naked capitalism

Whoops, that was the old brand, and it was to be led by Japan. The results were less than happy since Japan was not prepared to take “no” for an answer.

But this time around, necessity as well as opportunity are leading China, Japan, and Korea to discuss moving forward on closer economic ties. In fact, the driver for talks appears to be more than a tad of desperation of the Japanese.

The US has been opposed to anything more than symbolic movements on this front. For instance, in the 1997 Asian crisis, Japan wanted countries in the region to lead rescue efforts. That idea was opposed, forcefully, by Robert Rubin, Larry Summers, and Timothy Geithner, who was then at the IMF but slotted to join the Treasury. And we know how that movie ended. The IMF “reforms” were the same template they had used for Mexico, and was inappropriate in key respects for high-savings Asian countries. The Asian tigers’ resentment of punitive and painful programs led them to institute currency pegs at artificially low rates so they could build up their reserves. China held its peg during the crisis at US request, reinforcing its use of pegs (and one can further argue that the low rates implemented in the crisis countries gave China plenty of cover to maintain its peg even as its currency became increasingly undervalued).

It is still not clear how serious this move is. There has been talk for some time of beefing up ASEAN (for instance, having it have its own development bank as an alternative to the World Bank). This initiative is outside ASEAN and is in the brave talk stage. The biggest potential obstacles is long-standing distrust among the principal actors. That may be compounded by China trying to assert a leadership role, which is understandable given its economic position, but diplomacy is not yet one of China’s strengths.

From the Telegraph :

The three countries, dismayed at falling levels of trade and investment from the US and Europe, met in Beijing to plan for more structured levels of co-operation.

The move came as HSBC warned there is likely to be a “shift in the world’s centre of economic gravity from West to East”. The bank has already decided to move its chief executive, Michael Geoghegan, from London to Hong Kong next February to prepare for Asia’s ascendancy.

Wen Jiabao, the Chinese prime minister, and his Japanese and South Korean counterparts, Yukio Hatoyama and Lee Myung-bak, said the three countries were “committed to the development of an East Asia community”, similar to the European Union.

The idea, which is being strongly pushed by Japan, could eventually lead to a free trade block and co-operation on public health, energy and the environment….

The proposals are in their early stages, and the three countries emphasised that it was a “long-term goal”. Liu Changli, a professor at China’s North East Finance University, said a free trade area could be in place “by 2020, on a best-case scenario”. He added: “Add another five to 10 years for an economic union and a further five to 10 years after that for a true economic, military, political and cultural union”.

The proposals come as Japan is struggling with the collapse of its export sector, a key motor of its economic growth. Since Mr Hatoyama was elected at the end of August, he has been searching for a way to kick-start the economy and alleviate the country’s debt, which currently stands at 283pc of GDP, the highest of any G20 nation….

South Korea’s ties with China have also weakened, with substantial Korean populations in Beijing and Shanghai returning home because of the downturn.

Both countries now see China’s booming economy, which is set to grow by at least 8pc this year, as a beacon of hope. China, for its part, has a long-term strategy of reducing its dependence on the West and building political and economic ties with Russia, the Middle East, Africa, Latin America and Asia. It has already signed a bilateral free trade agreement with ASEAN, the coalition of South East Asian nations, which is due to come into full effect next year.

However, any attempts by the three nations at closer integration are likely to be opposed by the US, which is concerned about any waning of its influence in the Pacific.

Japan’s role in this is a clear statement of diminished US power. Japan is a military protectorate of the US. For at least the last three years, if not longer, Japan has been playing a very careful game between the US and China. It appears to have decided it has little to lose in seeking to throw its lot in with China.