HONG KONG — In the previous article in this series, I asked whether capitalism would be sustainable into the 21st century. In the article before that, I emphasized that never had the world seen so many democracies, but warned that there were risks that the conditions for maintaining the momentum of global democratization would not be met. Another crucial question that needs to be asked — the answer to which will have a significant bearing on the other two — is whether free trade in global markets can be developed, indeed enhanced. In Greater China (China, Taiwan and Hong Kong) that is a matter of enormous importance.
Free trade is still a long way off. Protectionism remains strong, especially in the discrimination practiced by industrialized countries against the exports of developing countries, for example in agricultural goods and textiles. There is a great deal of protectionism among developing countries. This maze of trade barriers is a primary culprit in the prevalence of poverty around the world.
Protectionism is also practiced in the cross-border movement of people and labor markets generally. If Nokia makes a cheaper and better mobile phone than an Indonesian manufacturer, it can sell its product in the Indonesian market. Everyone benefits: the Indonesian consumer from having a better and cheaper product, Nokia by the profits it makes in the Indonesian market. However, if an Indonesian can offer a cheaper service through his labor in the European Union, it will be very difficult for him to do so.
Whether labor markets should be fully open to free trade is debatable and politically explosive. (There is an excellent survey on migration in the Nov. 2 edition of The Economist.)
Following the establishment of the General Agreement on Tariffs and Trade in 1948, maintaining the momentum for trade liberalization has always been a struggle. Protectionist lobbies are well organized and rich. Protectionism gives great scope for cronyism and corruption, hence is preferred by many politicians. Nevertheless, the open trade agenda has been kept in motion as a result of successive rounds of trade negotiations that succeeded, inch by inch, in expanding open trade and pushing back the many new forms of protectionism that, like deadly mushrooms after rain, keep popping up. The Uruguay Round, was a seven-year-long protracted and tortuous process. One of the outcomes of its conclusion was the establishment of the World Trade Organization in 1995.
The attempt to launch a new round in Seattle in 1999 failed dismally, though it succeeded in November 2001 in Doha, Qatar — a success due, without much doubt, to the “shadow” of 9/11. Since then, however, the United States has been engaging in unilateral protectionist acts that are quite startling, while the EU and Japan remain inflexibly protectionist in agriculture. The Doha trade round is theoretically supposed to take into special account the needs, grievances and aspirations of the developing countries; hence it is known as the “Development Round.” As things stand today, however, there is not too much reason to feel encouraged.
What has changed the whole global pattern of production and trade quite dramatically — and it is possible that we have seen nothing yet — has been the meteoric rise of China as an economic power. Fifteen years ago, China was nowhere on the trade and investment scene; now it is the world’s sixth leading trading power, the fourth in total stock of foreign direct investment. FDI flow this year will surpass even that of the U.S. China has become the workshop of the world, making virtually everything from the cheapest labor-intensive goods (toys, textile, Christmas decorations) to high-tech electronics. More foreign companies are also now locating research and development facilities in China.
The massive power and especially the potential of China are all the more so when drawing upon the synergies of Greater China, mainly the high technology of Taiwan and the capital and knowhow of Hong Kong. Greater China is redefining the basis of global competition. The China challenge also seems to be having quite dynamic effects on its southern neighbors. To boost its own competitiveness in attracting investments and raising productivity, the Association of Southeast Asian Nations is accelerating the agenda for its own free-trade area, and talks are under way for establishing free trade between China and ASEAN.
All this is positive and resurrects the idea of the Pacific driving the world economy in the 21st century, an idea that seemed to falter after the East Asian financial crisis in 1997-98. But while greater ties and more open trade and investment between Greater China and ASEAN are to be welcomed, Greater China needs an open global economy, not just an open regional economy. Both the U.S. and the EU account for a significant share of exports from Greater China and ASEAN. It is also to North America especially, and to a lesser extent the EU, that Asians look as destinations of migration.
Already the slowing American and European economies are having an adverse effect on Asia. Were this economic downturn to be compounded by an upturn in protectionism, the consequences could be very dire indeed, not just economically, but also politically and socially.
And here again Japan is letting the world down. Japan is the country that in the last half-century has most benefited from an open world economy and especially from having been able to drive its export-led growth by easy access to the voracious American market. Having been a major beneficiary of open markets, however, Japan seems little inclined to become a benefactor. Asian exporters find it far easier to penetrate the American or European markets.
As to labor, the percentage of foreigners in the Japanese labor force is a paltry 0.2 percent; the figures for the other Group of Seven countries are: U.S. 11.7 percent, Canada 19.2 percent, France 5.8 percent, Germany 8.8 percent and Italy 3.6 percent. More open labor markets are vital for developing countries, as they allow emigrant workers to acquire skills and to transfer capital home. Remittances have become a much bigger source of foreign funds than aid; in the case of India in 2000, for example, remittances amounted to more than $9 billion, while net foreign aid amounted to $1.5 billion.
China’s continued rise as an economic power is bound to cause turbulence. The more open the world trade and investment environments become, including in the cross-border movement of people, the greater the benefits will accrue to China and to the global economy. It is not a question of making special concessions to China, but of achieving a robust and dynamic global framework. If China is given scope for exporting its energies, its products, some of its labor and skills, it will benefit, as will its trading partners. If China finds protectionist restrictions, China’s economy will suffer, the world economy will suffer and the regional political environment will be endangered.
A key condition for establishing a robust and dynamic global framework is for Japan to open up. This would be an act of enlightened self-interest.
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