EAI Fellows Program Working Paper Series No.21

Author
Saori Katada is an Associate Professor of School of International Relations at University of Southern California. She received her Ph.D. in Political Science from University of North Carolina at Chapel Hill. Her previous positions include Researcher and Consultant at World Bank and International Programme Officer at United Nations Development Programme (UNDP). Her special interests include international financial and monetary relations, foreign aid, and foreign investments that involve both the United States and Japan, as well as other countries in Asia and Latin America. Her most recent work focuses on the study of regionalism.

This paper was submitted to "EAI Fellows Program on Peace, Governance, and Development in East Asia" supported by the Henry Luce Foundation based in New York. All papers are available only through the online database.

Emerging Regional Institutions in East Asia

Recent global challenges to the governance of East Asian political economy including the Asian Financial Crisis (AFC) have led to two sets of visible institutional innovations in the region. Kicked off by the Japanese proposal of the Asian Monetary Fund in the immediate aftermath of the AFC, there have been active cooperation and policy coordination around the financial and monetary arrangements such as the Chiang Mai Initiative and the ongoing discussion of regional bond and currency initiatives. On the trade side, several Free Trade Agreement (FTA) negotiations have taken place since the early 2000s, and numerous bilateral and plurateral agreements were signed. This is a noticeable turn of East Asian dynamics in the last five decades (1945-1995), and unlike past informal and bilateral initiatives (Katzenstein, 2000), many East Asian governments appear to be committed to formalize their regional economic relations legally and institutionally.

Hence, formal and relatively exclusive regional institutions (or architecture) have finally emerged in East Asia. Intriguingly, however, those two sets of institutions in trade and finance stand quite independent and contrasting from each other. Scholars argue that it is quite common to have regional monetary cooperation not to follow trade cooperation (Cooper 2007), and that it is futile to take lessons from Europe as the common trajectory of regional integration for the regions beyond Europe (Baldwin 2008). Nevertheless, this eclectic and fragmented institutionalization deserves analysis as we strive to understand the regionalism dynamics and the future course of East Asia’s “regional turn.” In addition, the shape and evolution of coherent regional architecture is crucial theoretically and empirically. Theoretically, the validity of neofunctionalist prediction of the “logical roadmap” to regional integration (Balassa 1961) is at stake, and empirically the efficiency, bargaining power and the most solid public goods (or club goods) would come from the coherent regional arrangement between trade and finance (Rose 2000).

In recent history, the region’s major economic powers, namely Japan, China and Korea, have been vividly reminded of the importance of regional economic stability and prosperity by the AFC and also by the current (2008- ) global economic crisis. Numerous steps have already been taken toward this regional integration goal. Such efforts will not only support and sustain the regional business networks linked through the regional production strategies of the large Japanese and Korean corporations (Hatch and Yamamura 1996) and through the ties among the ethnic Chinese businesses (Peng 2000), but they will also boost the bargaining power of East Asia as a region in the multilateral forums, be it the international financial realm or in the WTO negotiation rounds. Furthermore, as the wishful discussion of unrealized “decoupling” indicates, East Asia has critical yearning to insulate the region from global imbalances and economic downturns triggered by events occurring outside of the region (Economist 2008).

As discussed in detail below, the East Asia’s financial and monetary cooperation operates under a collaborative and well-defined regional framework. ASEAN+3, which kicked off its regular meeting in the aftermath of the AFC, has become the central forum where regional financial and monetary arrangements such as the Chiang Mai Initiative (CMI), Asian Bond Market Initiatives (ABMI), and Asian Currency matters are discussed. Meanwhile, regional trade arrangements are highly eclectic, whose negotiations are often triggered by competition (Solis, Stallings and Katada, 2009). Both the Japanese and Korean governments have thus far concluded bilateral agreements with both regional and extra-regional partners (e.g. Mexico, Chile, and some European countries). China, whose first move was to create ASEAN+1 free trade area, has now launched FTA offensive in many parts of the world (Iceland, Chile and Peru, for example). Here, the membership and regional exclusivity of the arrangements contrast significantly with the field of finance, as the region struggles to define the most appropriate and effective regional trade area.

The preferences and policies of the three Northeast Asian countries, China, Korea and Japan, are crucial in defining the regional economic architecture. Not only do they constitute a large bulk of regional economic base in terms of trade volume and financial resources, it is also obvious from the constellation of ASEAN+1 trade arrangements that these three countries are the source of eclectic regional architecture. Hence the questions for this paper focus on the sources of the distinctive approaches in the fields of trade and finance/monetary affairs in the regional institution building.

I argue, first, that the state interaction within East Asia is constrained by domestic politics in each of those major countries. Even bilaterally, trade cooperation between Japan and Korea is hindered by agricultural opposition, a powerful source that influences policy making in both countries, while the Chinese government enjoys relative policy-making freedom due to recent liberalization efforts in the face of WTO accession. In monetary policymaking, the state autonomy is much higher than trade for all the three countries. The second issue is the positions of and dynamics among these major states in the context of regional and global economic environments. In trade, all three countries are exporters (mostly to the United States, but also within and outside of the region) and have still some ways to go before any country in the region can replace the United States as the “buyer of the last resort.” In other words, East Asia as a region overall is profoundly permeated (Katada and Solis 2008b) or porous (Katzenstein 2005). On the other hand, despite massive dependence of the US dollars (Katada 2008), the three Northeast Asian powers, particularly Japan and China, are in the position that could make them “lender of the last resort” at the time of regional currency and financial crises. Massive dollar accumulation in their foreign exchange coffers, continuing current account surplus and with relatively high savings, all make those countries a reliable source of financial resources both short-term and long. Although permeation of the regional finance by the outside forces are quite evident, regional effort to insulate itself against the recurrence of AFC-type crisis is not so distant a dream.

The following paper consists of four parts. First, the paper summarizes the existing discussions over determinants that influence the formation and the shape of East Asian regionalism. In the following section, the paper provides my argument as to how state preferences and domestic politics are fundamental elements in shaping regional institutions. Then, in the third section, it gives overview of institutional developments in the fields of finance and trade in East Asia in the last ten years. In the fourth section, the study focuses on the domestic politics surrounding the state’s preferences in Japan, Korea and China in two issue areas and how they contribute to very different development of regional architectures. Finally, the last section concludes with a discussion of the implications of the political dynamics and state preferences on the regionalism in East Asia...(Continued)