June 9, 2005

CONSTRUCTING EAST ASIA

Mr Donald Kanak, Executive Vice-Chairman and CEO of AIG and Chair of this afternoon’s session
Dr Vishakha Desai, President of Asia Society
Excellencies
Ladies and Gentlemen

It is one of the paradoxes of our time that as the world globalises, regionalism simultaneously gets stronger. Europe is integrating and has expanded its traditional boundaries. The Americas too are coalescing through the North America Free Trade Agreement (NAFTA) and eventually through the Free Trade Agreement of the Americas (FTAA). Globalisation and regionalism are two sides of the same coin, driven by the same powerful market forces.

After the collapse of Communism, there is no viable alternative to the market. That is why events such as the French and Dutch rejection of the European Constitution and resistance to the FTAA by countries like Brazil will only be blips when viewed in the longer perspective of the history of the 21st Century. These and other possible future hiccups are only speed bumps on the road to the future. They will not reverse the basic strategic trend towards greater regionalism.

East Asian regionalism is less defined than in the Americas or Europe. It is still plastic; in a malleable stage, its final form subject to political decisions and strategic choices. I believe that a key macro strategic issue of the 21st Century will be how the Americas, Europe and East Asia act and react with each other. The decisions that we make now - how we construct East Asia - will therefore have a profound influence on these dynamics. I am grateful to the Asia Society for giving me the opportunity to share my thoughts on this very important subject.

Deepening Economic Integration

First of all, let me say we have little choice but to construct a new architecture for East Asia. If East Asia does not coalesce, it will lose out to the Americas and Europe. The key question is not whether East Asia will integrate. It is how quickly and the form East Asian regionalism will assume.

Some of the broad outlines are already evident. Regional economic links have expanded as a result of the growing web of FTAs. Singapore has signed an FTA with Japan, concluded one with Korea and is finalizing the Comprehensive Economic Cooperation Agreement (CECA) with India. Malaysia has concluded FTA negotiations with Japan and is negotiating with Australia and New Zealand. Both Thailand and Indonesia are currently negotiating with Japan. China and ASEAN will establish an FTA by 2010, while India and ASEAN will complete one by 2011. ASEAN has also agreed to form an economic community, with the aim of creating a single market with free flow of goods, services, and investment by 2020.

Increasing economic integration is reflected by the rapid expansion of intra-Asian trade. From 20% in 1980, intra-Asian trade as a share of the region’s total trade doubled to 41% last year. In the last five years alone, intra-Asian trade grew by 17% on average, well above the average growth rate of 5% for intra-NAFTA trade and 9% for intra-EU trade.

The trend towards greater economic integration in Asia will gather speed. East Asian regionalism will, however, be far less institutionalised than in Europe. New patterns of trade and investment, business decisions, production chains and webs of FTAs will draw the region together. Such a looser and less bureaucratised structure will be more appropriate to a diverse East Asia than the EU model.

Managing Strategic Complexity

East Asian regionalism will also occur in an environment of greater strategic complexity. Europe's initial impetus to integrate stemmed from the need to bury the past in order to face the Soviet threat. In East Asia, there is no such stark strategic imperative. Nor is there, unlike in the Americas, a single dominant power asserting an irresistible gravitational pull.

East Asian regionalism will be multipolar. China's rise is only one story. India's re emergence is another. Japan will be a crucial player well into the 21st Century as it remains an economic heavyweight.

Relationships among China, India and Japan are historically uneasy. Beijing, New Delhi and Tokyo understand the benefits of cooperating with each other. But the adjustments as they grow and redefine their places in the region will not be comfortable for any of them. Still, the very market forces that are stitching the region together also make the matrix of their interests more complex, with shifting patterns of competition and cooperation.

Sino Japanese tensions over the interpretation of the history of World War II are real and worrying, particularly since they engage domestic politics and will arouse nationalism on both sides. Current strains are only one manifestation of the profound ambivalence with which Beijing and Tokyo view each other. There has never been a period in East Asian history when China and Japan were simultaneously strong powers. Their search for a new modus vivendi will be fraught with anxieties. But this is only part of the story. Hopefully, as China and Japan grow more economically interdependent, they will see strong incentives to build better ties.

China and India fought a short but bloody war in the early 1960s. Their wariness of each other lingers, although they are now improving ties. China is India's second largest trading partner after the US and trade is expanding rapidly. Premier Wen Jiabao's visit to New Delhi in April was a positive development. Yet as China and India develop, they will inevitably acquire the resources to pursue wider strategic interests across Asia, not all of which will coincide. The race for access to energy, for instance, will only grow more intense. Pakistan remains a complication.

Japan's relations with India are less problematic than Sino Japanese relations or Sino Indian relations. But there is a sub stratum of cultural unease that needs to be managed if the potential is to be realised. Prime Minister Koizumi's visit to India in April, hot on the heels of Premier Wen, signalled a desire to establish a new basis for relations. But the common underlying concern with China is a fragile foundation upon which to build a stable relationship.

As they grow and take on new roles, it is inevitable that China, India and Japan will all loom larger on each other's radar screens. And since East Asian integration will be loosely multipolar, the jostling between New Delhi, Beijing and Tokyo that will certainly ensue must be squarely confronted and cannot be wished away.

Great power competition and rivalry are facts of life. The European experience shows that the trend towards integration can mute but not erase differences of national interests. However, competition need not lead to conflict if it can be managed within an agreed framework.

This, for example, was the original, and remains the essential, raison d'etre of ASEAN. Southeast Asia enjoys no natural coherence. Rather it is characterised by a deep political, ethnic, cultural and religious diversity. It was not self evident when ASEAN was formed some 38 years ago that despite all that the region had endured, Southeast Asia would today be at peace with itself.

The Southeast Asian experience shows that the construction of a broad framework to manage and contain differences cannot be left to market forces. It must be the result of conscious political choices to shape and sustain a specific architecture. These choices have profound strategic consequences and will thus be hotly debated.

Defining East Asia

This indeed was the case during discussions on the modalities and membership of a proposed East Asia Summit that will be held in Malaysia in December. The big underlying issue was how to define East Asia.

Would it be a traditional geographical definition, encompassing only the ASEAN countries, China, Japan and South Korea? Or could we look beyond physical geography to take into account deeper political trends and economic driving forces? Would it have been prudent for us to cut ourselves off from a dynamic India with burgeoning economic and political links with East Asia and an Australia that has been politically and economically engaged in the region for many decades?

In April, ASEAN Foreign Ministers agreed on a set of criteria that would allow the participation of India, Australia and New Zealand in the first East Asia Summit. This was a wise decision. It kept East Asian regionalism inclusive, forward looking and open. It underscored the importance of adapting to new developments and not being trapped by narrow and outmoded geographic notions. But that decision was only the end of one chapter, not the end of the book.

There is now an urgent need to establish a substantive agenda for the East Asia Summit and to distinguish it from existing processes like the ASEAN's annual Summit meetings with China, Japan, and South Korea; the ASEAN+3. These will be crucial decisions.

It would be a mistake to define the East Asia Summit's agenda too narrowly. If the East Asia Summit is to contribute to the elaboration of the kind of framework for managing and containing the diverse realities of East Asian regionalism, it must not only have the widest possible participation; it must also deal with the widest possible range of issues. It cannot confine itself to economic or functional issues. It must also confront sensitive security concerns.

Role of the US in East Asia

Nor can the East Asia Summit be the only pillar supporting the entire architecture of East Asian regionalism. It is only one of many. If we are to discuss security issues, as I believe we must, the role of the US in East Asian regionalism cannot be excluded. All the actual or potential tensions I had mentioned, and several others, are best managed within a structure that includes America.

The US has been deeply embedded in the region for many decades. American trade, investments and technology are vital. Production chains stretch from India, through Southeast Asia and Northeast Asia, to the US. The US fought several wars to keep the region open and free. It was the stability generated by American power that provided the foundation for East Asia's prosperity and development. The US will remain a key, indeed the dominant, player well into the 21st Century. American power will provide the overarching strategic unity within which the interactions of Chinese, Indian and Japanese interests with American interests will be an increasingly important factor.

In a wider sense, the US is already part of East Asia. The question is how to give structural form to this reality. How do we fold the US into the emerging formal East Asian architecture, just as we have melded India, Australia and New Zealand into the East Asia Summit? An East Asian architecture that does not have the US as one of its pillars would be an unstable structure.

Historically, the preferred US structure for its engagement of East Asia was bilateral; woven in a web of security alliances and other relationships with America as its centre. It would not be prudent to discard what has served the region and America so well for so long. But such structures were clearly designed to deal with Cold War threats and contingencies that no longer exist, or at least are no longer the key issues.

There are, of course, voices in the US that seek to recast China as America's strategic adversary in a new Cold War. They argue that it is better to deal with China now when it is relatively weak rather than after it has become strong. This is dangerously myopic. To treat China as an enemy will only arouse Chinese nationalism and make China an enemy. The rest of the region will not play this game. It is not in our interest, nor the world’s.

There need not be any fundamental conflict between the US and China. Current strains over such issues as the revaluation of the RMB and textiles exports are clashes of interests within the framework of the market and not fundamental conflicts over alternative economic systems. Such differences of interests can be managed.

President George Bush understands the need for the US and China to have good and stable relations. I believe so does President Hu Jintao. On the critical regional issues, there is broad agreement. President Bush has made it clear that the US will not support Taiwan independence. Beijing and Washington agree that a nuclear North Korea is not in their interests, even though they may have different views on how best to deal with the problem.

What is needed is to supplement the East Asia Summit, the ASEAN+3 and America's current bilateral relationships with other institutions that will include all the major powers. Here, the basis already exists in ASEAN's Post-Ministerial dialogues, the ASEAN Regional Forum and APEC, which include the US and all the other major players. We need to seriously re-look these structures and fora. We should also examine how they can be enhanced to serve as broad frameworks within which East Asian regionalism can be elaborated.

Neither should we only think in terms of a single structure. Instead, we should think of an array of institutions that can be deployed according to the issue and need or, to change the analogy slightly, in terms of a variable geometry that changes shape and form according to issue and need. The US need not be involved in each and every institution, but the US must be an integral part of the overall architecture.

For such an approach to work, two conditions must be met. First, the region must understand the need for it to work. Second, and equally important, the US must want to play the game. This unfortunately is not to be taken for granted. The US' attitude towards East Asian regionalism and regional diplomacy more generally, has been ambivalent. I sense that some in Washington still ask whether the game is worth the candle.

Let me leave you with some observations that I hope will provide our American friends with food for thought. Formal ASEAN India dialogue relations were established in 1995. In the ten years since, 14 ASEAN India mechanisms were established. Formal ASEAN China dialogue relations were established in 1996. In the nine years since, 27 ASEAN China mechanisms at different levels have been established. ASEAN Japan dialogue relations were formalised in 1977. In the 28 years since, 33 ASEAN Japan mechanisms were established. The US ASEAN dialogue relationship was formalised at the same time as Japan's, almost three decades ago, but there are currently only 7 ASEAN US bodies and they meet only infrequently.

I will now be happy to take some questions.