliances in Asia; develop a coherent strategy which establishes clear-cut priorities and goals; look to preserve a long-term balance of power which takes into account such developments as the eventual emergence of a unified Korea; and facilitate the development of multilateral forums for security discussions involving the United States, Japan, Korea, hopefully China, and perhaps Russia.

Disengagement: Abrogate the bilateral security treaties signed during the Cold War; cut U.S. troop deployments (especially the Marines); pull back naval bases to the mid-Pacific; and seek to impede the emergence of an alternative dominant power (China and/or Japan) by playing the role of neutral power broker among Japan, Korea, China, and ASEAN or by mobilizing regional coalitions aimed at inhibiting Chinese or Japanese domination.

Various arguments have been advanced in support of both options. We overwhelmingly endorse the first, a strategy of continued engagement. Disengagement would undercut America's position in the region (including its economic involvement), trigger a fierce power struggle, aggravate conflicts, and generate new problems at precisely a time when the region is going through a major transformation. To ensure peace and lasting security, America's presence in East Asia remains indispensable. Staying involved in Asia also entails the lowest risks and costs and the fewest uncertainties. Disengagement, by contrast, is apt to open a Pandora's box of problems that will overburden America's capacity to protect its core interests.

Thus, the real debate in the years ahead is likely to focus on how best to continue engagement--how rapidly to adjust America's bilateral treaties, whether the treaties can remain robust at lower troop levels, what American arms sales policies should be, and how best to combine an economic and security presence.

Cardinal Principles for a Security Strategy

Four principles should guide our thinking about the security role that the United States plays in East Asia:

1. America should not only maintain but strengthen its security ties with Japan and Korea. This means retaining forward military deployments, maintaining air and naval superiority, and preserving a favorable balance of power in East Asia.

2. The United States should adopt a positive attitude with respect to China's economic development while recognizing that there are major questions and looming uncertainties about China's future for which we must be adequately prepared.

3. America should work to open up multilateral channels of communications that will include Japan, Korea, ASEAN, Australia, New Zealand, and hopefully China and Russia.

4. We should anticipate eventually strengthened links between South Asia and East Asia; and as those links intensify, South Asia should be welcomed into East Asia's multilateral arrangements.

Even with the end of the Cold War, East Asia continues to face problems. Korea remains the most volatile spot. But Japan is no further along toward resolving the Northern Territories dispute with Russia. And China believes that it has unfinished business with Taiwan--specifically, the possibility of Taiwan's unilateral declaration of independence. New dangers include the prospect of a hard landing for the destitute North Korean economy (including a famine in 1996), the spread of nuclear and chemical weapons capabilities, and a more aggressive China causing possible flare-ups in the South China Sea and elsewhere along the Chinese border.

In a best-case scenario, Korea will be peacefully unified; China will evolve into a stable and internationally responsible nation; and the major powers in East Asia will work out their problems through multilateral mechanisms for conflict resolution. If such a scenario comes to pass, it will obviate the need for U.S. force deployments. In the meantime, the value of America's presence and stabilizing role remains as compelling as ever.

The four cardinal principles also mean rejecting any strategy that casts the United States in the role of a nonaligned balancer among rivalrous Asian states. The notion of a neutral America playing the role of power broker in East Asia is not only hard to imagine; it is also potentially dangerous. Concerning big-power interactions in Asia, we think that:

• The breakup of the Soviet Union and Russia's internal troubles mean that the locus of power relations in East Asia now centers on the Sino-Japanese-American triangle. Peace in Asia will depend primarily on America's pattern of interactions with Japan and China. The United States needs to manage its relations effectively with both Japan and China in order to be able to take care of pressing regional and global issues.

• It is essential that America remain close to its two democratic allies, Japan and South Korea (one a great economic power and the other a rapidly growing one), rather than to stake out a nonaligned position or to shift alignment to China or Russia.

• We see no inherent conflict between the objectives of sustaining close ties with Japan and Korea while improving those with China, Vietnam, and India. Such separate objectives might involve difficult choices at times, but it should not be presumed that conflict is inevitable. The United States certainly does not want a presumption of ultimate incompatibility to turn into a self-fulfilling prophecy.

The Need to Adapt

The end of the Cold War, like the end of the Second World War, has left the security environment in Asia in a state of flux. The United States is widely seen in Asia as a declining power, not because it lacks military might, but because its commitment to, and interests in, the region appear to be receding. Expressions of isolationism are read abroad as disquieting omens of future disengagement. Endless discussions about the costs of maintaining forward military deployments and the publicity surrounding trade disputes also erode confidence. And the post-Cold War environment has yet to produce a fresh vision of security that would soothe Asian anxieties about America's long-term staying power.

The United States also faces the difficult task of sharing leadership in the region if it is to build the kind of security system best suited to its interests in burden-sharing and regional stability. While the alliances with Japan and Korea serve as the cornerstone of the U.S. security presence, we should also seek to establish multilateral channels of discussion and, hopefully, mechanisms of conflict resolution. Preserving American influence will require that the United States work in closer concert with its allies in East Asia, especially Japan and South Korea.

Owing to future unknowns, we cannot specify what form the security system will take. Much hinges on China. If China evolves peacefully toward a more cooperative stance, region-wide security can be consolidated. If, however, China acts aggressively, new security alignments may have to be built. Several overlapping security subsystems may be needed: one in Southeast Asia with ASEAN and Australia, one in the Northeast Asia with Japan and Korea, and perhaps one linking the two sub-regions. Whatever the structure, the United States will have to play the pivotal role. In Northeast Asia, where the most intractable security problems are found, there is no alternative.

Without harboring illusions about the ease with which a collective security system can be created, the United States should support expanded discussions within the ASEAN Regional Forum (ARF). Currently, its focus is on confidence-building measures and greater transparency in military budgets and doctrines, in weapons transfers, and in military exercises throughout the region. Perhaps at some point in the future, ARF's scope might be widened, especially if early efforts turn out to be fruitful and the region perceives that there is a common threat of sufficient gravity to pull the major powers into a serious dialogue on collective security.

The U.S.-Japan Alliance

American security strategy must continue to be based on its alliance with Japan. This alliance has been pivotal in terms of stabilizing what had been a chaotic region during the first half of the twentieth century. Its success has come from a counterintuitive formula: in spite of relatively low costs and low risks, the U.S.-Japan alliance has yielded immense benefits (confounding the usual calculus of risks/costs versus benefits). Looking to the future, we ought to take note of the fact that Japan has been doing incrementally more on security, and contributing more to the costs of stationing U.S. troops. After considerable political debate, Japan has also accepted a role in UN peacekeeping. It is cooperating with efforts to head off North Korea's nuclear weapons program. Notwithstanding friction between local Japanese and American installations, Japan's government seems eager to extend the U.S.-Japan Security Treaty and associated arrangements. And Japan is seeking permanent membership in the UN Security Council, a case the United States should support if its goal is the inclusion of Asian powers in global burden-sharing.

Given the hazards of the post-Cold War environment, however, there is room for Japan to do more. The Cold War-induced security blanket in which Japan has been wrapped is no longer the reassuring insurance policy that it used to be. Japan continues to live in a time capsule, insulated from the churning of power politics. Political circumstances, including the legacy of the Pacific War and such postwar institutions as Article Nine of the "peace" constitution, make it hard for Japanese policymakers to openly discuss China, Taiwan, the Korean peninsula, and other problems as serious potential threats to Japanese national security. The absence of hard-headed analysis and candid debate is both highly unusual and rather worrisome. Sooner or later, Japan will probably find that it has to emerge from its time capsule. For regional stability, Japan's emergence ought to be gradual rather than sudden. A gradual approach diminishes the likelihood that Japan's low-profile approach will be completely reversed.

A gradual buildup of Japan's military power and the assumption of a greater international role ought to be welcomed. If the process is carried out within the framework of the U.S.-Japan alliance, it should not be destabilizing. Since its defeat in the Pacific War, Japan has undergone a thorough metamorphosis, and the postwar transformation of Japan's economy, society, and polity makes a revival of militarism highly unlikely. Indeed, so long as Japan maintains its alliance with the United States and plays a constructive international role, the evolution should not upset the region's equilibrium. If anything, it may even facilitate the adaptations necessary to extend the life of the U.S.-Japan alliance.

Japan may come to feel that it has to do more militarily, given the threat from North Korea and the uncertainties surrounding China and Russia, not to mention the future of U.S.-Japan relations. At some point, Japan may feel compelled to abandon one or more of the "three inviolate" principles of its postwar defense program--no nuclear weapons, no power projection capabilities, and no arms exports. If so, the shift will be more palatable to Asian neighbors if Japan remains linked with the United States; if Japan abrogates its alliance with the United States, the reaction throughout Asia will be that of overwhelming alarm.

No one wants to see Japan embark on a crash program to turn itself into a military superpower. The U.S.-Japan alliance is the best guarantee that this will not happen. The alliance also provides the framework for greater bilateral coordination in dealing with a broad array of problems--from the Kuriles to the Korean peninsula. Although such coordination will not be easy, there is no substitute for U.S.-Japan security cooperation.

China Policy

The United States should welcome China's integration into the international community and ease the path of entry, based on a clear understanding with Chinese leaders that America's forthcoming posture is conditional upon evidence that China will adhere to its international commitments and will shoulder its responsibilities as a major power. Hence, its membership in the MTCR and participation in the setting of standards with respect to dissemination of weapons of mass destruction are important ingredients in shaping its arms sales behavior. Membership in the WTO on terms that safeguard the gains of the Uruguay Round is essential for China's continued and growing access to the markets of the United States and other OECD countries. Chinese attendance at the G-7 is justified by the size of its economy and would provide an excellent opportunity for the industrial democracies to foster a shared perspective with China's leaders concerning their integration into the global economy. These should be priority issues for the United States.

A resumption of high-level visits and a strategic dialogue between the leaders of China and the United States in each other's capital is particularly important. This has been lacking in Sino-American relations for seven years. Brief meetings in third countries are no substitute for wide-ranging conversations that engage the leaders and bureaucracies of both countries. In such meetings, leaders identify their common interests and cultivate shared perceptions about world and regional affairs, thereby generating the will to overcome the myriad problems that plague bilateral relations. In this context, the restoration of military-to-military contacts would also contribute significantly to a more accurate assessment at the Pentagon and within China's armed forces of the other side's intentions, strategies, and capabilities.

A policy of integration and dialogue must be accompanied by a policy of deterrence--a continued and robust American military presence in the region capable of deterring the use of force by anyone on matters where American interests are at stake. But China's leaders must be led to understand that U.S. forces are not directed against China; they are there for the purpose of promoting stability and preventing any country from threatening the peace.

Taiwan

The United States has a strong historical and moral interest in the continued prosperity, tranquillity, and democratization of Taiwan. It has no interest, however, in promoting the de jure independence of Taiwan. Rather, the United States would welcome any peacefully reached agreement between Taipei and Beijing. The use of force by the People's Republic of China (PRC) or Taiwan's declaration of independence would be serious breaches of the norms governing China-Taiwan relations. The United States must respond to an unprovoked Chinese attack by assisting Taiwan as stipulated in the Taiwan Relations Act. The United States also must make clear that it would not recognize an independent Taiwan. America's basic position of supporting peaceful reconciliation should be made abundantly clear.

The framework for handling the sensitive Taiwan issue, so carefully developed in the 1970s and early 1980s, is now tattered. Taiwan's democratization and changing sense of identity, Beijing's increased assertiveness, and Washington's blundering have produced renewed tensions between Taiwan and the mainland. Yet substantial opportunities exist for easing the tension and increasing contact between the two. American diplomacy must avoid inflaming the situation either by too flaccid a response to Beijing's assertiveness or exuberant support of Taiwan's occasionally provocative behavior. American diplomacy should encourage both sides to resume the progress that characterized their relations until mid-1995.

The government in Beijing must understand that the executive branch cannot bar American groups from inviting democratically elected leaders in Taiwan to carry out unofficial visits to the United States. Beijing should not overreact to private invitations and unofficial visits.

A Forward Military Presence

America's military presence in Asia has shrunk somewhat since the end of the Cold War--though less so than U.S. force deployments in Europe. Not only has the United States left the Philippines, U.S. policy is also properly cautious about extending commitments beyond those already made to South Korea, Japan, Taiwan, and defense of the sea lanes.

There is a threshold below which the United States presence in Asia should not fall. We are close to that point now. The financial costs of America's military deployment in Asia are not unduly high. The local costs of U.S. forces in Japan are paid for by the Japanese and a rapidly rising share of those in Korea by the Koreans. Even at a time of fiscal stringency at home, it would be hard to come up with convincing financial reasons for troop withdrawal. Aside from residual ground forces in Korea and Japan, U.S. force capacity is highly mobile. It provides a virtual presence in many locations around the region.

Without doubt, staying in Asia is cost-effective, considering the direct benefits of protecting U.S. core interests and the indirect multiplier effects of economic growth that peace and stability make possible. America's forward deployments should continue to consist principally of mobile air and naval capabilities. The domestic political environment in the United States would not be supportive of becoming ensnared in a protracted land war in Asia. Except for its long-standing commitments to the defense of Japan and Korea, which it is obliged to honor, the United States should avoid sending conventional ground troops to fight in armed clashes in East Asia.

The Korean Peninsula

The division of Korea continues to pose the greatest danger of igniting a destructive war in the region. The United States needs to stay the course. America must help to protect the ROK while doing what it can to advance the processes of peaceful unification. The prospect of a unified Korea is discomforting to many Japanese and also to some Chinese leaders. But what the Japanese fail to realize is that Korean unification would likely stabilize the region in ways that would be of incalculable benefit to Japan. It would remove the constant threat of a conflagration on the Korean peninsula, eliminate the DPRK's capacity to engage in mischief that could undermine Japan's alliance with the United States, create a new buffer against China, and expand ties of economic interdependence between Japan and Korea. And China would enjoy the benefits of having a volatile flash point on its border eliminated. Unfortunately, few Japanese or Chinese see it that way. What worries them is that a united Korea, even under stable, democratic rule, would be a much greater and potentially threatening power in Northeast Asia.

In the short run, the United States must be prepared to deal with an economically desperate North Korea on the brink of collapse, facing famine, fuel and power shortages, a debilitating credit crunch, with no international currency reserves, little hard cash, and a malnourished, demoralized population. Should the United States offer assistance? Or should it keep North Korea isolated and wait to see if the economic crisis forces the regime to soften its hard-line policies? Is it conceivable, indeed, that economic collapse will bring down the Pyongyang regime? Will a desperate North Korea resort to violent acts? Should America stand together with South Korea or pursue its own policies? To deal with the North Korean crisis, we recommend that:

• The United States closely coordinate its policies with South Korea, letting the ROK set the general parameters of how to handle the DPRK;

• The United States also coordinate closely with Japan and, if possible, seek China's cooperation;

• Basic agreement be reached with the ROK as to whether the extension of foreign assistance of any kind be contingent on a softening of the DPRK's intransigent and belligerent position;

• Humanitarian assistance to North Korea be funneled through the UN or neutral private organizations, once there is assurance that the aid will be distributed to the needy and not simply fall into the hands of the military or government;

• The United States, ROK, Japan, and hopefully China make a virtue out of necessity by using North Korea's economic crisis to erect the scaffolding of a multilateral framework for security consultation, deliberation, and coordination.

Security Ties after Unification

When the Korean peninsula is unified, an uncertain process that may occur overnight (as in the collapse of the Berlin Wall) or may take years to work out (perhaps a more likely scenario), the United States and Korea will have to decide what to do about the security alliance, since the ostensible reason for America's security guarantee--the threat of invasion or attack from the north--would no longer exist. China harbors ambivalent views about the U.S.-Korean alliance. The continued American presence precludes China asserting dominance over Korea, but the presence also contributes to regional stability and deters either Japan or Korea from going nuclear. If China wishes to weaken America's power in the region, it may seek to drive a wedge between the United States and Korea and insert itself as Korea's friendly neighbor. Japan, by contrast, would want U.S. forces to remain on the peninsula as a moderating force and to mitigate the intensity of power struggles in Northeast Asia. It is not clear yet what a unified Korea would want. But hopefully it would welcome the continuation of some sort of modified security relationship with the United States, if only as a hedge against rising Chinese power and the likely nationalistic reaction in Japan to the birth of a unified, powerful Korea across the narrow Japan Sea.

The question of what role, if any, the United States will play on the Korean peninsula following unification is perhaps the most pressing one that will have to be addressed over the next several years. What would be its mission? How would forces be deployed? There is no doubt that the answers, whatever they may be, will affect the structure of Asia's security system in the next century. The U.S. role will alter the emerging balance of power and affect the mission of the U.S.-Japan alliance. We believe strongly that the United States should maintain security ties with a unified Korea as part of an ongoing American role and presence in Northeast Asia.

Of course, the new U.S.-Korean security arrangement will have to be adapted to possible changes in the U.S.-Japan security alliance. Political and psychological circumstances permitting, the idea of a closer, stronger, more cooperative triangulation--based on three separate sets of bilateral relationships, U.S.-Korea, U.S.-Japan, and Korea-Japan, or, better yet, direct three-party coordination--would make strategic sense as the backbone of a new security system. The history of Japanese colonial rule and the legacy of deep-seated antipathy have prevented closer interactions between South Korea and Japan in the past and may stand in the way of such coordination in the future. But the converging, strategic interests of the three powers make the U.S.-Japan-Korea triangle increasingly central to the design of any new security order in Asia.

The security triangle would be more stable and effective if, somehow, regular contact with China could be maintained--not as an ally, obviously, but as part of an ongoing forum for communication, consultation, and conflict resolution. As China will be a key power in Asia during the next century, involving it in the emerging security dialogue will be essential. In the best of all worlds, there would be formal channels and informal back channels to transmit information and to engage in discussions.

Some American policymakers had hoped that U.S. negotiations with North Korea over the nuclear issue from 1994 to 1995 would provide an opportunity to lay a communication network between the United States, South Korea, Japan, China, and Russia; and to an extent, some channels were opened, especially between Japan and South Korea. But opening an effective channel with China has proved to be difficult. Perhaps North Korea's famine and economic crisis will provide another opportunity for engaging China. To a lesser extent, the same can be said for the inclusion of Russia, though its capacity to be a constructive factor in Asian security is likely to be quite limited for many years.

Meanwhile, the lingering problem of North Korea's nuclear weapons program continues to confound the United States. The U.S. strategy of placating Pyongyang with oil and light-water nuclear reactors has very troubling aspects, including the failure to hold Pyongyang accountable for likely diversions of nuclear materials and the perceived rewarding of Pyongyang's defiance of the Nuclear Non-Proliferation Treaty (NPT). The DPRK has elevated to a fine art the strategy of what can be called "blackmail by the weak." And it is by no means certain, given North Korea's past behavior, that Pyongyang will abide by any written agreement. Nevertheless, the Kuala Lumpur accord has moved the situation past a volatile point of crisis which might have brought U.S.-Korean, U.S.-Japan, and U.S.-China relations to a possible point of rupture. To everyone's relief, the Kuala Lumpur accord has frozen North Korea's nuclear activities and will lead to a dismantling of the old nuclear facilities. If the deal falls apart, the United States will have to work closely with Seoul, Tokyo, and Beijing to reexamine what would constitute an appropriate response, renewing efforts to enlist China's cooperation.

Southeast Asia: Taking Stock of American Interests

America's national interests, security role, and presence in Southeast Asia are weaker, less obvious, and harder to justify politically than those in Northeast Asia. The United States has no treaty commitments in Southeast Asia comparable to those with Korea or Japan. America has no ground troops stationed there, as along the 38th Parallel; it has no permanent naval bases, as in Sasebo and Yokosuka. America's departure from Subic Bay and Clark Air Force Base in the Philippines has reduced American capabilities in Southeast Asia and, realistically, diminished U.S. motivation to act. The countries of ASEAN welcome the U.S. presence but prefer it to be "over the horizon." ASEAN is becoming bigger and more cohesive; the addition of Vietnam will strengthen its political-military voice and lengthen its economic reach, but the United States has no formal ties or obligations with ASEAN.

When America sets the geographic coordinates of its core security interests in Asia, the points of the coordinate pass through Northeast Asia--Japan and Korea--but not through Southeast Asia. If one of the countries in Southeast Asia--say, Myanmar, Cambodia, or even Malaysia--were to undergo domestic upheaval or turn overtly hostile, American security would not be jeopardized. In Southeast Asia there are no counterparts to Japan or Korea--a strategic ally whose fate carries an immediate, direct, and far-reaching impact on America's core interests.

If no single nation, or subset of nations, falls into the category of a core interest, what about Southeast Asia as a whole? Can it be written off as peripheral to America's vital interests? What if growing Chinese power and assertiveness prompted Southeast Asian countries to adopt policies of appeasement and accommodation? What if China brought Southeast Asia into its sphere of influence? Obviously, the loss of the whole sub-region would be a major blow, since it probably would tilt the regional balance of power decisively in China's favor.

This is only part of the picture. Half a billion people live in Southeast Asia. For several years, economic growth in Southeast Asia has outpaced growth in Northeast Asia. In tandem with this boom, American investment in the sub-region also is increasing, even in sectors such as automobiles that were once written off to the Japanese. For example, in Southeast Asia's largest economy, resource-rich Indonesia, the cumulative value of American investments rivals Japan's, and will rise further with planned investments in the vast gas fields off Natuna in the South China Sea. These economic and strategic concerns have fostered bilateral memoranda of understanding on security cooperation between the United States and most of the ASEAN states. Particularly important in the new post-Subic and Clark strategy of "places not bases" is Singapore, where U.S. military personnel have been assigned to facilitate American air and naval movement in and through Southeast Asia.

Even if there is no overriding interest in an individual country or subset of countries, therefore, the United States has a significant stake in facilitating the emergence of a stable, prosperous, independent Southeast Asia which is disposed to be friendly to the United States and the West. Concretely, America has interests in seeing:

• Free and open sea lanes of transportation through the Malacca Strait and South China Sea;

• A strong, cohesive ASEAN as a source of region-wide stability and prosperity capable of helping to integrate China into Asia-Pacific multilateral institutions, balancing Chinese and Japanese strength, and as a framework for sub-regional peace and stability;

• Economic growth and political stability throughout the region but especially in the strategically pivotal states such as Vietnam, Indonesia, and the Philippines;

• Stable and effective democracies in each of the nation-states of Southeast Asia, including the countries of former Indochina;

• An influential voice in the region for states such as Australia and Singapore, whose economic and diplomatic roles can help keep Southeast Asia open to cooperation with the United States;

• Expanding ties of economic interdependence between Northeast and Southeast Asia, and finding a healthy balance between Japan, the United States, Europe, and the Northeast Asian states economically involved in Southeast Asia;

• Creating commercial opportunities for the United States to participate in the unfolding economic boom in Southeast Asia. A high level of commercial involvement may be the best guarantee of America's continuing interest in the region.

In short, America does have a major stake in Southeast Asia. Fortunately, it is an area on the upswing, and, as it develops, Southeast Asia's importance to the United States is also rising.

III Economic Opportunities and Challenges

Alongside American security interests, U.S. economic interest in East Asia is no less important. Indeed, with Asia setting the pace in global growth rates, America's economic stake in Asia is outpacing that in Europe and Latin America. Of course, it is the private sector, not the federal government, that is supplying the kinetic energy behind American commercial advance into Asia. Accordingly, less attention in this report will be given to economic issues than the subject deserves. But there is an essential role for the U.S. government to play--namely, to devise policies that facilitate regional development, promote openness and accountability, establish clear and enforceable rules, and assure America's full participation in Asia's economic boom.

East Asian growth is good for America, and we welcome it for many reasons--not the least of which is the greater demand for U.S. products. America's interests lie concretely in the positive-sum gains to be made from the liberalization of trade and of investments, the evolution of a regional division of labor, greater Asian contributions to the collective good, preservation of the global environment, and the establishment and enhancement of multilateral institutions which set effective norms and enforce clear rules facilitating international economic activities.

Booming consumerism and expanding demand for physical infrastructure are creating vast potential markets for American firms. Over the past 25 years, per capita incomes in East Asia have nearly quadrupled, and poverty has fallen steeply. If the present momentum continues, by the year 2000 only four percent of East Asians will be living below the poverty line. Such trends augur well for peace, prosperity, and democracy.

Not only is East Asia expanding rapidly, it is also becoming an increasingly interconnected market, one less reliant on exports to the U.S. market alone. Asian goods exported to other Asian markets stood at 34 percent in 1985, slightly above the 33 percent exported to the United States; by 1992, however, Asia-to-Asia trade rose to nearly 45 percent, while exports to the United States fell to 24 percent. The U.S. market remains important, though shrinking in relative terms, because it is still the biggest for certain products.

While the U.S. market is becoming progressively less central to East Asians, their market is becoming progressively more important to Americans. Ten years ago, the region had already become America's leading trading partner, larger than Europe or the entire Western hemisphere. Today, American exports to the developing countries in Asia represent the fastest growing segment of U.S. exports, a key to faster growth rates in our domestic economy. America's ability to compete in Asian markets is central not only to our economic well-being; it also keeps the United States from sliding into protectionist shelters for non-competitive sectors. American successes in foreign markets give elected politicians the breathing space necessary to defend the country's commitment to openness and global interdependence against the lobbying of special interest groups trying to shield domestic producers from foreign competition.

Owing to buoyant growth over several decades, Asia has become the world's third engine of growth (along with North America and Europe). This is good news. It suggests that East Asia is less vulnerable to the ups and downs of business cycles in the West. This was apparent during the period from 1989 to 1991, when the U.S. economy hit the trough of a severe recession and the speculative bubble in Japan popped; as jarring as the two downturns were, they failed to arrest Asia's momentum, which continued moving forward at the brisk rate of 8 percent. For the world economy, Asia's emergence as a locomotive of growth lowers the likelihood of synchronized booms and busts, as was experienced in the aftermath of the two oil shocks during the 1970s. Asia is now in a position to play the countercyclical role of stabilizing world demand when North America and/or Europe slip into recession. Asia's dynamism will also spur continued economic expansion worldwide.

American economic policy in East Asia should be based on six measures:

1. Promote Asia's economic development through openness, market competition, and conformity to multilateral rules. There is no place in this philosophy for "managed trade."

2. Encourage and help facilitate American foreign direct investments in manufacturing, infrastructure, resource extraction, and the services.

3. Expand economic interdependence and advance a regional division of labor so as to raise the costs and risks of irresponsible unilateral action.

4. Coordinate economic policies and U.S. security strategy; the two need to be thought of as constituting an integrated, coherent whole. The surest way of guaranteeing America's security presence in Asia over the long run is to continue expanding vital U.S. economic interests in the region.

5. Reserve economic sanctions primarily for political enemies, not key trading partners; economic sanctions seldom work and the political costs of issuing threats often outweigh the narrow commercial benefits.

6. At home, address the savings rate. Unless it corrects the glaring savings-spending gap, the United States will continue ringing up huge trade deficits, having to rely on large infusions of foreign savings, and finding itself mired in endless conflicts and nasty trade disputes. America's economic prospects in Asia will look immeasurably brighter if it can remedy its macroeconomic ailments.

America's Edge

Although America's relative economic strength is waning, it retains several uniquely valuable assets, including an indispensable role in maintaining international institutions, a huge home market, and technological creativity. The last of these--technology--is an asset of prime strategic value, given the fact that Asia's growth will turn increasingly on technological progress and less on incremental increases in labor and capital inputs. China, for example, is embarked on a modernization course that requires foreign technology; this need yields some potential for leverage over China, which can be used to encourage compliance with international rules and norms.

American producers are in a strong position to compete overseas. The U.S. competitive edge in technology, agriculture, processed food, the services, medical equipment, movies and entertainment, computers, software, telecommunications, heavy equipment, aircraft, aerospace, environmental protection systems, consumer products, and much more means that American companies are equipped to do very well.

East Asia's growth requires expansion of its basic infrastructure to transmit information; meet energy demands; make use of airports, sea ports, and highways to move people and goods around; and alleviate environmental degradation. America's economic strategy in Asia should feature as a prime objective the laying of physical infrastructure--information and telecommunications, energy, construction, and transportation. The importance of basic infrastructure makes this strategy both compelling and congruent with regional interests. There also are positive externalities to be gained by winning contracts to lay infrastructure--especially the chance to set technical standards that leverage America's commanding edge in software production. U.S. corporations that set technical standards will find themselves in a position down the road to supply capital equipment, intermediate goods, servicing and maintenance, and manpower training. And since Japan has earmarked generous sums of its official development assistance (ODA) for infrastructure development in Asia, Washington should call upon Tokyo to make good on its promise to untie its ODA and open project funds to foreign and joint American-Japanese bidders.

U.S. Foreign Direct Investment

Asia is becoming a large market for goods made locally by U.S. subsidiaries and joint ventures. Locally produced goods and services will exceed the volume of U.S. exports to the region if current rates of American foreign direct investments are continued and if FDI patterns in Europe and North American also hold true for Asia. Large-scale American investment is the main reason for America's preeminent economic position in Europe today. U.S. companies have reaped a cornucopia of benefits--a massive volume of goods and services locally produced by their subsidiaries, first-hand knowledge of European markets, and a high degree of intra-industry trade between American and European producers. These links have made for enduring U.S.-Europe ties; they have also helped to modulate trade friction. Contrast the situation in Europe with that in Japan and Korea, where long-standing barriers to FDI have brought the two countries into the rough-and-tumble of endless economic conflicts with the United States.

America's FDI in Asia is the instrument that will carve out its long-term economic position. FDI creates the basic framework within which trade, capital flows, technology transfers, and R&D take place. U.S. corporations should be encouraged to seize current opportunities to invest in Asia. Many want to do so and some are, but America's FDI in Asia is below the level of where it should be if the United States wants to secure the same preeminent position that its corporations have achieved in Europe. The level is lower than Japan's FDI in Asia. This is not because the United States is saddled with intrinsic disadvantages, such as geographic distance or cultural unfamiliarity. Rather, the explanation is more straightforward: Japan has an excess of savings over investments at home and much of the excess savings is, naturally, flowing to the fastest growing region in the world. By contrast, because the United States is forced to borrow foreign money to cover its deficits, it has much less to invest abroad.

The Macroeconomic Problem

The American macroeconomic imbalance is not simply the by-product of market forces. It is, at bottom, the outcome of poorly conceived policies--specifically, those affecting U.S. savings and spending rates. There are other, more compelling reasons for correcting the deficient savings rate, but Americans should recognize that the nation's macroeconomic malaise places U.S. corporations at a serious disadvantage when they compete in Asia and elsewhere. Left unchanged, this imbalance will hurt our standard of living, give rise to lopsided current account imbalances (with attendant political conflicts), and undermine America's capacity to exercise world leadership. Happily, there is an emerging political consensus, uniting Democrats and Republicans alike, that the federal budget needs to be balanced by the year 2002. Although it remains to be seen whether a balanced budget will actually be carried out, the emergence of a bipartisan consensus following decades of profligacy is, by itself, an encouraging development.

If the president and Congress can demonstrate the will to balance the budget, the United States will bolster its sagging power, shore up its prestige, and elevate its position in the world. While America will never be restored to the heights of power it enjoyed during its heyday, turning the tide on years of fiscal mismanagement will certainly help to arrest the nation's steady slide. Progress on other fronts--business downsizing and re-engineering, improvements in manufacturing, the recovery of confidence, and unmatched excellence in high technology and other high-value-added sectors--has also helped to beat back America's image as a superpower on the steep and slippery slope of decline. If the federal government can restore balance to its macroeconomy, the United States will find itself in a much stronger position to pursue its economic interests and to convert its competitive assets into bountiful commercial benefits in Asia.

Trade with Japan

From 1992 to 1995, America's strategy of managed trade led to acrimonious negotiations with Japan that took a heavy toll on the bilateral alliance. Indeed, it led to the depletion of mutual trust on both sides of the Pacific and even put U.S.-Japan defense ties at risk. Trade disputes came to dominate U.S.-Japan relations. And for this state of affairs, both sides were at fault. Both governments adhered to bad economics: the United States government was preoccupied with numerical targets and bilateral trade deficits in a multilateral trading world, rather than focusing on the underlying savings/investment imbalance; on the Japanese side, the problem was a stubborn unwillingness to remove informal trade barriers and deregulate the protected and inefficient sectors of its economy.

The political heat generated by trade disputes has melted down the reserve of goodwill so painstakingly built up over the past half century. At the low point, in 1995, the Clinton and Murayama administrations brought America and Japan to the brink of a disastrous trade war, from which both countries and the WTO would have emerged as net losers; fortunately, an eleventh-hour compromise was reached. Both sides must not resort again to playing the game of chicken. The risks and costs are simply too great.

The United States and Japan must come up instead with a positive-sum strategy. A mutually beneficial approach would include joint support for multilateral rules for conflict resolution (as set forth in the Uruguay Rounds of GATT and the WTO), creation of an independent dispute-settlement mechanism to resolve disagreements specific to U.S.-Japan trade (that lie outside the scope of the WTO), decisive Japanese moves to deregulate and open up its economy, and joint efforts by both sides to advance the liberalization of trade and investment through APEC. The two sides should turn some of their bilateral disputes into opportunities for international agreement, pulling the Europeans into the effort at liberalization. The conflicts over automobiles and photo film provide the United States and Japan with a timely opportunity to launch a new round of GATT trade talks focusing on the problem of anti-competitive practices.

The question of whether to extend the U.S.-Japan semiconductor agreement signed in 1990 is open to debate. The U.S. side sees the semiconductor agreement as the most successful bilateral accord ever reached, a shining example of what can be accomplished. It believes that America's share of Japan's semiconductor market would never have reached 20 percent if the agreement had not existed, prompting the Japanese government to jawbone the private sector into achieving the target. The accord is a model that the U.S. side would like to see extended and, if possible, replicated. The Japanese side, which feels that signing the semiconductor agreement was a major mistake, wants to let it lapse. It regards the agreement as a bad precedent that must never again be repeated. Now that foreign companies have claimed 26 percent of Japan's semiconductor market (1995), the Japanese side argues that the accord is no longer needed. We are of the opinion that the semiconductor agreement may have accelerated the entry of U.S. companies into Japan's hard-shell market but that it is not a paradigm suitable for replication in most other sectors, and the U.S. government should not spend a lot of political capital insisting on its extension.

America's approach to trade liberalization should be designed to win the backing of influential domestic groups in Japan (not to mention groups in Europe and elsewhere in East Asia). Mobilizing domestic support is essential if the United States wishes to move the countries of East Asia toward goals that lie in their own national interests--namely, greater economic efficiency, along with more options and a higher quality of life for consumers. Unless the U.S. government comes up with programs that appeal to consumers and key domestic interest groups, it stands scant chance of seeing its trade policies implemented. This is precisely the problem with the managed trade approach: it has engendered popular political resistance in Japan and through the Asia-Pacific region. Frustrated by the lack of progress and cognizant of the high collateral costs, the United States appears to be moving away from the track of managed trade.

Instead of focusing on a confrontational strategy that only hardens the lines on both sides, the United States seems to be searching for new areas of common interest on which the two countries can concentrate. And one of the most promising areas where national interests clearly converge is that of deregulation in Japan.

The Japanese economy is struggling to lift itself out of the longest and severest recession in postwar history. Although Japan remains healthy in terms of standard vital signs--savings rate, educational test scores, labor quality, and so forth--its economic system is in need of fairly major surgery. Hard hit by the strong yen, Japan's prime export sectors, such as consumer electronics and automobiles, are moving many operations offshore (especially into China and Southeast Asia). This is leading to the familiar problems of "hollowing out." Offshore production means that Japan must develop new high-value-added sectors, new export performers, and new products to market internationally. In short, it must become more innovative; it has to move to the cutting edges of technology or risk losing its position as Asia's leading economy.

Japan's non-traded sectors (agriculture, housing and construction, wholesale and retail distribution, cargo and freight, financial and other services) tend to be high-priced, inefficient, and non-competitive vis-à-vis foreign firms. These non-traded enterprises, which account for upwards of seventy percent of Japan's gross domestic output, are suffering from the ill effects of decades of protection, political clientelism, cozy cartels, rigged bidding, and excessive regulation. For Japan to regain vitality, the non-traded sectors have to become more efficient. This means that the Japanese government must lift the onerous weight of regulatory controls and throw open closed domestic markets to the bracing winds of international competition. To continue protecting, subsidizing, and coddling the poorly performing sectors is a costly and ultimately self-defeating course.

Japan stands at a crossroads similar to 1952 when the American Occupation ended. It has a huge stake in internationalizing and deregulating the sheltered segments of its economy. But this transformation will not be easy. Whether Japan's leadership can overcome inertia, reform outmoded structures, and jettison ingrained habits is by no means guaranteed, given the embeddedness of old institutions and practices. Nevertheless, it is here that America's interests in greater market access and Japan's in economic recovery converge. The United States and Japan can work together if the atmosphere of confrontation is abandoned for one of joint exploration and good faith bargaining. For a strategy of deregulation to be effective, strong political will by the two chiefs of state will be required. The American president and Japanese prime minister will have to be involved to keep negotiations moving forward and to develop a sense of partnership.

More generally speaking, there is an urgent need for leadership to put the U.S.-Japan relationship back on track. Indeed, not since the two countries drifted into confrontation in the 1930s has the need for leadership been more acute. But the political climate appears to be unpropitious. In both countries, the public mood is cynical, restive, fed up with political parties and partisan politics, anxious about declining wages and job security, and pessimistic about the future. This means that the power of the two heads of state, the advantages of incumbency, and levels of party loyalty are weakening.

Reflective of the bilateral malaise has been the manipulation of the yen-dollar exchange rate as a readily available tool for correcting imbalances in merchandise trade and current accounts. From the Plaza Accord of 1985 until mid-1995, the value of the yen relative to the dollar was pushed upwards to higher and higher levels. Exchange rate manipulation has been costly. For the United States, the weak dollar has led to a lower relative standard of living, higher import invoices, higher costs in doing business abroad, and a sense of diminished financial clout. Monotonic rises in the value of the yen have increased incentives for Japanese and other holders of American financial instruments to move away from dollar-denominated holdings and for Japanese firms to expand capital investments elsewhere, particularly in East Asia.

On a more technical note, the United States, Japan, and the other Asian governments should try to come up with a better metric for assessing trade flows. A clearer distinction needs to be drawn between trade imbalances and market access; the two tend to be treated, mistakenly, as synonymous. The metric ought to take account of the multilateral nature of trade. It should incorporate data on overseas production by home-based companies. As indicators of market barriers, comparative data should be gathered on prices and price differentials between domestic and foreign markets. Measures of intra-industry trade, if lower than expected, could also be signs of future trade conflicts. Trade statistics ought to be supplemented by extensive data on FDI, local production, and sales by overseas subsidiaries and joint ventures. Having an accurate, comprehensive set of measures would serve to defuse some of the political tensions generated by excessive reliance on one highly simplified indicator, the bilateral flow of merchandise trade.

Using today's exchange rates, the United States and Japan are the world's two biggest economies. The bilateral relationship is not only one of intense commercial competition but one of variable-sum cooperation as well. Competition is healthy, the driving force behind real gains in efficiency, innovation, and consumer welfare. Competition will always be present, even though trade friction may diminish as Japan recovers from its recession and China's growing trade surplus with the United States diverts attention away from the U.S.-Japan problem. But as the heat is turned down, the United States still needs to come up with constructive ways of widening access to Japanese markets, especially through multilateral channels, in the context of a systematic program of deregulation in Japan. The two countries also must remember that they hold vital interests in common and stand to benefit immensely--along with the rest of the world--from cooperation in upholding an open and robust international economic system. Just as U.S.-Japan cooperation is essential for East Asian security, so too is bilateral cooperation indispensable for East Asian growth and global prosperity.

Trade Disputes with China

Trade disputes will be a part of U.S.-China relations for the indefinite future because of China's large and gathering economic weight, the distance it has to go to conform to international rules, and America's inclination to use trade sanctions as punishment for China's human rights violations and arms sales policies. The latter has led to confusion about the linkages between U.S. political and commercial interests with Beijing.

Instead of using economic sanctions as an all-purpose tool to punish China for all variety of sins, the United States would be better advised to keep economic sanctions separate from political and military countermeasures. Responses should be confined to the same sphere in which objectionable acts take place--that is, imposing economic sanctions for violations of commercial rules and norms, and using appropriate military measures in response to military aggression. Keeping the baskets separate will not always be easy, of course, but unless a clear separation is maintained in principle, the temptation to slap on economic sanctions indiscriminately, such as the denial of MFN, will be hard to resist. And because MFN is subject to annual review, America's policy toward China is hostage to whatever objections may be raised by the Congress, nongovernmental organizations, lobbyists, or particularistic interest groups at the time. Annual MFN review pits the president and administration against the Congress and private interests, making it hard to develop and sustain a coherent, long-term China policy. For this reason, we recommend that MFN review be conducted on a more periodic basis--perhaps every five years-- instead of annually, as is the case today.

America should welcome and support China's development, not least because the best assurance of a democratic China is a prosperous one. Growth in China should lead over time to greater degrees of freedom and expansion of the marketplace and the private sector. To the extent that it reduces the risks of military aggression or political intimidation, the decentralization of state power in China may serve the national security interests of the United States and neighboring Asian states. However, to the extent that it destabilizes the political economy and inhibits the Chinese state from providing the rudiments of social order and physical safety, the devolution of power runs counter to Chinese, American, and regional interests. On the desirability of Chinese prosperity, order, and stability, the United States and China have no fundamental differences.

It would be desirable to admit China into the WTO as soon as China meets the conditions of admission. China must be held to the same international standards and rules as are applied to other countries; Chinese admission to the WTO would carry with it commitments for which special exemptions cannot be made. Once China becomes a member, if it violates WTO rules and norms, it will receive a hearing but will be forced to accept the organization's binding decisions. This will largely relieve the United States of the onerous task of trying to change Chinese behavior unilaterally.

Unilateral sanctions, such as the use of Super 301, expose the United States to the threat of counter-retaliation (not to mention the threat of a possible WTO violation). If the U.S. government imposes stiff fines on Chinese imports for violations of intellectual property rights, for example, the Chinese are apt to retaliate by making purchases from Europe's Airbus rather than from Boeing. There is, in short, a problem of free riding by third parties layered on top of the direct fallout effects of bilateral confrontation. This makes multilateral approaches an appealing alternative to the exercise of unilateral sanctions. Of course, there are bound to be plenty of instances where the U.S. government has no choice but to deal one-on-one with China; in those instances, the application of economic sanctions, as stated earlier, ought to be appropriate and confined to violations of economic rules and norms.

Multilateral Organizations

In less than two decades, APEC has developed from an embryonic idea--another in a long line of proposed regional arrangements--to the main multilateral mechanism for regional dialogue and policy deliberations in Asia, including trade and investments, development and foreign aid, intellectual property, and other relevant matters. APEC's emergence as the main framework for regional policy discussions is timely, since the speed of economic development in Asia requires the creation of a forum capable of addressing the variety of problems caused by fast-paced change. What APEC has accomplished so far is impressive, including the statement of intention to reach liberalization targets by the year 2020. Its achievements have exceeded expectations. If the momentum can be maintained, perhaps APEC will fulfill a mission comparable, in some respects, to that of the European Union (EU).

There are compelling reasons for the United States to continue playing a major role in APEC. As first-order priorities over the next few years, the United States ought to encourage developments to keep investment and trade liberalization on track, establish the rule of law where lacking, and devise a regime for protecting intellectual property rights. Secondarily, America should seek to address environmental problems and to lend a hand in expanding the ASEAN Regional Forum into a multilateral forum to hold ongoing security discussions (going beyond preventive diplomacy and confidence-building steps).

As stated earlier, the time has come to build meaningful and lasting multilateral institutions in Asia. To do so will require constructive American participation and coordination with the nations in the region. In strengthening APEC, the United States will have to develop a consistent and coherent approach with respect to multilateralism. Sometimes, it is not clear whether we see APEC or GATT as the leading edge of liberalization. Are we using APEC to apply tacit pressure on the European Union to remain open? Does progress in APEC accelerate progress on the GATT negotiations? Is it better to concentrate on GATT and the WTO and let precedents at the global level bring pressure to bear on regional groupings like APEC and the EU? Of course, there is no inconsistency about moving simultaneously at both the regional and global levels. The two are compatible and, indeed, are synergistic in the sense that movement at one level tends to promote progress at the other. But there may be situations in which one institution--say, the WTO--requires greater attention and a higher priority because the precedents set might carry consequences for other multilateral organizations. Where distinctions or choices have to be made, the United States ought to give priority, other things being equal, to global institutions and commitments. Care should be given not to crowd out, neglect, contradict, or jeopardize its commitment to institutions like GATT and the WTO.

If America throws its support behind multilateralism, it ought to also be willing to funnel some of its most contentious bilateral conflicts into multilateral channels of discussion and dispute settlement. This could provide a framework to handle problems with Japan and China. It may also be the direction in which some of our Asian allies, such as Japan, will want to push us. The United States should be prepared, accordingly, to accept whatever decisions are reached by multilateral bodies like the WTO. It has to abide by multilateral rules and norms, even when they constrain its power to impose unilateral outcomes and seem to run against its short-run interests.

Contributions to Science

Everyone benefits from breakthroughs in science. Advances in basic research make it possible to commercialize knowledge and not only to develop innovative new products but also to create whole new industries. In this sense, basic research is a collective good. During the second half of the twentieth century, the United States did more to support and advance basic research than any other nation.

In the long run, issues of reciprocity and global responsibility matter as much, if not more, than disputes in merchandise trade. The world has now entered an era in which the most advanced East Asian countries, especially Japan, must increase their contributions to basic research. They have been living off of American and European investments for decades and have produced little themselves to restock the scientific cupboard. Many Asian nations have reached a stage of economic development where they can afford to do much more. Japan acknowledges this responsibility and, in fact, is spending more money on science today than ever before. But Asia's aggregate investment in basic science remains small, far below the level of what it ought to be. And the other East Asian nations, several of whom are above the OECD threshold in per capita income, contribute hardly anything to the world's storehouse of scientific knowledge. Such free riding can no longer be tolerated.

IV Addressing the Correlates of Growth

Rapid development already has exacted a high toll on Asia's environment. Air pollution is a chronic condition of urban life. Safe drinking water is in short supply; untreated sewage and industrial waste routinely flow into waterways. The extension of agriculture and human settlement into uplands areas, coastal wetlands, and semi-arid zones has hastened deforestation, desertification, soil degradation, and pollution of coastal waters. Pressures on natural habitats are, in turn, diminishing biodiversity.

Much of the impact of environmental degradation is being felt locally in East Asia. In China's urban areas, for example, there are striking increases in respiratory ailments due to poor air quality, while in Southeast Asia, crippling diseases from drinking unsafe water are the principal causes of infant and youth mortality. But the effects of pollution also are increasingly felt across national borders, as in the case of acid rain from China (carrying across Japan and Korea) and the degradation of transnational river systems. Other deleterious effects are--or will be--felt globally.

America's interests in East Asia's environment are more diffused and less directly linked to national foreign policy than the other areas discussed thus far. Nonetheless, the United States has much at stake in working with Asian governments to assure that economic development proceeds in an environmentally sustainable way. In thinking about U.S. interests and appropriate policy responses, it is useful to disaggregate the East Asian environmental situation in terms of:

• Transborder outcomes that directly affect the United States, most notably the emission of greenhouse gases, depletion of the ozone layer, and potentially global climatic change. In the next two to three decades, Asia (excluding Japan) will probably surpass all OECD countries combined in CO₂ emissions. Within the next fifteen years, it will be the world's primary source of sulfur dioxide and nitrogen oxide emissions. China looms as particularly prominent in chemical emissions because of its large and growing use of coal.

• Patterns of resource use that affect America's stake in promoting global prosperity. The most obvious would be utilization patterns that slow the growth process in East Asia itself or distort global supply and market prices for critical resources. Should bottlenecks in urban infrastructure, shortages of energy, or similar issues related to sustainable growth inhibit the capacity of East Asian countries to continue their robust growth rates, the slowdown will dampen America's economic prosperity because the U.S. economy is increasingly interdependent with the region.

• Vital consequences to Americans as inhabitants of the global ecosystem. Losses of biodiversity are the main concern, with the situation in certain Southeast Asian countries bearing close monitoring.

An effective environmental agenda for East Asia must be both timely and farsighted. Timeliness matters because preventive action is the most cost-effective method of dealing over the long run with the array of environmental problems confronting the region. It is also important because the environmental outlook for East Asia in the coming years is worrisome. Given trends in industrial output and projected population increases over the next several decades, the worst conditions are probably yet to come:

• Per capita demand for resources, historically low in developing East Asia, is climbing steeply as a result of industrialization and rising incomes. As Asia's economic development draws on a greater proportion of world resources and pushes up total resource consumption, the effects are likely to be felt in world prices of basic commodities, most notably oil and food/feed grains.

• Although fertility rates are declining in East Asia, the region's population is still expected to grow from the current 1.9 billion to 2.4 billion in 2025. By that time, many countries will come close to doubling their current populations; China will add 275-300 million people, the equivalent of creating another United States. This will increase demand for resources of all sorts, especially food.

• Asia is rapidly becoming urban. By 2005, more than half the region's people will live in urban areas, and nearly two-thirds will be urban dwellers by 2025. The lag between urban growth and infrastructural development in much of East Asia suggests that the cities will experience even more concentrated pollution, along with all the associated health problems and social costs, before things get better.

While ecosystems throughout developing East Asia are deteriorating, the situation in China is of special concern. As a result of both rapid industrialization and lingering underdevelopment, China faces a host of urban and rural environmental problems; and its renewable and nonrenewable resources are under enormous pressure. It is estimated that losses from pollution and ecosystem degradation in 1989 were higher than the government's total expenditure on education, culture, science, and health care. Moreover, China is at an income level where such damage will probably get worse before it has a chance of becoming better. On the other hand, the Chinese people are much better fed, live longer, receive higher levels of education, and enjoy better housing than ever.

In devising a long-term strategy, two kinds of problems need to be distinguished with respect to the spectrum of environmental challenges facing East Asia: (1) those that are a by-product of the level of development; and (2) those that are confined to East Asia versus those that spill over and affect areas outside of East Asia, including the United States.

Some environmental problems, as the World Bank has observed, decrease with rising incomes--for example, the demand for clean water, sanitation, and urban amenities increases as income rises; so, too, do the means for supplying them. Some problems first worsen and then improve as incomes rise (e.g., industrial pollution, deforestation, and encroachments on natural habitats) while others grow progressively worse with real gains in income (e.g., emissions of carbon and nitrogen oxides). As a general rule, advances in per capita income lead to greater demands for a cleaner environment, and countries are better able to meet the demands. One estimate puts the point of maximum degradation at about $4,000 per capita. If this is accurate, the growth of incomes well beyond this level will be positive for many, but not all, environmental issues. Early policy intervention also is critical, especially for the kinds of degradation, such as deforestation and the destruction of natural habitats, which are not reversible.

It is tempting to exclude from the American policy agenda concerns for environmental matters that are confined to the region or to specific countries. It may seem logical to focus exclusively on global problems that impinge directly on U.S. interests. However, the pitfall of following such an approach is that it puts the most scientifically and economically complex issues (e.g., the greenhouse effect) at the top of the agenda, while Asian governments are inclined to give priority to local pollution problems where the need for action is urgent and the payoffs are tangible and immediate.

Working in concert with the developed countries of East Asia, America's long-term strategy, consequently, should seek to create local constituencies for mobilizing environmental action and for developing compliance mechanisms, making effective use of local and national agendas. Japan, in particular, has a stockpile of excellent technologies and is committed to making environmental protection a priority in its foreign aid programs in Asia; joint Japan-U.S. leadership in providing technical assistance is pivotal to creating a cooperative, regional approach to East Asia's environmental problems.

While the physics and economics of the greenhouse effect are still unknown, it is clear that (1) international cooperation will be needed to achieve effective results; (2) gradual adaptation will be much less costly than sudden shifts in policy; and (3) the international trading of emissions levels will substantially reduce costs. The Rio formula, which calls on each country to stabilize its emission levels, falls relatively lightly on the rich countries and much more heavily on the fast-growing, poor ones, especially those like China that use a lot of coal. The level of spending required in China's case is so high that China is unlikely to conform to the Rio formula without assistance from the United States, Japan, and other developed nations. For other developing countries as well, the process of compensation or of assigning emission rights would be very difficult, not least because the costs and benefits of climate change would be unevenly distributed.

Food and Energy

The expected 30 percent increase in East Asia's population over the next 30 years implies a proportional increase in food consumption, if diets remain unchanged. But diets will change, of course, as growing wealth invariably leads to different eating habits. As a consequence, food demand in East Asia is likely to grow more than 50 percent over the current level (in constant value terms) by 2025. It is hard to predict whether increases in local agricultural production can keep up with demand, given the high yields already obtained in Asia and the uncertainty of significant improvements in agricultural technology. Growing incomes will allow Asian nations to import some of the increment. This might mean large increases in the volume of food sold internationally, and it might also leave some countries vulnerable during years of bad harvests.

Energy consumption has grown more rapidly in East Asia over the past twenty years than anywhere else, and the trend will continue. By 2010, Asia is expected to account for 27 percent of global energy demand, double its world share in 1971. China, already the world's third largest energy consumer, is expected to increase energy use faster than the rest of the region.

Electric power generation, the principal energy need for developing East Asia, is highly dependent on coal, the most polluting of all fossil fuels. With vast coal reserves, China is the world's largest burner of coal. Equipment suppliers see annual increases of 15,000-18,000 MW of electrical generating capacity and, of necessity, most will be coal-fired.

Automobiles are the major source of air pollution in most Asian cities, and the number of autos in East Asia, led again by China, is projected to grow more rapidly over the next decade than anywhere else. The region's demand for oil is expected to double or even triple by the year 2010, depending on pricing policies and non-price restrictions. Its share of world primary oil demand, 19 percent in 1991, will exceed 25 percent by 2010, much of it coming from the Middle East. This steep growth in demand, together with that of other regions, is apt to increase the use of synthetic fuels and alternative energy sources.

The Prospects for Democracy

The United States has a compelling interest in the emergence of a more democratic East Asia both because it values democratic forms of governance and because the spread of democracy is likely to make for a more stable and peaceful region. The historical record suggests that democracies do not go to war with one another. Given the importance of America's stake in regional stability, it is more than idealism that motivates its interest in greater participation, political openness, and clear accountability.

As an expression of its core values, national identity, and vital national interests, the United States has long sought to promote democracy around the world. It should continue doing so in East Asia. However, Americans need to understand that democracy is not a system of governance that springs into existence overnight. It takes a great deal of time and effort to cultivate the soil, sow the seeds, and nurture the delicate buds so that democracy has a chance of flowering. This involves the establishment of effective legal systems, press freedoms, civil society, administrative institutions, political party competition, the protection of individual rights, and much more. For many nations of the region, the process has only started. Regimes in China and Indochina, for example, have just begun to move away from their totalitarian pasts. Viewed in the context of their long histories, most East Asian societies have only recently shed their colonial shackles and emerged as nation-states. Their daunting domestic agendas include simultaneous attention to such basic tasks as universal education, institution-building, and industrialization. Democracy in East Asia needs to be understood in the context of long-term socioeconomic as well as political change.

As of now, the long term looks encouraging. South Korea and Taiwan have made the transition from authoritarian military rule to electoral and party competition and greater accountability to public opinion. The middle class has asserted itself in Thailand. Filipinos have begun to repair their damaged democracy. In Japan, the Liberal Democratic Party's parliamentary monopoly has been broken and a new era of party realignment and contestation is under way. The judiciaries, media, and parliaments of a number of East Asian countries have become more independent. Pressures for more pluralism have been set in motion even in China and Vietnam, whose regimes, though by no means democratic, now tolerate differences on at least some topics that were formerly beyond discussion.

But democracy's prospects should not be overdrawn. Recent signs of a possible reversion to authoritarian rule in Cambodia cannot be ignored. Myanmar's dictatorship has bought itself time by negotiating peace accords with insurgent movements. The succession to President Suharto in Indonesia, when it comes, may or may not liberalize his authoritarian regime. Democracy in Hong Kong seems likely to become a casualty of the colony's reversion to China in 1997. Ruling elites in Beijing, Hanoi, and other East Asian capitals still believe they can and should curtail political pluralism for the sake of stability and development. Nor have regional organizations such as ASEAN and ARF put democratization on their agendas.

It is the underlying trends that give cause for optimism in the long run. East Asian economies continue to surge ahead. As the region's middle classes grow, they tend to want a greater say in the policies that affect their lives. Trade constitutes a substantial share of many East Asian economies. Rising flows of goods, services, capital, and technology encourage openness to the outside world. Domestic politics cannot long remain uninfluenced by international interdependence. Global engagement can stimulate greater transparency and accountability, an increasing degree of compliance with international laws (particularly ones governing economic transactions), and the gradual acceptance of the conventions and norms common to other countries. Economic growth raises the level of education and encourages travel and the use of telephones, faxes, satellite dishes, and other private channels of information. Communication becomes harder to control; new standards are introduced; and dissent becomes harder to prevent or repress. These circumstances, in turn, make political reforms more likely.

Again, realism is in order. Every country is different, and economic growth alone will not guarantee democracy. The myriad social changes that come with rapid growth and internationalization generate anxieties that can undermine political stability. Typically what emerges from this mix is not unilinear democratization but a set of tensions: between economic freedom and political stability; between internationalization and Asian "exceptionalism"; between the impatient young and the bewildered old; and between those who prosper from change and those left behind. Ethno-religious and geographic fissures may aggravate such contrasts. For all these reasons, democratization in East Asia will not follow a simple, rapid, or straight-line trajectory.

What might retard or reverse favorable trends? First, a breakdown of international trade would be enormously damaging. It would lead to slower growth rates, greater government controls, a weakening of middle classes, and less international openness. Second, too much foreign pressure could crystallize nationalist resentment and result in a patriotic circling of the wagons. That too would interrupt the momentum toward political tolerance. Third, tensions and conflicts among East Asian states could stoke nationalistic fervor and reactivate old animosities. Militarism could revive, and that also would undercut democratic prospects.

A sound grasp of the underlying forces at work should guide American policies regarding democratization and human rights. Our approach should be consistent, nuanced, and long-range. Aware that democratization is a complex, diverse, and contingent process, the United States should operate on these assumptions:

• The emergence and consolidation of democracy in East Asia will result primarily from domestic developments, including popular demand for accountability, not from American pressures, sanctions, or intervention.

• Economic development and international interdependence are the best assurance that trends toward political pluralism and respect for human rights can be sustained.

• The introduction of new information technologies, including computers and modern telecommunications systems, will tend to erode authoritarian controls.

• Democratization will not culminate in a victory for any one political model. Given its many checks and balances, its potential for executive-legislative deadlock, and its priority on maximizing the rights and freedoms of individuals, American-style government may not be the most attractive or effective model of democracy for East Asians.

A patient, gradualist approach offers the best hope of achieving widely and deeply held commitments to democratic values, practices, and institutions in East Asia. This may mean, in certain cases, decoupling American concerns about human rights from trade and security arrangements. A long-range strategy based on a recognition of the power of evolutionary forces and facilitating conditions will also help the United States to avoid allowing its policies on democratization to be driven by the tactical need to react ad hoc to media exposure of human rights violations.

By helping to ensure East Asian peace and security, economic liberalization and growth, and demographic stability, the United States can enrich the soil in which democracy grows. We can help form and strengthen multilateral institutions for regional security and prosperity. Within East Asian countries, we can assist the expansion of civil society by encouraging the growth of business, labor, and professional associations, volunteer and consumer groups, and independent media. These steps should be part of a strategy to help East Asians achieve more effective governance under the rule of law.

In sum, America should stand ready to take appropriate actions against unacceptable violations of human rights in East Asia. But the United States can further the cause of democracy most effectively in the long run by (1) making the case that socioeconomic development is conducive to greater political openness and pluralism; (2) helping to bolster civil societies in ways that increase popular participation in political processes that can hold public authorities accountable for their decisions; (3) acknowledging the limits on its ability to impose its own model of democracy on a region most of whose member states are culturally distinctive, economically dynamic, and politically self-confident; and (4) avoiding off-the-cuff or holier-than-thou reactions to media reports of human rights violations.

V The Conduct of Foreign Policy

Asia routinely gets put on the back burner in Washington as more immediate foreign and domestic issues constantly engage the attention of top policymakers. When Asia does surface, it is often in a negative, event-driven context (such as the arrest of a human rights advocate) that provokes a short-term reaction. The media and lobbying groups control the agenda with remarkable ease under these circumstances. More vital, long-term interests are neglected, and the downward cycle of drift continues at a high cost to U.S. influence and participation in Asia.

There is no good substitute in foreign policy matters for clear and strong leadership. This is particularly true in instances, as with Asia policy, where public opinion is unfocused and national interests are diverse and changing. Active and continuous presidential involvement in the form of speeches, trips to the region, and the welcoming of Asian leaders to Washington can be as important as the content of policy itself. It ensures coherence and consistency. It leads to all cabinet members and their deputies understanding the president's desires. And it minimizes the chances of partisan gridlock or policy co-optation by narrow interest groups.

But presidential leadership is not enough. Someone has to be in charge of coordination and implementation. The president must designate one person to integrate the disparate parts of Asia policy and to enforce the president's priorities within the administration. We recommend that person to be either the national security advisor, his deputy, or a specially designated ambassador (who concurrently might be assistant secretary for East Asia), and that he or she have responsibility for clearing the Asia policies that emanate from the various departments and executive agencies.

VI Summary: U.S. Policy and Changing East Asia

The Cold War "bargain," in which the United States provided the lion's share of public goods, including access to American technology and markets, in exchange for Asian allies' compliance in the containment strategy, has become outmoded. U.S. security needs are less apparent with the end of the Cold War; and Americans now see a more complex interplay between commercial interests and strategic concerns.

Much like Europe after World War II, a new East Asia is in the process of formation. There are fresh ideas about regional cooperation on the table. The domestic politics of one country after another are changing as regimes supported by the Cold War fall away or adjust to new conditions. To play an effective role in these developments, the United States needs to be more explicit about the future East Asia it would like to see evolve. Clarifying American interests is the first step toward creating policies to advance them.

In working with its Asian friends to give shape to this emerging, dynamic region, America brings many strengths to the table. For one, the United States is as much a Pacific nation geographically as an Atlantic one. America has a long record of playing a positive role in Asia. It provides military protection to millions of people. The United States has been a force (albeit not always a consistent one) for openness in economic relations. There is widespread respect for American democracy and other aspects of American life. Its significant Asian-American communities provide important links to many countries of the region. The United States has flexible business organizations that offer capital, state-of-the-art technology, and managerial know-how. It is the undisputed leader in science and high technology. And America's market continues to be a major destination for Asian goods.

But instead of complacency--taking U.S. strengths for granted or turning its back on an Asia that appears increasingly unwilling to subordinate itself to its will--the United States needs to adapt its policies to the emerging realities of East Asia. Precisely because there is no clear and present threat in the region, the timing is right to develop new and more balanced relationships to the mutual benefit of the United States and its Asian friends.

We stand on the verge of a new millennium. America's challenge for these last few years of the twentieth century will be to apply its considerable strengths cooperatively with East Asians in the pursuit of common interests in physical security, material welfare, accountable governance, and the sustainability of these vital public goods into the next century.

East Asia

Table 1. The Population of East Asia

Table 2. Economic Growth in East Asia(as percent GDP)

Table 3. U.S. Trade with East Asia

Table 4. The Military Balance in East Asia

Table 5. Military Forces in East Asia