European Union and East Asia: An Economic Relationship

The European Union and East Asia

The world economy continues to be dominated by the ‘Triad’ regions—Europe, North America and East Asia. This text analyses the economic relationship that has evolved between two Triadic powers—the European Union (EU) and East Asia—and its future prospects, especially in the wake of the recent financial crises that have shaken the East Asian region. The author examines the development of economic diplomacy and exchange between the EU and its East Asian trading partners—Japan, China, South Korea, Taiwan, Hong Kong, and the Association of Southeast Asian Nations (ASEAN) —in both bilateral and multilateral contexts. The inter-regional dimension provided by the Asia-Europe Meetings (ASEM) is also considered, as are theoretical perspectives from the field of international political economy on these different relationships. Furthermore, the economic development and future challenges facing the East Asian states are studied with special reference to the region’s recent financial crises. This text argues that the EU must afford greater priority in the promotion of its economic relationship with East Asia. If it continues to remain the weakest Triadic link, the EU risks future geoeconomic marginalisation as the transpacific axis strengthens into the twenty-first century. It is also proposed that the EU and major East Asian powers must assume greater responsibilities in managing the international economic order. Undergraduate and postgraduate economists and students of European, International Relations and Asian Studies will find in this book possible answers to the challenges facing Europe and East Asia in the next century. Christopher M.Dent is Senior Lecturer in Economics and European Studies at the University of Lincolnshire and Humberside and is the author of The European Economy: The Global Context (1997).

The European Union and East Asia An economic relationship

Christopher M.Dent

London and New York

First published 1999 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2002. © 1999 Christopher M.Dent The right of Christopher Dent to be identified as the Author of this Work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval systm, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Dent, Christopher M., 1965– The European Union and East Asia: an economic relationship/ Christopher Dent. p. cm. Includes bibliographical references and index. 1. European Union countries—Foreign economic relations—East Asia. 2. East Asia—Foreign economic relations—European Union countries. I. Title. HF1531.Z4E184 1999 98–55762 337.405–dc21 CIP ISBN 0-415-17199-7 (hbk) ISBN 0-415-17200-4 (pbk) ISBN 0-203-02368-4 Master e-book ISBN ISBN 0-203-17215-9 (Glassbook Format)

To Ruth, Thomas and Koshka… amor fidelis pertinax est

Contents

List of figures List of tables Preface Acknowledgements List of abbreviations 1 2 3 4 5 6 7 8 9

viii x xiii xiv xv

The international political economy of EU-East Asia relations: theoretical perspectives EU-East Asia economic relations: an overview of recent developments The EU and ASEAN The EU and Japan The EU and China The EU, Taiwan and Hong Kong The EU and Korea Regionalism and inter-regional co-operation Future prospects for the EU-East Asia economic relationship

250

Appendix Notes References Index

259 267 287 309

1 16 36 76 118 152 187 219

Figures

2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5.1 5.2 5.3 5.4 5.5 5.6 6.1 6.2 6.3 6.4

World Bank model of East Asian growth East Asian group shares of EU trade with the region (1980, 1997) EU-East Asia trade (1975–97) EU trade with East Asia by member state (1987, 1997) ASEAN’s exports to the EU by sector (1980, 1987, 1997) EU-ASEAN merchandise trade (1975–97) ASEAN member state shares of EU-ASEAN trade (1987, 1997) EU member state shares of EU-ASEAN trade (1987, 1997) Inward FDI stocks in ASEAN by geographic origin (1996) EU financial assistance to the ASEAN 10 group (1976–98) Stock of outward FDI from Japan by geographic destination (1981, 1996) EU-Japan merchandise trade (1975–97) Japanese FDI flows to Europe and USA (1981–96) Sectoral structure of EU-Japan trade (1980, 1997) EU trade with Japan by member state (1987, 1997) Stock of Japanese FDI in Europe by host country destination (1996) Inward FDI stocks in Japan by geographic origin (1989, 1996) EU direct investment in Japan: net stock invested by member state (1996) China’s import and export trade (1979–97) Inward FDI flows in China, 1979–97 (actual realised) Inward FDI stock in China by geographic origin (1987, 1995) China’s exports to the EU by sector (1980, 1987, 1997) EU-China merchandise trade (1975–97) EU trade with China by member state (1987, 1997) EU-Taiwan merchandise trade (1975–97) EU member state trade with Taiwan (1987, 1997) Taiwan’s exports to the EU by sector (1980, 1987, 1997) Inward FDI stocks in Taiwan by geographic origin (1987, 1996)

19 23 24 25 52 53 67 68 68 69 84 93 102 104 109 111 112 113 120 120 124 133 134 138 168 169 170 171

Figures

6.5 6.6 6.7 6.8 6.9 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.1 8.2

ix

Stock of outward FDI from Taiwan by geographic destination (1996) 172 EU-Hong Kong merchandise trade (1975–97) 179 EU member state trade with Hong Kong (1987, 1997) 180 Hong Kong’s exports to the EU by sector (1980, 1987, 1997) 181 Inward FDI stocks in Hong Kong by geographic origin (1987, 1996) 182 EU-Korea merchandise trade (1976–97) 198 EU member state trade with Korea (1987, 1997) 202 Korea’s exports to the EU by sector (1980, 1987, 1997) 203 Inward FDI stocks in Korea by geographic origin (1989, 1996) 204 Stock of outward FDI from Korea by geographic destination (1987, 1996) 205 International lending to Korea (by end of June 1997) 210 Stock of Korean FDI in Europe by host country destination (1996) 211 Cumulative stocks of Korean outward FDI (1980–96) 212 EU direct investment in Korea: net stock invested by member state (1996) 215 Subregional economic zones in East Asia 224 Europe’s major growth axis 237

Tables

2.1 2.2 3.1 3.2 3.3 3.4

3.5 3.6 3.7 3.8 4.1 4.2 4.3 5.1 5.2 6.1 6.2 6.3

Triad trade flows: percentage shares of world total (1960, 1980, 1996) The Triadic distribution of East Asian trade (percentage of total) Geographic breakdown of ASEAN’s international trade (percentage per trade partner, 1960–97) EU-ASEAN relations: the institutional framework EU-ASEAN economic relations: main co-operative activities Average utilisation rates of quotas by East Asian countries in EC imports of textiles and clothing under the MFA, 1979–82 (%) EC non-tariff barriers against imports from selected East Asian countries, 1974 ($m affected) Applications approved under Article 115 against imports from selected East Asian countries, 1981–5 EU financial assistance to ASEAN by category and time period (Ecu million) EU anti-dumping duties on ASEAN products (at November 1998) Geographic breakdown of Japan’s international trade (percentage per trade partner, 1960–97) EU-Japan consultation frameworks EU anti-dumping duties on Japanese imports (at November 1998) Geographic breakdown of China’s international trade (percentage per trade partner, 1960–97) EU anti-dumping duties on Chinese imports (at November 1998) Geographic breakdown of Taiwan’s international trade (percentage per trade partner, 1960–97) Geographic breakdown of Hong Kong’s international trade (percentage per trade partner, 1960–97) EU anti-dumping duties on imports from Hong Kong and Taiwan (at November 1998)

17 20 39 47 50

55 56 56 58 63 89 99 101 130 141 156 160 173

Tables xi

7.1 7.2 7.3

Geographic breakdown of Korea’s international trade (percentage per trade partner, 1960–97) Major Korean manufacturing FDI projects in Europe EU anti-dumping duties on Korean imports (at November 1998)

8.1 The ASEM: main elements A.1 East Asian countries: comparative economic profile A.2 Economic growth in East Asia during the 1960s to 1990s (real GDP growth %, average annual for each decade) A.3 Geographic breakdown of the EU15’s external trade, 1960–97 (percentage per trade partner) A.4 EU-East Asian trade: sectoral analysis in 1997 (Ecu million) A.5 EU industrial trade with East Asian countries: top ten positions of East Asian trade partners in selected extra-EU export markets and import sources (1997) A.6 Cumulative stocks of foreign direct investment in developing East Asia by Triadic source (1980, 1985, 1993, 1996) A.7 Extra-EU trade and the East Asian financial crisis (1997– June 1998) A.8 EU anti-dumping investigations initiated against trading partners A.9 Patterns in international trade (percentage shares of total by trading partner, 1960–97)

195 197 206 243 259 259 260 261

262 263 264 265 266

Preface

The economic relationship between the European Union (EU) and East Asia remains a much under-researched field, and yet it has become one of the most important structural features of the world economy. This text offers a systematic and thorough analysis on various aspects of this relationship. It not only considers the present state of EU-East Asia economic relations but also their historical development, primarily in a post-war context. Furthermore, the bilateral, interregional and multilateral dimensions of EU-East Asia economic diplomacy are examined with frequent reference to the wider ‘Triadic’ framework of relations (i.e. Europe, East Asia and North America). How developments at the sub-state, state and regional level have influenced the direction of the EU and East Asia’s economic relationship are also studied by this text. In the concluding sections to most chapters, different theoretical perspectives from the field of international political economy (IPE) are applied to enhance the reader’s understanding of the substantive issues covered. The text’s opening chapter provides its initial theoretical framework and introduces some of the running themes found in subsequent chapters. In Chapter 2 an overview of recent developments in EU-East Asia economic relations is offered that further introduces the reader to recurrent themes. Chapters 3 to 7 then respectively examine the EU’s economic relationship with the Association of Southeast Asian Nations (ASEAN), Japan, China, Taiwan and Hong Kong (jointly), and South Korea. Regionalism in both East Asia and Europe together with inter-regional co-operation are the focus of Chapter 8. Finally, Chapter 9 considers the future prospects of the EU-East Asia economic relationship. On a technical matter, while the term EU is often used to refer to its precursial guises (i.e. the EEC and EC) before 1993, the date when the Treaty on European Union was fully ratified, there are other times when the terms EEC and EC are used in their historical context. Furthermore, as no EU-based data beyond 1998 has been introduced into the text, ECUs (European Currency Units) instead of euros are accordingly used as reference terms.

Acknowledgements

The author would like to thank a number of people who have made this book possible. From my university, I owe a great deal to Leigh Davison who has both encouraged my efforts and helped facilitate research time and resources. The guidance and support I have received from Debra Johnson should also be acknowledged, as should the administrative efficiencies of Pat Phillips. A long overdue acknowledgement of thanks is also deserved by Clive Piggott, Jan James, Joan Lawrence, Malcom Bee and Lee Miles for inspiration. There are a number of people at other organisations to whom I am also very grateful. At the European Commission, Jonathan Hatwell, Lenette Kgeldsen, Jonathan Claridge, Peter Guildford, Alastair McDonald, Noreen Doyle, Jean-Pierre de Laet, Willem Noe, Maryvonne Coursin, Carl Asenius, Jean-Christian Remond, Laurence Argimon-Pistre and Philip van Amersfoort proved particularly helpful in supplying both valuable insight and information. At the various East Asian missions to the EU located in Brussels, I am extremely grateful to Pyung-oh Kwon (Korea), Young Song (Korea), Xian-kun Lu (China), Pang Eng Fong (Singapore), Mohamed Zain (Malaysia), Toshikazu Inui ( Japan) and Songsak Saicheua (Thailand). Masataka Fujita and Lizanne Martinez from UNCTAD provided a wide range of foreign direct investment data crucial to this text. I owe similar thanks to Hayley Crumpler at JETRO, Caroline Millerick (Bank of Korea), Simon Chan (Hong Kong Economic and Trade Office), Pam Lucas (Majestic Trade Centre), Melanie Grainte (Taiwan Trade Centre), Chong-wha Lee (Korea Institute for International Economic Policy), Michael Porteous (Invest in Britain Bureau), Pierre-Yves Leborgn (RJR International) and also Serge Perrin who proffered information on recent Korean investment projects in Europe. I would also like to extend my gratitude to the Routledge team— Andreja Zivkovic, Alison Kirk and Craig Fowlie—for humouring me through the ordeal that is book writing. I would finally like to thank my family who have had to suffer an ordeal of their own as a consequence of this project. In this respect, my wife deserves especial mention, as does our son Thomas, to whom I have given the onerous responsibility of writing this very last word. Cottingham, England

Abbreviations

ACP ADD AFTA AMF ANZCERTA APEC ASEAN ASEM CAP CCP CEC CEE CET CFSP CIS DG EAEC EAEG EC ECIP ECSC ECU EDF EEC EFTA EMU EOI EPZ ETDZ EU FDI FTA

Africa Caribbean Pacific anti-dumping duty ASEAN Free Trade Area Asian Monetary Fund Australia-New Zealand Closer Economic Relations Agreement Asia-Pacific Economic Co-operation forum Association of Southeast Asian Nations Asia-Europe Meetings Common Agricultural Policy Common Commercial Policy Commission of the European Communities (European Commission) Central and East Europe Common external tariff Common Foreign and Security Policy Commonwealth of Independent States Directorate General (of the CEC) East Asian Economic Caucus East Asian Economic Grouping European Community European Community Investment Partners European Coal and Steel Community European Currency Unit European Development Fund European Economic Community European Free Trade Area economic and monetary union export-oriented industrialisation export processing zone Economic and Technical Development Zone European Union foreign direct investment free trade area

xvi Abbreviations FTAA GATS GATT GDP GNP GPA GSP IBRD ILO IMF IPE IPR ISI ITA ITTO JERC KMT LDC LLDC MFA MFN MITI MNE MOF MOSS MPD NAFTA NAS NGO NIC NIDL NIDZNAT NME NTA NTB ODA OECD OPEC PAFTA QMV QR R&D RIA

Free Trade Area of the Americas General Agreement on Trade in Services General Agreement on Tariffs and Trade gross domestic product gross national product Government Procurement Agreement Generalised System of Preferences International Bank for Reconstruction and Development (World Bank) International Labour Organisation International Monetary Fund international political economy intellectual property rights import substitution industrialisation Information Technology Agreement International Tropical Timber Organisation Japan Economic Research Centre Kuomintang (Taiwan’s Nationalist Party) less developed country least developed country Multi-Fibre Agreement most favoured nation Ministry of Industry and International Trade (of Japan) multinational enterprise Ministry of Finance (of Japan) ‘market-oriented, sector-specific’ Modulated Preferential Duty North American Free Trade Agreement New Asia Strategy non-governmental organisation newly industrialising country new international division of labour National Industrial Development Zone for New and Advanced Technology non-market economy New Transatlantic Agenda non-tariff barrier official development assistance Organisation for Economic Co-operation and Development Organisation of Petroleum Exporting Countries Pacific Free Trade Area qualified majority voting quantitative restriction research and development Regional Integration Arrangement

Abbreviations

SEA SEM SEZ SII SPARTECA SREZ SRTA TAFTA TRIMs TRIPs TVE UN UNCTAD VER WTO

Single European Act Single European Market Special Economic Zone Structural Impediments Initiative South Pacific Regional Trade and Economic Cooperation Agreement sub-regional economic zone sub-regional trading arrangement Transatlantic Free Trade Area Trade-related investment measures Trade-related intellectual property rights township and village enterprise United Nations United Nations Conference on Trade and Development voluntary export restraint World Trade Organisation

xvii

1

The international political economy of EU-East Asia relations Theoretical perspectives

Introduction This text is a work of international political economy (IPE). The main aim of this chapter is to introduce the theoretical perspectives from the IPE field that can be applied to the European Union (EU)-East Asia economic relationship. Such an exercise serves two main purposes. First, it provides an analytical framework in which events and developments covered in subsequent chapters can be better understood. Second, it presents an additional introductory overview of the relationship to that offered by Chapter 2. International political economy can be defined as ‘the interplay of economics and politics in the world arena’, where ‘the economy can be defined as the system of producing, distributing, and using wealth’, and ‘politics is the set of institutions and rules by which social and economic interactions are governed’ (Frieden and Lake 1995:1). It emerged (some would say re-emerged) as a subset discipline of the international relations (IR) field in the early 1970s after the global shocks of the period, most notably the collapse of the Bretton Woods exchange rate system in 1971, the 1973–4 oil crisis and the ensuing stagflation experienced by the world economy. These raised new questions of economics and politics to which many politics-oriented IR specialists could not provide comprehensive and convincing answers. 1 Other developments in the international arena during the 1970s gave further impetus to IPE studies, for instance Japan’s ascendancy as the world’s next economic superpower and the growing global impact of the European Community (EC), both of which posed a challenge to the post-war American hegemony. More recently, the identification of new linkages forged between states and societies by the various processes of globalisation has supplied more work for IPE academics. The end of the Cold War and the associated shift from ideological competition to economic competition (and from geopolitics to geoeconomics) have had a similar effect. According to Milner (1998), IPE scholars are principally involved in the study of foreign economic policy (FEP) choices (e.g. protectionism, exchange rates), issues of comparative economic development and the impact of international economics on domestic politics. Moreover, they have generally

2 International political economy of EU-East Asia relations

sought answers to the above through the investigation of four categories of explanatory factors: • distribution of world power, with particular reference to the hegemonic state; • structure, function and consequences of international institutions; • impact of ideas, beliefs and values; • effect of domestic politics. These are recurrent themes and focal points in the chapters that follow. However, the specific organising principle of this text is the study of how the economic relations between the EU and East Asia have evolved to their present state, how these relations are likely to develop in the future and what conclusions can be drawn from the observations made by each chapter. This entails a multilevel analysis in which the process of economic diplomacy, the development of economic exchange, the impact made by systemic factors and different theoretical interpretations on the above are examined. Theoretical Perspectives of IPE In this section, we introduce IPE’s three main theoretical traditions, namely neo-realism, neo-liberalism and Marxism, concentrating on the key assumptions of each theoretical perspective as well as their associated theoretical concepts. Neo-realism From realism to neo-realism As its name suggests, neo-realism is a revision of realist theory, which itself is the most established school of thought in the IR field whose roots can be traced to the writings of Thucydides and Machiavelli. According to realism, the nationstate is the only significant actor in international affairs and all other actors are essentially subordinate to it. Moreover, states are assumed to be power maximisers and behave in a rational manner in seeking this objective. Thus, states are involved in a competitive struggle to advance their position and status within the international community. As no global governing authority exists to cajole states into acting in a certain manner, anarchy prevails in the realm of international relations. Although coalitions between states may arise where they assist each state to attain self-serving goals, these arrangements are loose and inherently unstable. States are more interested in achieving relative gains over other states than receiving higher absolute gains bestowed to individual states that participate in co-operative acts. In addition, the internal characteristics of nation-states (e.g. democracies, dictatorships) are irrelevant. All share the same goal of national advancement and hence function within the international system in a similar manner. Neo-realism is founded on these basic assumptions. However, whereas

International political economy of EU-East Asia relations

3

realism stresses hierarchy between states settled by equilibrium balances of power, neo-realism is more concerned with polarity and how centres of power within the international economic system affect state behaviour. Furthermore, neo-realism posits that the balance of power between states can change quite rapidly with the frequent shift in interstate alliances. Realist assumptions about the absolute primacy of politico-military objectives in the state’s agenda are also questioned by neo-realists, but only insofar as economic objectives can attain tantamount importance where their realisation advances the nation’s international status. Another departure from realist thinking lies in the neorealist view that the interstate struggle for power is the result of the anarchic structure of the international system as a whole. Consequently, state behaviour is conditioned, but not determined, by the structure of the international economic system. Hence, neo-realism is essentially concerned with both states and systemic structure (Waltz 1979; Gilpin 1984). Hegemonic stability An important aspect of neo-realist theory is the issue of hegemonic stability (Kindleberger 1973; Krasner 1976; Lake 1991). This centres on the role of the world’s hegemonic state to maintain stability in the international system amid the anarchic conditions of interstate relations. It is thus inclined because of the awards conferred with this responsibility. By supporting an open and free trading system, the hegemon is able to exploit its industrial superiority through exporting to accessible overseas markets. The hegemon also has the capability to persuade or force other states to comply with international trade rules, which it itself has principally fashioned. This constitutes an exercise in both relational and structural power. The former relates to the leverage that an international actor can directly exert on the behaviour of or decisions made by another. On the other hand, structural power refers to the ability of certain international actors to shape and determine the systemic structures within which other actors must also operate (Strange 1994). This pertains not just to an actor’s ability to influence the rules, procedures and scope of international institutions such as the World Trade Organisation (WTO), but also the regulatory environment in which transnational economic activity takes place.2 Hegemonic stability theory contends that friction in international economic relations will rise as hegemonic power declines. Neo-realists point to the demise of Britain’s hegemonic position after World War I and the trade conflicts of the 1930s as evidence of this. Even though the USA was in a position to assume the hegemonic mantle from Britain during the inter-war period, it was reluctant to do so, preferring instead a policy of isolation and passivity while simultaneously being engaged in a zero-sum game protectionism along with its industrial rivals.3 Post-war policymakers in the USA were, however, determined to avoid any conditions that would lead to another Great Depression. Consequently, the USA adopted a proactive hegemonic position as manifested by both its pivotal role in creating new international organisations—most notably the General

4 International political economy of EU-East Asia relations

Agreement on Tariffs and Trade (GATT), the United Nations, International Monetary Fund (IMF) and World Bank—and as architects of the Marshall Plan. Further historical evidence for hegemonic stability was provided by the golden period of Pax Americana that followed (late 1940s to 1960s). Moreover, the decline in American hegemony that was evident by the 1970s4 and the contemporaneous increase in trade friction during the decade were seen as further vindication of neo-realist theory. To a significant extent this originated from US recourse to unilateralism and a more defensive trade policy stance.5 However, the validity of hegemonic stability theory is contested by neoliberalism for reasons we shall discuss later. There is also a strong case that claims regarding the death of the US hegemonic position have been much exaggerated (Strange 1987, 1994). During the 1990s, the US economy has performed better than its two potential hegemonic contenders, the EU and Japan, and has maintained a technological lead across a broad range of strategic industries. Moreover, even if the EU is predicted to be the hegemonic successor to the USA (Thurow 1992; Hughes 1996), history shows that prolonged structural adjustments are required before such a transition is effected. For example, the US economy was around three times larger than Britain’s by 1914 and sterling persisted as the global standard currency up until the outbreak of World War II (Kennedy 1988). Acquiring hegemonic status is thus not automatically conferred upon attaining the world’s highest gross national product (GNP) but rather through a combination of factors. The collective economic weight of the EU may be greater than that of the USA (see Table A.1), yet it lacks the same politico-military weight carried by the USA in the international arena. This is a recurrent theme in subsequent chapters as most East Asian countries still look to the USA for leadership in many aspects of international economic affairs. The resurgent economy of the 1990s, as well as the US’s involvement in the Asia-Pacific Economic Co-operation (APEC) forum, have reinforced this position. Neo-mercantilism Neo-mercantilism is not so much part of the neo-realist theory but rather an expression of it. Mercantilism was the conventional wisdom on trading practices during the sixteenth and seventeenth centuries and much of the eighteenth century, thus pre-dating liberal notions of free trade based on comparative advantage. It stressed the role played by economic activity in ensuring the security of the state and promoting national advancement. This was primarily achieved by accumulating wealth through commercial endeavour and regulation, with the ultimate aim of realising higher political objectives. Traditionally, this inferred strengthening the state’s military capabilities in order to extend its sphere of influence within the international community. In modern times, enhancing the nation-state’s industrial capabilities with the additional objective of improving the material well-being of its people has become increasingly relevant. While the principles of free trade and comparative advantage have more or less dominated the intellectual high ground from the late eighteenth century

International political economy of EU-East Asia relations

5

onwards, many states have pursued neo-mercantilist trade policies during the post-war period. Among neo-mercantilism’s most ardent protagonists have been various East Asian countries, most notably Japan, Korea and Taiwan. Some EU member states, but particularly France, have also shown strong neo-mercantilist impulses, although national-level protectionism is circumscribed by the framework of the EU’s Common Commercial Policy (CCP). Neo-mercantilism is essentially a state-centric philosophy, hence its association with the neo-realist worldview. Its most ostensible practices are concerned with the protection and promotion of strategic industries, these being essential to maintaining the long-run political and economic security of the state. Examples include essential material-based sectors (e.g. steel), large globalised sectors (e.g. automobiles and electronics) and high-tech sectors with considerable future growth potential (e.g. information technologies and aerospace industries). The emergence of strategic trade theory during the 1980s lent some intellectual support to neo-mercantilism (Krugman 1980, 1986; Brander and Spencer 1985; Krugman and Smith 1993). Adopting an industrial organisation approach, the premise of strategic trade theory was based on the view that imperfect competition prevailed in most of the world’s industries and not perfect competition, a central assumption of the neo-classical theory of comparative advantage. Hence, by assisting its indigenous oligopolistic firms or ‘national champions’ in exploiting attainable economies of scale and scope, greater economic rents and other positive externalities could be generated to the benefit of the whole economy. Such state intervention could involve the granting of export subsidies or orchestrating inter-firm collaborations, hence the promotive aspects of neo-mercantilism. Despite its obvious appeal to policymakers, neo-mercantilism has become an increasingly untenable policy option for two main reasons. First, it is an antagonist commercial policy that is likely to have repercussions, for example, from retaliatory actions undertaken by other states. Furthermore, neo-mercantilist policies have become increasingly dissonant in the current era of freer markets presided over by the new multilateral order. Second, because globalisation has blurred the boundaries of ‘national’ economic activity, state sponsorship of indigenous firms and industries has become less effectual. The expanding web of cross-border linkages woven by multinational business activity has weakened the internationalised firm’s allegiance to its country of origin. This has narrowed the scope of the state’s ‘national’ industrial policies. Neo-realism in context At first glance, it may appear that an application of neo-realist analysis to EUEast Asia economic relations poses some important methodological difficulties. This is not least because the main actor most frequently considered throughout this text, i.e. the EU, is not actually a nation-state but rather a complex ‘system of governance’ operating between a regional group of nation-states (Chapter 8 provides a fuller discussion on this issue). Nevertheless, the general framework of this text is based on the use of territorial reference points—the economic

6 International political economy of EU-East Asia relations

relationship between two regions, or regional groups of states. Like a state, the EU can be defined by its territorial boundaries and employs diplomatic agents to represent its interests in international affairs. With respect to trade, this is principally conducted at the supranational level by the European Commission under the auspices of the CCP. In subsequent chapters we analyse the development of the EU’s economic relationship with other territorial-based units, whether they are nation-states ( Japan, China, Korea), another regional group of states (Association of Southeast Asian Nations, or ASEAN) or territories possessing economic sovereignty but where political sovereignty has either been withdrawn (Hong Kong) or remains contested (Taiwan). This gives scope to apply the basic tenets of neo-realist analysis to the text’s themes. For instance, a central preoccupation of the EU has been to improve its competitive position against East Asian producers and in the region’s expanding markets. Neo-realism’s anarchic struggle for advancement is even more applicable to the East Asian states. The rapid economic development that most have experienced during the post-war period has been achieved because, invariably, both the state and society have been willing to subordinate all other goals to ‘catching up’ with the developed countries. For Japan this specifically related to restoring its position as a major industrial power. Korea’s industrial endeavours were initially galvanised by the state’s objective to achieve ‘nation-building through exports’. A similar strategy was pursued by Taiwan in attempts to establish itself as a de facto nation-state and thus augment its political legitimacy. For most ASEAN states, the goal of rapid industrialisation has been part of a post-colonial, confidence-building exercise in nation-statehood. The significant economic achievements made by China in recent years have also demonstrated the willingness of state to make ideological compromises in order to secure national advancement. Furthermore, neo-realists would argue that the EU’s international agenda is only a reflection of inter-state bargaining within the group with more powerful member states able to shape this agenda quite considerably. Throughout this text we will note how EU commercial policy is often influenced by specific national interests, such as France with respect to agricultural trade. However, most neorealists did not expect the EU’s long-standing coalition of member states to endure because of the negation of political sovereignty that is required to make the coalition work. In the context of the international economic system, EU member states have accepted to varying degrees that they must co-operate in order to compete with their common industrial rivals, especially the USA and Japan. Neo-realism’s focus on systemic factors is shared to some extent by this text. In recent times, these factors have become more important with the strengthening of both the multilateral trade order under the aegis of the WTO and other regimes6 in which the EU and East Asian states participate. However, the role played by fortified international institutions and new regimes that helps govern the global economic system is stressed more by neo-liberals than neo-realists. The hegemonic stability issue is also highly relevant given the longer-term relative decline in US hegemony over the post-war period, the

International political economy of EU-East Asia relations

7

new multi-polar balance of power between the Triad regions (Europe, North America, East Asia) and recent developments in alliance formation between them (see Chapter 2). Frequent reference will be made to how the USA is still able to use hegemonic power to broker deals or forge alliances with East Asian states that have been to the actual or potential detriment of EU commercial interests. Finally, we have already noted that some East Asian and EU states have displayed a predilection for neo-mercantilist policies. As a whole, the EU has also been accused of neo-mercantilism, whether in regard to sponsoring major European industrial collaborations such as Airbus in civil aerospace or ESPRIT in information technology, or concerning its ‘managed’ trade policies (Winters 1994). In more recent times, these accusations have subsided as the EU has embraced a more neo-liberal economic agenda. Neo-liberalism From liberalism to neo-liberalism Like neo-realism, neo-liberalism is also a revision of an earlier theoretical tradition. The assumptions and emphasis of neo-liberal theory, though, are considerably different to neo-realism, being founded on ‘classic’ liberal notions of individual self-determination and utility-maximising rationality. The laissezfaire principles of free trade and comparative advantage are essentially expressions of the above, that is uninhibited individual endeavour in its quest to pursue laudable economic objectives. Moreover, the private organisations (i.e. firms) trade with each other, not states as such, and hence liberals emphasise the individual as the most significant actor in the international economic system. From this leads a preoccupation with competition between firms, rather than interstate competition, and the primacy of markets over states. Neo-liberalism builds on these assumptions but has also expanded its theoretical foundations. The view that non-state actors play a key role in international economic affairs is extended to include transnational and transgovernmental factors. Transnational actors can take many guises, for example, as representatives from non-governmental organisations (NGOs) such as industry associations, officials from supranational or international agencies, or business executives employed by multinational enterprises (MNEs).7 Transnational relations can either work separately or in tandem with interstate relations. Even where statecentric negotiations determine actual outcomes, transgovernmental coalitions may evolve between like-minded state officials whose own self-serving interests may not necessarily be aligned to the state they are supposed to represent. The growth in both the number and scope of international organisations, together with the new interlinkages forged by globalisation, have broadened the nature of transnational relations and introduced greater complexity to the governance of international economic relations (Risse-Kappen 1995). This trend has, of course, affected those between the EU and East Asia where transnational actors have become increasingly participative.

8 International political economy of EU-East Asia relations

According to neo-liberals, this proliferation of transnationalised linkages presents an a priori case for interstate co-operation. As interdependence prevails, and with it convergence of different state’s interests, governments are forced to work together to find resolutions to common problems and challenges. This can also manifest itself in state-firm co-operation and diplomacy (Stopford et al. 1991), where ‘to regain some influence over events, governments and firms have to collaborate with one another; they have to sacrifice their unilateral freedom of action for some degree of mastery over transnational flows of goods, capital, technology, ideas and people’ (Keohane 1993:48). While there exists a strong neo-liberal consensus against state intervention, it is also accepted that states need to co-operate both to redress market failure at the international level and jointly to provide the public goods required for the international economic system to function in a non-anarchical fashion. Examples of the former include collaborative efforts to regulate global monopoly power (e.g. the Microsoft case involving EU and US competition policy authorities) or international accords on pollution control (e.g. the Montreal Protocol on ozonedepleting substances). Examples of the latter include international organisations such as the WTO and IMF that are able to ‘facilitate co-operation by reducing transaction costs, improving transparency and elaborating rules and norms that serve to regulate relations among states’ (McGuire 1997:21). Moreover, neo-liberalism maintains that while international organisations may owe their origins to hegemonic power, they are not subsequently dependent upon it once established. This is partly due to the creation of conditions in the international economic system that help to legitimise their own independent raison d’être. The WTO is a case in point, although it is questionable whether it could function effectively without US membership. Some neo-liberals, however, play down the importance of institutionalised co-operation by arguing that ‘international organisations are not the causes of co-operation but mechanisms through which co-operation occurs’ (Haggard and Moravcsik 1993:285). Thus, the institutionalist wing of neo-liberal theory has often been treated as a separate theory. For the purposes of this text, though, the existence of a liberal-institutionalist synthesis is acknowledged. Complex interdependence Originally conceived by Keohane and Nye (1977), the notion of ‘complex interdependence’ is a critique of the neo-realist worldview that states are able to behave in a largely autonomous manner, proposing instead that independent state strategies are often not viable. This derives largely from the neo-liberal observation that multiple transnational channels connect societies, or sections of societies, across different nation-states. These may include workers employed by MNEs, members of international pressure groups (e.g. Greenpeace) and transgovernmental policy networks. The interaction of state and non-state actors through these channels produces a complex interdependence of relationships, while also challenging the neo-realist assumption that states act as coherent units

International political economy of EU-East Asia relations

9

with unambiguous national interests. Furthermore, non-state actors can develop their own agendas independent of nation-states. This process may be mutually reinforcing. For example, international organisations provide an important forum in which transgovernmental alliances are forged, that in turn help support or legitimise the distinct agenda of the international organisation. Complex interdependence is also applicable to the foreign policy agenda, whereby issues of concern have become increasingly more eclectic and interconnected with no clear hierarchy established among them. Issues of politico-military security thus compete with the new issues of economic security (e.g. the environment, drug trafficking). The greater interaction now witnessed between all issues can be largely attributed to the effects and processes of globalisation. Keohane and Nye also suggest that, in the daily minutiae of state affairs, governments are usually engaged more in maintaining or promoting co-operative economic interactions than distracted by traditional security matters. Moreover, the distinction between domestic and international issues has become increasingly blurred as a growing interdependence between them has emerged. This is explored by Putnam’s (1988, 1993) two-level games model, whereby the Janus-faced state must simultaneously reconcile both the demands of the international economic system and those of its own domestic stakeholding constituencies. Resolving conflicts of interest that lie therein may be achieved through striking bargains with other states, which must be simultaneously ratified at the domestic level. The relationship between the state and different stakeholding constituencies in the FEP-making process can also be analysed within Rogowski’s (1989) ‘commerce and coalitions’ model. The premise of this model is that economic cleavages between domestic stakeholding constituencies are caused by their exposure to trade, which is assumed to have either beneficial or adverse effects upon them. The distribution of effects in turn determines the configuration of alliances made between these constituencies that seek to influence the direction of the nation’s foreign economic policy. Surplus capacity The notion of surplus capacity is not so much part of neo-liberal theory, but rather an alternative explanation of trade friction to hegemonic stability that has been proposed from a neo-liberal institutional viewpoint (Strange 1979; Strange and Tooze 1980; Tsoukalis and Ferreira 1980; Cowley and Long 1983). Surplus capacity exists when, for a sustained period and for a large percentage of producers, demand is insufficient to absorb production at prices that can maintain a substantial level of employment and adequate returns on investment. This has been caused by major shifts in the world economy. First, the amount of capital investment per unit of output has risen sharply in many sectors, thus making idle capacity more costly. Second, newly industrialising countries (NICs) that have emerged in recent post-war decades have expanded their world market shares of manufactured products at the expense of established Western

10 International political economy of EU-East Asia relations

producers. Third, post-oil crisis structural changes have been responsible for greater unpredictability in patterns of demand for and prices of manufactures. Moreover, cyclical downturns exacerbate surplus capacity predicaments. Where surplus capacities exist in industry sectors, we can anticipate a rise in trade friction as less competitive producer countries, or those with a pronounced over-capacity problem, erect protectionist barriers against more competitive producer countries. Such sectors have tended to be those in structural decline in the West and where NIC producers have developed a significant comparative advantage. Surplus capacity’s main connection to neo-liberal theory lies in the international agreements that frequently arise between governments, as well as non-state actors, in which an understanding to limit competition is established. These restrict conflict among countries ‘by softening the costs of cutting capacity for weaker competitors and preserving some of the foreign markets for stronger ones’ (Cowley and Long 1983:162). However, while a capacity-cutting regime created by relatively uncompetitive producer countries but imposed upon competitive producer countries restricts conflict between the former group, it naturally antagonises the latter group. The Multi-Fibre Agreement (MFA) is an example of the above, where Western producer countries agreed to contain NIC competition in the textiles and clothing sectors. As we discuss below, surplus capacity situations have been an important theme in the EU-East Asia economic relationship. Neo-liberalism in context While the EU and East Asia are not engaged in a comprehensive security relationship, Chapter 2 shows in some detail how economic interdependence between the two regions has grown substantially in recent years. East Asia became the EU’s most important regional trading partner by the mid-1990s, while East Asian firms have been lured by the commercial opportunities presented by the Single European Market. The increase in mutual flows of foreign direct investment (FDI) and other interconnections generated by financial globalisation have expanded and deepened the economic linkages between the EU and East Asian economy. Managing the more complex interdependence in EU-East Asia economic relations has increasingly required the participation of various non-state actors, made more imperative by the general shift from states to markets. Representatives from business have become important constituents in the conduct and process of EU-East Asia economic diplomacy as globalisation has necessitated their deeper involvement in international public policy cooperation and co-ordination. For example, the relatively high exposure of European banks in the East Asian financial crisis gave them a considerable stake in helping find effective policy solutions. The growing engagement of business representatives is generally apparent in new initiatives taken within EU-East Asia bilateral accords and the new Asia-Europe Meetings (ASEM) framework.8 State-firm diplomacy has itself become increasingly relevant, for

International political economy of EU-East Asia relations

11

instance, where an East Asian MNE directly investing in the EU seeks the best incentive package from potential host governments. To some degree, the corporate governance practices of European and East Asian companies also bring influence to bear on economic relations. This becomes more relevant where strategic alliances between them have been formed or where industrial co-operation between companies from the two regions has been promoted within EU-East Asia bilateral or inter-regional framework accords. Globalisation can also make the allegiances or negotiating positions of some European or East Asian MNEs difficult to predict. For example, a European multinational that has established operations in an East Asian country may request the host government to impose an anti-dumping duty (ADD) against a rival European firm, or even lobby the European Commission to remove its own ADD against its locally produced exports which are destined for the EU market. While business representatives have thus become key constituents in EUEast Asia economic relations, their actual influence over the direction and governance of these relations is still limited. Within the existing framework of EU-East Asia economic diplomacy, the private sector’s function remains primarily consultative. However, if business is to make an effective contribution to promoting greater economic exchange between the EU and East Asia, its representatives will be required to play a more proactive rather than passive role in the future. This is more likely to be achieved through collective action, for instance, through initiatives undertaken at the industry association level or through certain consortium arrangements. Interdependence is also manifest in the broader range of issues now apparent on the EU-East Asia economic diplomacy agenda. This is revealed at the ASEM level and the various bilateral contact groups that have evolved to manage these issues. The latter is especially applicable to the EU’s economic relations with Japan and ASEAN, its two longest-standing partners in East Asia. Such regime building has forged a greater number of transgovernmental alliances and policy networks between EU and East Asian policymakers. It could be argued that these developments helped progress EU-East Asia economic diplomacy beyond the more conflictual relations of the 1980s towards the more co-operative trend that was evident by the 1990s. Transgovernmental linkages have also contributed to a mutual support of multilateral regimes, although Chapter 2 discusses how some East Asian states have remained wary of the emerging new trade agenda. However, the EU, Japan and the more advanced East Asian NIC s have all been signatories to new WTO plurilateral agreements. Their support of the WTO is especially important given the relative decline in American hegemony and the US penchant for occasional unilateralism in its trade affairs. Despite the co-operative trend in EU-East Asia economic diplomacy, the surplus capacity problem remains an important source of conflict. Many European firms have faced a significant competitive threat from their East Asian counterparts which has accelerated the process of industrial contraction in various sectors. In response, European industry lobby groups have urged

12 International political economy of EU-East Asia relations

EU national governments and the European Commission to defend their interests. Although EU protectionism aimed at counteracting this threat subsided during the 1990s, some measures have been retained. As we note in Chapter 2, the EU’s anti-dumping policy has been particularly singled out for criticism by East Asian states. Their graduation from the EU’s Generalised System of Preferences (GSP) scheme, in which trade concessions have been removed where beneficiaries have become too competitive, can also be linked to the surplus capacity issue. The current dismantling of the MFA regime is, however, an example where the EU and other Western powers have taken greater responsibility for tackling their own surplus capacity problems. Most recently, though, East Asia has experienced surplus capacity problems of its own as a result of the region’s 1997–8 financial crisis. Chapter 2 discusses the general implications of this for the EU. Marxism The Marxist worldview Marxism’s intellectual origins are the most modern of the three main IPE theoretical approaches, stemming from the writings of nineteenth-century political economist Karl Marx. According to Marxist theory, classes are the dominant actors in the international political economy, although it also acknowledges that states, societies and various non-state actors operate as part of the world capitalist system. Like neo-realism, Marxism contends that international economic relations are essentially conflictual. This is attributed to the inherent inter-class frictions that arise between capital and labour, and particularly from the capitalist exploitation of workers and the suppression of their interests. Thus, the prevailing hierarchy in the international economic system is determined not by politicomilitary power, as neo-realists suggest, but rather by the patterns of production and exchange established by MNEs. Moreover, globalisation has enhanced the power of capital which has strengthened firms’ influence over state economic policy. Marxists therefore emphasise the primacy of economic objectives in the foreign policy agenda of states. Furthermore, international economic relations must be understood from a historical perspective on the development of world capital (Wallerstein 1979). Marx’s own writings highlighted the relationship between the expansion of internationalised capital interests and imperialism. Imperialism arose from the exploitation of labour-intensive countries by their capital-intensive counterparts. This involved state governments from the latter organising or sanctioning the colonisation of other countries and regions to safeguard the commercial interests of their indigenous firms. Interstate competition between capitalist countries for control of these territories was another important feature of the international political economy. In the post-colonial era, the Marxist interpretation of transnational class conflict has moved on to place greater emphasis on MNE competition for global market shares, thus branding them as the new imperialists.

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The FDI of multinationals, in which firms extend their control over factors of production in other countries, is seen by Marxists as a continuation of imperialist practices. Marxist theory also stresses how MNEs use their oligopolistic market power to play off workforces against each other within international production networks in their endeavours to drive down labour costs and maximise economic rents (Frobel et al. 1980). The so-called new international division of labour (NIDL) has been facilitated by two main developments: first, advances in transport and communication technologies that have helped create these international production networks which link together different workforces within actual or potential transnationalised divisions of labour; second, new process technologies have fragmented and standardised specific tasks that can be more easily contracted out to developing countries with low labour costs. The wider diffusion of more mature production technologies in a number of sectors (e.g. textiles, steel) has also contributed to this development. Consequently, greater scope has emerged for competition between workforces from developed and developing country locations which MNEs exploit to their advantage. In analysing the structure of the international economic system, modern Marxist thinking focuses on dependency theory to explain the persisting gap between developed and most developing countries. According to this theory, the core-periphery divide between industrialised regions and under-developed regions is sustained by a subservient economic relationship in which the latter remain dependent upon the former for capital, technology, finance and trade. Marxists propose that this relationship has endured because it has been in the interests of dominant capitalist forces (e.g. state policymakers from developed countries, MNE executives and capital-orientated international organisations such as the IMF and World Bank) to maintain the status quo. It could be argued that many East Asian states have managed to cross the core-periphery divide, while the region as a whole has become a new pole of economic wealth in the world economy. However, Marxists would point to the pivotal role played by Japan—the region’s long-established core capitalist power—with respect to both these achievements and in determining the current regional division of labour, production and economic exchange. Radicalism, reformism and idealism Marxism is placed by some IPE scholars within a broader theoretical and ideological tradition that embraces the notions of radicalism, reformism and idealism. This is mainly due to its prescription of radical alternatives to marketoriented pluralist democracy, the current leading credible model of economic development. Moreover, the fundamental transformation of the international economic system Marxism advocates, based on the greater empowerment of labour in both its domestic and transnational contexts, is anathema to most of today’s policy-makers. The ideals to which Marxism aspires have also been interpreted by many as utopian. In addition, mainstream thinkers dismiss

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Marx’s prediction of the demise of international capitalism due to its inherent contradictions, even more so since the retreat of Communism from the late 1980s onwards. Radical alternatives to the current structure, conduct and process of international economic relations have been offered by other ‘reformist’ movements. Examples include environmentalism, pacificism and feminism, with most tending to emphasise transnational solutions to international economic problems. Links here can be made with the neo-liberal view that states alone are not able to resolve these and require the participation of non-state actors. Reformism argues this point further, contending that the pursuance of national sovereignty is ultimately damaging because of the nature of the economic problems faced by the whole international community. Again, another link can be made with neo-liberalism, on this occasion regarding the prominence of new economic security issues, e.g. ecological crises, drug trafficking, the persistent divide between rich and poor countries, economic migration and Third World debt. Reformists highlight the interconnections between these issues and therefore propose a holistic approach towards managing them. International organisations are seen as playing an important role here, although this is contingent upon them serving higher moral or ethical interests rather than simply the representations of powerful national interests. Marxism in context Marxist analysis on capital and imperialism has historic relevance to certain EU member states’ earliest involvement in parts of East Asia, and particularly Southeast Asia. The development of the EU’s economic relations with ASEAN has thus evolved within a post-colonial context. Moreover, many of the EU firms that were responsible for establishing an imperial division of labour in the region have not left. Some ASEAN states, such as Malaysia and Singapore, remain highly dependent upon inward FDI from European sources and EU governments are still concerned about safeguarding the foreign investment interests of their indigenous MNEs in the region. Furthermore, the long-running dispute between Portugal and Indonesia over East Timor (see Chapters 2 and 3) demonstrates how current economic relations can be impeded by postcolonial friction. Notwithstanding these points, the basis of the EU-East Asia economic relationship has generally moved away from dependency to interdependency as noted earlier under neo-liberalism. Most analysts would accept that East Asia has become a new ‘core’ region within the world economy, although the region’s lesser developed states arguably lie on the wrong side of the coreperiphery divide. However, the recognition of East Asia’s new commercial power and potential has been the principal motivation behind EU efforts to promote the economic relationship between the two regions. Marxists would interpret such endeavours as maintaining or extending the international capitalist alliance.

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Marxists would further argue that the NIDL concept is highly applicable to the EU-East Asia economic relationship. Competition between both regions’ workforces has intensified with economic interdependence as EU and East Asian MNEs have greater opportunities to play off domestic and foreign labour against the other. The emerging parity of unit labour costs between cost-inflated East Asian countries (e.g. Korea) and certain EU member states has broadened the scope of this competition, with companies from the former looking to expand their investments to Europe owing partly to this development. While there may be some truth in this Marxist analysis, other factors that explain the growth in FDI flows between the two regions are examined by this text. A final note should be reserved concerning the retreat of Marxism in East Asia. This can be most clearly observed in the capitalist experiments recently undertaken by the Communist states of China and Vietnam. Many other East Asian states that have practised variations of state economic planning have also embarked on a new policy direction. To some extent, this has eased the tensions in the EU’s economic diplomacy with the East Asian states owing to a firmer market-oriented, neo-liberal consensus which has grown as a consequence of these changes. However, both sides have been increasingly affected by the reformist agenda of new economic security issues, as witnessed by environmental clauses introduced to the EU’s GSP scheme in 1998, joint efforts to combat drug trafficking and various other initiatives. Concluding note Each of the different IPE theories that we have analysed offer their own perspectives on the EU-East Asia economic relationship. It is not the intention of this author to adopt a dogmatic theoretical position, but rather use these theoretical perspectives to enhance the reader’s understanding of the themes and arguments covered in the text, demonstrating their salience where appropriate. This primarily take places in each chapter’s conclusion where a specific theoretical evaluation on the preceding analysis will be made.

2

EU-East Asia economic relations An overview of recent developments

Introduction Over recent decades the tripolarisation of the world economy has become increasingly evident. By the mid-1990s, the Triad regions1 —the EU, North America and East Asia—accounted for around 80 per cent of international trade (Table 2.1) and investment. In acknowledging that its relationship with East Asia remains the weak link in the Triad, the EU has more actively promoted its economic relations with the region in recent times. This has been crucial given the global production centre and new pole of prosperity that East Asia has become. Progress made by the Asia-Pacific Economic Co-operation (APEC) forum in augmenting a stronger transpacific alliance has added greater imperative to the EU’s cause. However, now running parallel to the EU’s established ties with East Asian countries is the recently created Asia-Europe Meetings (ASEM) framework that provides an inter-regional basis for dialogue between the EU and East Asia. Together with the 1995 New Transatlantic Agenda (NTA), APEC and the ASEM represent the completed triangle of inter-regional Triadic links. The EU’s economic relations with East Asia must also be understood in their multilateral context. From one perspective, the scale of the inter-regional Triadic links noted above pose a challenge to the multilateral order, presided over by the World Trade Organisation (WTO). Another challenge facing the WTO lies in extending its legitimacy to deal with the so-called ‘new’ trade issues. These have arisen largely because both the gradual post-war reduction in tariff barriers and the exposing effects of globalisation have raised a variety of non-tariff trade barriers to prominence. If the WTO succeeds, this would have significant ramifications for how international economic relations are conducted and governed in the future. The purpose of this chapter is to provide an overview of the above themes, thus introducing the recent developments in EU-East Asia economic relations. We shall first examine the reasons why the EU has afforded increasing priority to developing its economic relations with East Asia. This includes a brief study of East Asia’s economic dynamic and recent financial crisis, and what impact these have had upon patterns of the EU’s economic exchange with region. We shall then consider the new developments in the EU-East Asia economic diplomacy,

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Table 2.1 Triad trade flows: percentage shares of world total (1960, 1980, 1996)

Source: IMF Direction of Trade Statistics Yearbook, various editions. Notes: 1 US, Canada and Mexico 2 Japan, China, Korea, Taiwan, Hong Kong and ASEAN10.

which involves an examination of the nature and practice of EU economic diplomacy, the EU’s bilateral economic relations with East Asian states, the new ASEM framework and diplomatic interactions at the multilateral level. East Asia in the balance: economic dynamism and financial crisis In the chapters that follow, we make separate studies of the dynamic economic development of each East Asian country, or group of countries in the case of the Association of Southeast Asian Nations (ASEAN).2 It is useful at this point, though, briefly to examine the wider regional dynamic of East Asia’s economic development and make reference to the debate over whether the ‘Pacific Century’ is inevitable. This relates to the notion that an emergent East Asia that is closely aligned to its North American economic partners constitutes a transpacific axis which could potentially marginalise the EU in forthcoming decades. However, the 1997–8 East Asian financial crisis changed assumptions regarding the region’s future growth and prosperity, with many analysts believing that the economic miracle was either a myth or had come to an end.

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Hence, each subsequent chapter will also examine how the crisis has affected the East Asian trading power in question and what impression this has made on its economic relationship with the EU. The East Asian economic miracle The economic performance of East Asian countries in recent decades has been stunning. Over a sustained period they have achieved the fastest economic growth rates yet recorded, both on an individual country and regional group basis (see Table A.2). In the wake of Japan’s post-war reindustrialisation came the advance of the ‘first generation’ newly industrialising countries (NICs) of Korea, Singapore, Taiwan and Hong Kong from the 1950s onwards. These were joined later by the ‘second generation’ NICs of Southeast Asia with Malaysia and Thailand in particular achieving the highest growth rates amongst this subgroup. As Table A.1 indicates, many East Asian states now enjoy income per capita levels that have overtaken or are approaching those for the EU. There have been numerous studies which have sought to explain the determinants of East Asia’s rapid industrialisation and growth.3 Although the highly diverse political, economic, demographic and socio-cultural complexion of East Asia has made it difficult to formulate a unified explanatory model, certain commonalties can be established between at least particular sub-groups of states and their paths to development. A World Bank (1993) study perhaps offers the most comprehensive attempt at providing such a model in which various multi-linked relationships between different developmental functions were considered (Figure 2.1). However, the study’s ‘market fundamentalism’ and strong emphasis on ‘macroeconomic basics’ as opposed to ‘microinstitutions that exhibit pervasive state intervention’ were criticised by Amsden (1994:627) and others,4 many of whom prescribe to the ‘developmental state’ model of East Asian development which emphasises the centrality of the state’s role. Additional determining factors could arguably have been given more prominence by the World Bank model, for example: the facilitating role played by Japan in the industrialisation of the region through foreign direct investment (FDI) and accompanying capital, technology and management practice transfers;5 benefits conferred by US financial aid, other capital investments, domestic institutional support and the provision of markets;6 socio-cultural factors (e.g. Confucianism) and the positive influence of ‘collectivist’ norms on human capital practices, industrial and societal relations.7 What has become clear is that East Asia’s developing economies are moving beyond a dependency on the USA and Japan, thus helping create a more independent momentum for the region as reflected in the growth of its intraregional trade and investment flows8 (Table 2.2). East Asia’s enhanced regional integration is extensively analysed in Chapter 8, but suffice to comment here that the future of a more defined and coalescent East Asian economy and the potential that lies therein have become the subject of much debate. On the one hand, there are those early optimists who believed that the region is destined to

Source: World Bank (1993)

Figure 2.1 World Bank model of East Asian growth

20 EU-East Asia economic relations Table 2.2 The Triadic distribution of East Asian trade (percentage of total)

Source: IMF Direction of Trade Statistics Yearbook, various editions. Notes: 1 US and Canada. 2 Includes intra-ASEAN trade for ASEAN.

become the world’s most prosperous economic region by the early twenty-first century.9 On the other, there are more sceptical analysts who remain unconvinced of East Asia’s assured bright future.10 The 1997–8 East Asian financial crisis certainly lent increasing credence to the latter view, although its longer-term effects on the region’s economic growth trajectory cannot easily be discerned. The 1997–8 East Asian financial crisis There is a multitude of views on the actual causes of the 1997–8 East Asian financial crisis.11 However, the region’s high debt-driven economic development and misconceived international finance policies are generally accepted as the main sources of instability from which the crisis evolved (Goldstein 1998; Henderson 1998; Wade 1998; Wade and Veneroso 1998). Bridges (1998) blames the immediate cause of the crisis on foreign over-borrowing by the region’s banks, companies and individuals on a short-term basis and the mountain of non-performing loans that this created. At a deeper level, the structural defects of many East Asian economies were exposed by the crisis but also served to exacerbate it, not least by undermining

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wider systemic confidence. Examples of such ‘defects’ included the use of political as opposed to commercial criteria in loan allocations (particularly in Indonesia and Thailand), surplus manufacturing capacity (Korea), over-ambitious megaprojects (Malaysia and Indonesia), macroeconomic weakness caused by sustained current account deficits and inadequate prudential controls in national financial systems (most affected countries).12 The one specific event commonly cited as having precipated the crisis was the Thai government’s decision to float the baht on 2 July 1997, the day after Hong Kong’s return to mainland Chinese sovereignty. The baht’s subsequent freefall on the foreign exchange markets created a general crisis of confidence in other Southeast Asian currencies,13 which was later to spread to the region’s stock markets. By November 1997, Thailand, Indonesia and Korea had accepted significant International Monetary Fund (IMF) rescue packages at $17.2bn, $37.0bn and $57.0bn, respectively. The two other countries most affected by the crisis, Malaysia and the Philippines, avoided direct appeal to the IMF but nevertheless were compelled to introduce a range of austerity measures aimed at maintaining economic stability.14 From July 1997 to January 1998, the currencies from all five countries had depreciated by between 40 and 60 per cent against the US dollar. Furthermore, in the latter half of 1997 their stock market indices had fallen by around 50 per cent. Japan’s ability to offer assistance to the wider region was constrained by both its own financial difficulties and prolonged recession. Moreover, its August 1997 proposal for establishing an Asian Monetary Fund (AMF), backed by secured pledges from China, Hong Kong, Taiwan and Singapore,15 lacked essential support from the USA which was reluctant to back any initiative that undermined IMF multilateral competence in such situations (see Chapters 4 and 8). Low or negative growth was anticipated in 1998 for the five most affected economies with significant spillover and transmission effects for the wider region. However, at time of writing, most estimates predicted a mild recovery towards 1999 or 2000 and beyond. Yet the longer-term impact of the crisis on the region and its ‘developmental state’ model of economic development remains difficult to determine at this point (Burkett and Landsberg 1998; Johnson 1998), but we shall nevertheless return to this issue in subsequent chapters. The European response It was not until Korea’s financial difficulties became fully apparent in November 1997 that the EU’s political reaction to the wider East Asian crisis became significantly audible. Even then, the EU’s response was somewhat dismissive. In January 1998, European Commission President, Jacques Santer, stated that the EU economy would be only slightly affected by the crisis.16 A similar evaluation was given by Yves-Thibault de Silguy, EU Monetary Affairs Commissioner at the time, who argued that the crisis would have ‘only a marginal impact on growth in Europe’.17 However, by the time of the Second ASEM Summit held at London in April 1998, a more foreboding view was taken by EU leaders.

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Notwithstanding the setbacks, pressures and dour predictions generated by the crisis, this text will argue that the EU’s efforts at fortifying its economic links with East Asia must remain a priority. The region has recently offered some of the most significant commercial opportunities for European companies, as the following analysis on EU-East Asia economic exchange testifies. East Asia’s improving competitiveness in an ever wider range of industries also poses a serious threat to EU producers. Both trends should be anticipated to continue at least over the medium term and hence provide a case for the EU to develop more harmonious and collaborative economic relations with East Asian states. However, it becomes evident in subsequent chapters that the USA generally enjoys a more developed and encompassing economic relationship with East Asia, which itself is underpinned to varying degrees by US close security ties with many of its allies in the region. Progress made by APEC over the 1990s has further cemented the transpacific alliance,18 thus making the EU’s task of achieving proximate influence over East Asia’s economic affairs even more arduous.19 The new ASEM framework has, however, managed to redress this somewhat. Moreover, as Chapters 8 and 9 discuss, the financial crisis had generated considerable tensions in transpacific relations by the end of 1998. In order to obtain a clearer perspective on the above matters, let us now examine a broad overview of recent trends in economic exchange between the EU and East Asia. Economic exchange between the EU and East Asia Trade For the last decade or so, East Asian countries have been the most dynamic trading partners of the EU. In 1980, East Asia’s share of extra-EU imports was 11.7 per cent and its share of extra-EU exports 8.4 per cent. By 1997 these had increased to 26.9 per cent and 20.2 per cent, respectively (see Table A.3). Five years earlier trade flows between the EU and East Asia had overhauled the vol ume of transatlantic trade,20 thus making East Asia the most important regional trading partner of Europe from this time onwards.21 Among the East Asian group, China has been the EU’s fastest growing import source while Korea and Taiwan have been its fastest expanding export markets in the region (Figure 2.2). In comparison, the EU’s shares of East Asian trade have remained relatively static with a few exceptions (see Table 2.2). For example, the EU improved its shares of Japanese, Korean and Taiwanese import trade over the 1975–97 period although these are still well below those for North America and other East Asian countries. Meanwhile, the EU’s share of Chinese import trade fell sharply in the 1980s, while its share of Hong Kong’s exports almost halved during the period. Like the EU, North America’s shares of East Asian trade have also remained reasonably stable, but it should be remembered that it began the period with generally much higher shares than the EU. The rise of intra-regional trade in East Asia has, though, posed a challenge to both Western regions. The general regional balance of trade between the EU and East Asia lies

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23

Figure 2.2 East Asian group shares of EU trade with the region (1980, 1997) Source: Eurostat.

squarely in the latter’s favour, with the EU’s trade deficit standing at Ecu33.8bn in 1997 (Figure 2.3). The deficit’s peak of Ecu51.5bn reached in 1991 more or less coincided with Japan’s 1992 peak surplus against the EU recorded at Ecu34.1bn. China’s own growing surplus with the EU threatens to reach the same scale as Japan’s, having risen from Ecu5.3bn in 1990 to Ecu20.9bn by 1997.22 Both ASEAN and Taiwan also achieve trade surpluses with the EU on a regular basis, although Hong Kong has seen its trade balance with Europe fall further into the red over the 1990s.23 The EU has also recently moved into a trade surplus position against Korea. An examination of EU member state trade with East Asia reveals that Germany and the UK are the EU’s most prominent traders with the region, with France, Italy and the Netherlands also being key trade partners (Figure 2.4). A closer examination of sectoral trade flows presents a more revealing picture. In general, the EU’s chemical industries have retained their competitive advantage over their East Asian counterparts (see Table A.4). However, the technological balance is shifting more in East Asia’s favour in manufactures trade. The EU

24 EU-East Asia economic relations

Figure 2.3 EU-East Asia trade (1975–97) Source: Eurostat. Note: 1975 figures do not include Korea.

continues to import higher tech goods from Japan in return for relatively lower tech exports. While China’s low-tech exports to Europe are still growing rapidly (e.g. clothing, footwear and toys), it has also begun to dispatch higher value-added products to EU markets (e.g. electrical machinery, telecoms and audio-visual goods). As with East Asia’s NICs, though, China has increased its demand for EU capital goods to assist the industrialisation process. Yet the EU’s dependence on the NIC group’s technology-intensive consumer products is now quite pronounced. For example, in the office machines and computers sector the EU’s import:export ratio with the group is 1:9. Moreover, in both this and the telecoms and audio-visual sector, East Asian countries represented eight of the EU’s top ten import sources for these products (see Table A.5). Notable sectoral imbalances also persist in other sectors at country level, such as Korea’s exports of automobiles to the EU which outnumber imports by over 100 to 1. Foreign direct investment Greater economic interdependence between the EU and East Asia has also been nurtured through FDI links (CEC 1996a). East Asia has attracted huge inflows of investment since the 1980s and much of this has come from European companies (see Table A.6). The EU’s share of FDI in developing East Asia has nevertheless fallen marginally since the mid-1980s, although those for both Japan and the USA have declined more sharply. However, over the mid-1990s the EU’s share of cumulative inward FDI in developing East Asia increased from 8.7 per cent up to 1993 to 12.3 per cent by 1996, which contrasted with

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25

Figure 2.4 EU trade with East Asia by member state (1987, 1997) Source: Eurostat.

Japan and USA’s falling shares. This was primarily due to the surge of European investment in Southeast Asia and China over the period. Triad investments in the region have fallen in proportionate terms, mainly due to the expansion of inter-NIC outward investments.24 Meanwhile, Europe has been increasingly targeted by East Asian multinationals for FDI projects, particularly those from Japan and Korea.25 The escalation of Japanese investment in Europe, especially during the late 1980s, helped to increase the region’s cumulative share from 11.6 per cent by 1981 to 19.2 per cent by 1996. Largescale investments made by Korea’s senior chaebol companies in Europe during the mid-1990s have attracted more recent attention (Dent and Randerson 1996), not least because LG and Hyundai still intend to make the two largest inward investments into the EU from a third country source.26 Europe has subsequently increased its share of Korean outward FDI from 6.4 per cent at the beginning of the 1990s to 15.3 per cent by 1996. European investments made by companies from Singapore,27 Taiwan and Hong Kong are also on the

26 EU-East Asia economic relations

rise as, like many of their East Asian counterparts, they seek to establish a stronger global positioning (UNCTAD 1997). The general impact of the East Asian financial crisis Finally, there has been much conjecture about the impact of the East Asian financial crisis upon EU business. There are a number of negative and positive outcomes that could apply, although it is too early to evaluate the long-term balance of effects (CEC 1998a). On the negative side, the depreciation of East Asian currencies has caused the EU an immediate price competitive loss, although over the longer run this effect will be mitigated by depreciation-induced inflation in East Asian countries. European firms will face additional competitive pressure as their East Asian counterparts and others seek to re-route exports away from contracting East Asian markets. The general economic slowdown in the region will reduce the demand for EU exports, particularly for luxury or non-essential items, as already revealed by some 1997 and early 1998 trade figures. These figures also suggested that East Asian firms had begun to export more aggressively to EU markets (see Table A.8). One estimate suggested that the crisis could reduce West Europe’s net exports by $55bn a year.28 Furthermore, Europe has already witnessed a decline in inward FDI from East Asian sources as a result of the crisis. On the positive side, the EU can expect to pay lower prices for East Asian imports. Intensified price competition will also force European firms to look for efficiency gains where scope exists. Moreover, the crisis-induced restructuring of East Asian economies will generate market-opening opportunities for foreign firms. This has been perhaps most clearly demonstrated in Korea under the conditions of the IMF ‘bailout’ programme. In addition, East Asia’s asset deflation presents new acquisitional FDI opportunities for EU investors, although these may not be exploited until the path of the crisis has become more determinate. With regards to finance, European banks were even more exposed to the crisis than their US or Japanese counterparts.29 The subsequent loan defaulting to which they have been subject in the most affected East Asian countries has placed severe pressure upon them. Many have had to work closely with East Asian governments and firms to establish private-sector rescue packages to resolve short-term debt repayment problems (Bridges 1998). The adverse effect on the European financial community’s earning and profit levels has been considerable,30 although it is unlikely that any European bank will become bankrupt as a result. While some European banks are obviously more circumspect in their dealings within the region, others have looked to the new commercial opportunities that crisis-related events have spawned. For example, in Korea, where IMF loan conditionality includes liberalising the country’s financial sector, some EU banks are looking to set up subsidiary operations or buy into indigenous operations. In the chapters that follow, the more specific impacts of the crisis on EU-East Asia economic exchange will be considered.

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27

New developments in the EU’s economic diplomacy with East Asia The nature and practice of EU economic diplomacy Economic diplomacy can be defined as the means and parameters within which trade, investment and any other international economic relations are conducted between representative agents, the process of which may or may not take place within an institutionalised framework. An important aspect of economic diplomacy concerns the protagonist’s use of defensive and promotive policy measures. Defensive measures are derived from the application of commercial policy instruments, whereas promotive measures stem from trade and economic cooperation accords but also commercial policy concessions. Other key aspects of economic diplomacy centre on negotiatory engagements at the bilateral, plurilateral or multilateral level where conflict resolution may be the prime issue. As a supranational actor, the EU is a relatively young proponent of economic diplomacy with both its Common Commercial Policy (CCP) and European Political Cooperation (EPC) framework31 beginning to operate effectively from the early 1970s onwards. Since then, the European Commission has acted as the EU’s interlocutor in international trade negotiations, although FDI policy remains at the member state level. Thus, in terms of governance the management of the CCP is both a demonstration of the EU’s model of common policymaking and its collective exercise of power against third country partners.32 Its member states accept that it is generally in their own interests to grant the European Commission exclusive competence of the CCP for the strategic advantages this confers upon them in the international economic system. The Commission, though, requires a mandate from the Council of Ministers on CCP decisions,33 and hence the levers of direct governance and control over EU trade policy lie somewhere between the two institutions. Moreover, the Commission can be viewed as either an initiator or facilitator of EU trade policy, depending on the degree of politicisation surrounding the trade issue at hand. While it is more or less left alone to the technical management of the CCP, it is susceptible to the influence of member state coalitions who desire a certain outcome from international trade negotiations. This is most likely to occur on sensitive issues such as agriculture, France’s interventions in the Uruguay Round being a case in point. More recently, the future direction of the EU’s anti-dumping regime is being contested by the European Commission, protectionist-minded EU member states (e.g. France, Italy, Portugal) and liberal-minded EU member states (e.g. Germany, UK, Netherlands).34 The expansion of EU-East Asian economic exchange and the accompanying competitive threats to European industry which lie therein have meant that the European Commission and CCP have become increasingly familiar to the East Asian countries. In the European Commission, Directorate General (DG)1 is responsible for conducting the EU’s external economic affairs. More specifically, DG1A deals with Northeast Asian states ( Japan, China, Korea, Taiwan and Hong

28 EU-East Asia economic relations

Kong) while DG1B manages relations with Southeast Asian states (i.e. ASEAN) and other South Asian countries (i.e. the Indian subcontinent). This division is significant in that DG1A adopts a more hard-nosed approach towards its group of generally more advanced industrial states, which is in contrast to DG1B’s approach that has traditionally been based on the donor-recipient relationship that one expects between developed and developing country powers.35 However, as we shall later discuss, attempts at restructuring the basis of EU-ASEAN economic relations has been attempted in recent years to reflect new realities. Each East Asian trade partner also has a designated status within the CCP’s hierarchy of preferences. The EU’s trade relations with Japan function on a ‘most favoured nation’ (MFN) basis. Most developing East Asian countries are beneficiaries of the EU’s Generalised System of Preferences (GSP) which grants them tariff concessions in both industrial and agricultural products. The advanced industrial development of Hong Kong, Singapore and Korea led to their ‘graduation’ from the EU’s GSP in May 1998,36 while their East Asian counterparts that remain in the scheme have experienced a partial graduation in those sectors in which they enjoy a growing competitive advantage. However, of greater impact to East Asian producers has been the EU’s use of anti-dumping duties (ADDs). Since the mid-1980s they have been targeted more than any other group by the EU, attracting 46.8 per cent of all anti-dumping investigations over the 1985–97 period37 (see Table A.8). These have coincided in industries where East Asian exporters have attained high levels of import penetration in EU markets and hence have been interpreted by the offenders as overtly defensive countermeasures.38 Although East Asian fears of a ‘Fortress Europe’ have subsided,39 the consolidation of the Single European Market (SEM) heralded important changes to the CCP which have affected the conduct of EU-East Asia economic diplomacy. For instance, the SEM necessitated that the European Commission’s competence in EU commercial policy matters be fortified in order to avoid internal market distortions that would arise from national level measures. The extension of the Commission’s governance in this area was perhaps most clearly shown by the EU-level voluntary export restraint negotiated with Japan on its automobile exports to Europe. This replaced five national-level equivalents that had been previously operated by France, UK, Italy, Spain and Portugal. Other similar bilateral arrangements have either been transposed to the EU level or eradicated altogether, which particularly affected the numerous quantitative restrictions that individual EU member states had previously placed on East Asian imports. More promotive aspects of the EU’s economic diplomacy with East Asia have come through new accords being signed with the region’s countries, or established ones being upgraded. This approach has been underpinned by the EU’s ‘New Asia Strategy’ which it launched in 1994 (CEC 1994a) to provide a more coherent basis for developing its relations with East Asia. The EU’s economic diplomacy with each East Asian partner has nevertheless evolved in its own distinct manner, as Chapters 3 to 7 show. The section that follows offers a summary analysis.

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Bilateral developments The conduct and management of the EU’s economic diplomacy with Japan have proved the most challenging, largely due to its ascendant economic superpower status and the substantial competitive threats it has posed to a broad range of European industries. Japan’s adeptness of playing off one EU country against another in pre-CCP trade negotiations was actually a significant catalyst in the development of the CCP itself (Rothacher 1983).40 Moreover, EU-Japan economic diplomacy can only be fully understood within the context of trilateral relations, i.e. including the USA. Concepts of trilateral co-operation date back to the work of Brzezinski (1973) and others,41 although this primarily centred on issues of high politics. Until quite recently, the EU pursued a largely reactive policy towards Japan by following in the slipstream of US policy initiatives. This particularly related to bilateral market access deals brokered by the USA (e.g. on semiconductors) normally under threat of ‘301’ actions.42 Some years later, Japan usually conceded to granting the same or similar access to EU producers.43 Furthermore, two of the Triad powers have often formed an alliance against the other so as to extract concessions from it. Transatlantic alliances of this kind have been the most prevalent, invariably at the USA’s behest, although a transpacific alliance was deployed to effect at the Uruguay Round from which the EU agreed partially to liberalise its Common Agricultural Policy (CAP).44 Notwithstanding the enlivened debate on Triadic competition (Hart 1992; Thurow 1992; Tyson 1992; Albert 1993), there has been a gathering momentum behind trilateral economic co-operation. The Plaza Accord of 1985 and subsequent G7 meetings on co-ordinating macroeconomic policy were important first steps forward.45 By the early 1990s, all three powers had signed bilateral ‘declarations’ with each other46 inspired by possibilities that the new post-Cold War era could herald. While the 1991 EC-Japan Declaration enabled the EC somewhat to redress the trilateral imbalance of relations, its influence with Japan remains a considerable distance behind that enjoyed by the USA. However, the EU and USA have actively encouraged Japan’s deregulation programme47 with equal verve and both have witnessed an improvement in their trade position with the country. In contrast to the underlying geoeconomic basis of EU-Japan economic diplomacy, that between the EU and China was initially determined by geopolitical factors. Before the normalisation of Sino-American relations, Western Europe was a major trade partner and crucial source of advanced capital and technology for China during much of the Cold War period. Nevertheless, full diplomatic relations were only established with the receding of Maoism and the first EC-China trade agreement was not signed until 1978. We have already noted how China has subsequently become a key trading partner for the EU, yet due to a combination of China’s state-trading policies and cost-competitive export production, the EU has deployed various defensive measures against its imports, particularly ADDs.48 China’s relatively high tariff levels, regular breaches of intellectual property rights (IPR) and other numerous trade-related problems, together with its growing trade status, have made the EU keen advocates of the country’s accession into the WTO

30 EU-East Asia economic relations

(CEC 1995a, 1998b). If this is achieved it will make a significant impact on how EU-China economic relations are governed, not least because it will provide the EU with another legitimate channel through which to pursue its trade disputes with Beijing. The path taken by EU-ASEAN economic diplomacy has evolved from postcolonial links and an initial ‘donor-recipient’ basis. What also makes this relationship different is its inter-regional nature. Furthermore, the 1980 ASEAN-EC Cooperation Agreement has helped create a wide range of joint policy initiatives and business contact groups making the EU’s economic diplomacy with the ASEAN states arguably the most interactive of all with its East Asian partners. Nevertheless, attempts to update the 1980 Agreement on a ‘partnership of equals’ basis (CEC 1996b) has been beset by political obstacles at the national level.49 Parallels here can be drawn with the economic relations between the EU and Hong Kong, which are also now post-colonial and moreover largely hinge on the pivotal role played by one member state, i.e. the UK. How the new Special Administrative Region of China conducts its economic diplomacy with the EU and other international economic partners raises interesting questions of governance.50 These will undoubtedly be considered very carefully by Taiwan, whose own sovereignty disputes with Beijing have kept the island state’s economic diplomacy with most third countries at an informal level. As Taiwan is no longer a member of any major international forum after China’s normalisation of relations with the West, its economic diplomacy with the EU has remained the most under-developed of the East Asian group.51 Yet Taiwan’s current position as the EU’s tenth largest trading partner, higher even than either Canada or Australia, necessitates that a strong informal economic diplomacy be maintained. The EU’s economic diplomacy with Korea was only advanced and formalised after the onset of democratic reform in the country from the early 1990s onwards (CEC 1996c). We mentioned earlier that EU-Korea trade and investment flows have expanded considerably during this decade. Yet Korea’s aggressive export practices in key sectors have also generated problems for the EU which has responded by applying a comparatively high number of ADDs on Korean imports.52 Despite ongoing trade frictions in EU-Korea economic relations, Korea’s growing stature within East Asia as its third largest economy holds yet unexplored strategic value for the EU if it can persuade the Koreans to become its advocate in Asia-Pacific affairs (Dent 1998a). This has to some extent been proven by Korea’s past support of the EU when it sought ‘dialogue partner’ status to APEC, although this bid was not actually successful. Korea’s admission to the Organisation for Economic Co-operation and Development (OECD) in 1996 also improved the scope for co-operation with Europe in economic affairs. ASEM: the new inter-regional framework The most important recent development in EU-East Asia economic diplomacy has been the creation of the ASEM dialogue framework. This essentially emerged out of the EU’s existing inter-regional arrangement with ASEAN to incorporate

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31

Japan, China and Korea in new summit-driven negotiations (CEC 1996d). Inaugurated at Bangkok in March 1996, the ASEM’s value at present remains largely symbolic, although it has made better than anticipated progress on trade facilitation and investment promotion initiatives. For the EU, it could provide a strategic counter-balance to APEC by reminding East Asia that Europe also has a stake in its future. For its East Asian participants, the ASEM constitutes a riskaverse strategy by diversifying their economic relations beyond the Asia-Pacific region. To many, the EU’s potential as a trade and investment partner is only just being explored. There are a number of observations that should be made regarding how the ASEM functions and its potential impact upon how EU-East Asia economic relations could be governed in the future. Unlike APEC, the ASEM does not aim mutually to align the regulatory environments of its participants but instead to establish both congruency in selected administrative procedures (e.g. customs, standards and certification) and to enhance familiarity among companies of the policy regimes they confront in their opposite region (Dent 1998b). Engendering a broader and deeper understanding between the EU and East Asia on economic issues on this basis is also hoped to close the psychic and cultural distances that had previously kept them apart. Like APEC, though, the ASEM framework could act as a catalyst for WTO liberalisation by helping to filter negotiating issues in preparation for WTO ministerial meetings.53 However, both interregional arrangements carry the latent threat of producing considerable diversionary effects upon trade and investment flows. In other words, the ‘open regionalism’ principle to which both ASEM and APEC subscribe is yet to be thoroughly tested. In addition, important questions exist surrounding how the ASEM’s interregional framework of relations is supposed to interface at the bilateral level (e.g. EU-China). Although the European Commission believes that the two are intended to have mutually reinforcing effects upon the other, this has not been exactly clarified. Furthermore, there exists the potential for confusion over where the actual demarcation of responsibility lies between different Directorate General (DG)1 authorities.54 Ironically, this will especially arise if the EU wishes to develop a more coherent approach towards East Asia. For example, where the Commission wishes to adopt a joint position towards both China and Japan on a common issue, should this be driven at the bilateral or ASEM level? There is, though, no reason why both approaches cannot be co-ordinated. Moreover, the ASEM must be allowed to develop in order to judge if it provides a more suitable approach than bilateral channels in dealing with certain issues. These issues are discussed in greater depth by Chapter 8. The 2nd ASEM summit in London provided an important opportunity for high-level discussions on the East Asian financial crisis. However, EU leaders were not willing to offer any real ‘crisis management’ solution beyond their rhetoric extolling the greater market and policy reform needed in East Asia. The only initiative of substance to emerge was the creation of the Asia-Europe Trust Fund, whereby Ecu30.9m would help resource the provision of technical assistance for those East Asian financial sectors in most difficulty. No new significant policy

32 EU-East Asia economic relations

framework was established to deal with potential crisis-induced problems that may affect EU-East Asia economic relations. Where commercial tensions arose, for instance from those negative outcomes highlighted in the previous section, these would be managed through the usual bilateral and multilateral channels. In the financial realm, policymakers and banking representatives from the EU and East Asia have worked in a largely ad hoc manner with the IMF to help resolve the crisis. While this constitutes a new governance structure of sorts, it is a relatively loose arrangement that may have an ephemeral existence depending on the future proportions of the crisis. Developments at the multilateral level The conduct of EU-East Asian economic diplomacy at the multilateral level has also become increasingly important. This is primarily due to the more active participation of both sides in multilateral economic regimes and the broadening of the new trade agenda. Most East Asian states have become WTO members and those that have not enjoy observer status.55 Neo-liberal institutionalists would argue that the responsibility now conferred upon the WTO and other international organisations (e.g. the OECD) to handle the new trade issues makes them part of the governance equation in their own right, although as neo-realists contend, this ultimately depends on just how much responsibility participating members are willing to part with (Qureshi 1996; Jackson 1998). More generally, the growing relevance and impact of ‘new’ trade issues have both broadened the scope of EU-East Asia economic relations and furthermore have encompassed more constituents with a stake in how they are governed.56 This relates to discussions concerning the interaction between the domestic and international economic agendas covered in Chapter 1. In summary, the new trade issues refer to: • The interface between competition policy and trade. As an OECD (1994a:2) report argues, ‘trade liberalisation and globalisation change the basic features of competition in ways that increase the potential benefits to be derived from greater competition policy convergence and greater international cooperation’. The OECD’s own Committee on Competition Law and Policy already provides a forum for discussions between enforcement agencies from developed countries. • Trade-Related Investment Measures (TRIMs). The relationship between trade and investment has become increasingly entwined and hence there is a need for FDI codes or rules on matters such as local content regulations and government incentives to attract FDI that are consistent with existing trade rules. • Trade-Related Intellectual Property rights (TRIPs). Breaches of IPR have become an important concern for both the EU and USA in their economic relations with East Asia. • Environmental clauses and social clauses (e.g. labour standards, human rights) in trade relations. Again, these have been pushed by both the EU and USA, although different approaches have been adopted.57

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• The stricter and wider application of the ‘national treatment’ principle, especially con cerning domestic tax policies and public procurement contracting.58 • Securing wider market access in specific sectors, particularly where government restrictions are designed to limit foreign company access. The Information Technology Agreement (ITA) negotiated at the WTO’s inaugural Singapore Ministerial Meeting held in December 1996 to which twenty-eight countries became signatories59 was an important example of this. • The increase in services trade. The Uruguay Round’s General Agreement on Trade in Services (GATS) was a key breakthrough in establishing the norms for service trade rules. Since then, WTO negotiations have led to specific agreements on liberalising basic telecoms trade, financial services, electronic commerce and other service sectors. • Harmonising the results of different regional integration arrangements (RIAs). Although the proliferation of RIAs during the early 1990s was not regarded as a threat to multilateralism by the WTO (1995), this is yet to be proven.60 The prospect of WTO negotiations being managed more on an inter-regional basis also carries some interesting questions relating to the governance of the new multilateral order. Most of these issues acquired their prominence during the Uruguay Round or in subsequent WTO deliberations, although a few have come through bilateral negotiations or OECD attempts to establish plurilateral codes of practice.61 The more technocratically difficult to manage tend to be discussed through the latter channels. However, the OECD’s persistent failure to conclude the Multilateral Agreement on Investment (MAI) may soon lead the WTO to become the new forum in which any common FDI rules are established, thus further extending its competence into trade-related matters.62 The process of multilateralising a wider range of trade-related matters that have traditionally been the realm of domestic policy, or indeed work conducted by other international organisations,63 has already led to numerous disputes over institutional governance and ownership. Moreover, such developments have been viewed with more concern by the East Asian states than by the EU.64 In general terms, this stems from both the EU and USA’s comparatively stronger structural power over the WTO and how this can be used to shape its agenda. Taken to the extreme, this may be interpreted as a new means to legitimise developed country interference in the internal affairs of developing countries.65 As I have argued elsewhere (Dent 1997b), the EU has been mainly preoccupied with tackling ‘internal’ barriers to international trade in East Asian markets (i.e. non-official trade barriers such as discriminatory domestic tax structures, complex administrative procedures and biased public procurement contracting) rather than the more conventional ‘external’ barriers (e.g. tariffs, duties and quotas). However, both the EU and USA’s respective structural power over influencing WTO outcomes is circumscribed by the organisation’s own independent procedural and enforcement capabilities (e.g. its trade policy reviews and disputes mechanism)66 which have been enhanced in comparison to the preceding GATT

34 EU-East Asia economic relations

framework. In addition, both Japan and China have the potential to exert their own significant structural power within the WTO, although China must of course first become a member. Japan is also helping developing Asian countries to learn how to manipulate WTO processes to their own advantage.67 A more fortified WTO regime would itself constitute a shift towards a more rule-based rather than a power-based system of international trade relations. As Woolcock (1993) has argued, the EU is more likely to concur to this change than the USA because European integration has made EU member states more accepting of rule-based or adjudicative methods of resolving disputes. Nevertheless, the EU’s faith in the WTO’s rule-based procedures may only run as deep as the degree to which it can fashion the rules themselves. In a 1997 article interview, Leon Brittan, the EU Commissioner responsible for external economic affairs, stated that: The EU has increasingly used the WTO…to negotiate open markets worldwide in high technology sectors where European industry has a competitive edge. The unity of purpose required to achieve this—and to shape WTO policy in the way Europe—will collapse if Europe ever takes a pick-and-choose approach to individual disputes.68 Thus far, the EU has made considerably more use of the WTO disputes mechanism than the East Asian group, both in its general dealings with third countries and with those complaints brought specifically against its East Asian trade partners.69 Furthermore, the WTO has assisted the EU’s cause by pressuring Korea into ending its ‘frugality campaign’ after it was deemed to have protectionist objectives.70 With the EU’s advanced technocratic capabilities comes the expectation that it will also more easily subsume the new trade issues into its commercial policy framework than most of its trading partners.71 This in itself could strengthen the EU’s bargaining position in multilateral trade negotiations. However, as we discussed earlier, the institutional management of the CCP is a relatively complex process. Higher degrees of complexity can be anticipated given the encroachment of the new trade issues into areas of EU domestic policy. This will arise from a more politicised CCP as certain member states oppose any challenge to national sovereignty that such an encroachment poses, or those decisions perceived as having detrimental effect upon their own internal affairs. Yet the parameters of the CCP have never been clearly defined which gives it an inherent malleability to adapt to a changing trade agenda. Certainly DG1’s high profile ‘market access’ strategy (CEC 1996e) alluded to such a broadening of the CCP to encompass the new issues. This process has entailed the introduction of new constituents with a direct interest or involvement in how the CCP is governed. For example, DG1 authorities now have to work more closely with fellow DGs with responsibility in other policy areas (e.g. social, environmental, competition, marine transport, energy) and also a wider band of transnational actors with trade-related concerns. The impact of these changes upon EU-East Asia economic relations will be most

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widely felt where these new constituents wish to use any influential leverage they have either to seek the restriction or tighter regulation of certain East Asian imports (e.g. for environmental reasons) or where they want particular ‘internal’ trade barriers to East Asian markets to be removed. Conclusion While Chapter 1 provided an introductory overview of theoretical perspectives on EU-East Asia economic relations, the purpose of this chapter has been to introduce the main substantive issues that are examined in greater detail in following chapters. In addition, a number of important observations have been made here regarding how new developments have affected the governance of these relations. Although the new ASEM framework has provided an important new basis for enhancing EU-East Asia economic relations, questions still persist over its compatible management alongside existing bilateral links and the new multilateral order presided over by the WTO. The impact of the WTO depends on the extent to which the EU can and will exert structural power over the organisation, how willing both the EU and East Asian countries are to resolve their trade disputes through its channels, as well as how far the WTO’s own scope and capabilities are allowed to develop. The new trade issues are not only relevant here but also regarding how they are shaping bilateral governance structures and processes in the EU’s economic relations with East Asia. Furthermore, it has been suggested that while the East Asian financial crisis has changed the immediate context of EU-East Asian economic relations, there has been no substantial change to the structure of how they are governed. We have also shown how the CCP is having to adapt to the encroachment of the new trade issues into the traditional realm of domestic policy, in addition to the institutional pressures and complexities this has introduced to its own governance. At the same time it was noted how there is greater resistance among East Asian countries to accommodate the expansion of the new trade agenda, not least because of the legitimacy it confers upon the EU and USA to meddle in their internal economic affairs. Yet calls to remove ‘internal’ barriers to international trade are generally being echoed by both EU and East Asian business, which have much to gain from new economic interdependencies being created between the two regions and whose representatives have also become increasingly active in the economic diplomacy process. Thus, the new developments in multilateralism and the globalisation of economic activity that have been highlighted here will bring increasing influence to bear on how EU-East Asia economic relations are governed at every level.

3

The EU and ASEAN

Introduction The EU’s economic relationship with the Association of Southeast Asian Nations (ASEAN) is unique among those studied over the next five chapters in that it represents an inter-regional relationship. Although ASEAN has not developed to the same level of integration as the EU, it has been arguably the most successful and enduring regional integration arrangement (RIA) that has emerged from the developing world. This group-to-group relationship is one of the EU’s most established in East Asia. It is made further distinct by the ex-colonial ties between European and Southeast Asian countries. Thus, the development of their more recent economic relations can to some extent be viewed in a post-colonial context. We shall also show how during the 1990s the EU-ASEAN economic relationship made further significant shifts from dependence to interdependence, based on Southeast Asia’s continued dynamic economic development. Nevertheless, both the region’s financial crisis of 1997–8 and EU disputes with ASEAN members over certain human rights issues have hindered attempts to recast the institutional framework of this relationship. As well as discussing these and other issues in depth, this chapter also sets a pattern for Chapters 4 to 7, whereby an initial analysis of the EU’s East Asian economic partner in question is made to provide an important background context to the chapter’s main study, namely the development of this partner’s economic relations with the EU. This is followed by an evaluative conclusion which pays more specific reference to international political economy (IPE) theoretical perspectives on the relationship. Southeast Asia: economic dynamism and change Southeast Asia has become one of the most dynamic regions in the world economy. In this section, we shall consider those factors that have contributed towards the region’s ascendancy. The economic development and internationalisation of the ASEAN states are analysed first, followed by a study of the origins and evolution of the ASEAN organisation itself. We shall then examine in closer detail its ambitions to create a free trade area, AFTA, by

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37

2003 and its compatibility with ASEAN’s commitments to the Asia-Pacific Economic Co-operation (APEC) forum. Finally, the most important economic challenges facing ASEAN in the future are considered. The ASEAN states: economic development and internationalisation Southeast Asia has a long history of international trade. For centuries its peninsula and archipelago territories have been a major thoroughfare for traders passing between China and the Indian subcontinent. This not only explains why the Southeast Asian states have traditionally been more outward looking than the once ‘hermetical’ economies of Northeast Asia (Lim 1995), but also the former’s relative ethnic diversity as traders migrated and settled across the region. The advent of colonial rule in Southeast Asia continued the legacy of internationalisation by linking conquered lands into an imperial division of labour. Most Southeast Asian countries succumbed to the Western colonialists: Myanmar, Malaysia, Singapore and Brunei to Britain; Vietnam, Laos and Cambodia to France; Indonesia to the Netherlands; the Philippines to Spain and then the USA.1 Independence came to some by the late 1940s (Indonesia, the Philippines, Myanmar) and to most others by the 1950s (Cambodia, Laos, Malaysia, Singapore), with Brunei finally becoming independent in 1984. During the early post-colonial years, much tension surrounded the nationbuilding process in Southeast Asia. Communism’s advance in Indochina (i.e. Cambodia, Laos and Vietnam) posed an ideological threat to the US-backed, market-conforming model prescribed to by their neighbours. There was also concern that the costly civil wars in the former (as well as in Myanmar) would have adverse spillover effects into the latter. Elsewhere, additional friction was generated by territorial disputes between Malaysia, the Philippines and Indonesia in the early 1960s, and Singapore’s separation from the Malaysian Federation in August 1965. The formation of ASEAN in 1967 was thus taken as an antagonistic gesture by the region’s Communist states by marking a clearer ideological divide in Southeast Asia. However, for the ASEAN states themselves it provided an important framework for conflict resolution. The ASEAN group remains a diverse collection of nation-states, yet there are also notable similarities within subsets of members. Singapore and Brunei are both rich ‘microstates’ with the former having developed arguably the most sophisticated techno-industrial base of any East Asian newly industrialised country (NIC). Moreover, Singapore is the main regional hub for financial and business services and has thus facilitated the development of other ASEAN states. Most members are resource-rich with many being oil and gas producers since the late 1970s (Brunei, Malaysia, Indonesia, Thailand). Malaysia in particular has managed to shift its dependency from primary to secondary exports,2 a strategy that has helped to make it the second most advanced in the group and one that was later emulated by other resource-rich members. The Philippines, which has undergone least structural change, has made only limited progress and consequently remains the least dynamic core ASEAN member3 (see Tables A.1, A.2).

38 The EU and ASEAN

The relatively poor performance of the economy of the Philippines can also be attributed to a series of domestic political problems. This contrasts with the political stability and continuity experienced in many other ASEAN countries, notably in Malaysia, Singapore and until quite recently in Indonesia,4 which created a generally more conducive environment for enterprise to flourish, allegations of ‘crony capitalism’ notwithstanding. Although most Southeast Asian countries have pursued market-conforming economic policies, these have invariably been structured within a broad state-planning framework.5 However, ASEAN’s developmental state agencies do not exercise the same degree of bureaucratic guidance over the economy as their northerly counterparts (see Chapters 4 to 7). In recent years, many ASEAN states have also witnessed the emergence of more assertive and influential business associations that have sought alliances with reformist technocrats in economic ministries, referred to by Doner (1991) as a process of ‘inclusionary institutionalism’. Such a decentralisation of the developmental state has been accompanied by deregulatory policies in the 1990s across Southeast Asia, yet the state remains active in orchestrating endeavours to accelerate domestic techno-industrial development. Like their East Asian NIC counterparts, the dynamic economic development of the ASEAN states has been principally export led. Singapore’s early switch to export-oriented industrialisation (EOI) in the mid-1960s had positive demonstration effects for the others. Malaysia, Thailand and the Philippines initiated their EOI strategies to varying degrees of conviction and effectiveness in the late 1960s, while Indonesia did not follow until the early 1980s (Ariff and Hill 1985). Table 3.1 shows that the USA has been a prime export market for the ASEAN states while Japan has served as an essential source of imports. As a group, ASEAN’s share of world trade has risen consistently in recent decades, with 4.6 per cent of world imports and 4.1 per cent of world exports in 1997 (see Table A.9). Many Southeast Asian economies have also developed a notable capital dependence on inward FDI flows.6 Singapore actively courted investment from US electronics manufacturers from the late 1960s onwards. Malaysia’s foreign to domestic investment ratio was as high as 60:40 in 1993, although this subsequently moved towards parity during the latter 1990s. Thailand and Vietnam have increasingly played host to investments from Singapore, Hong Kong and Taiwan as guanxi business links continue to extend across the Chinese diaspora.7 The region in general experienced a substantial wave of inward investment as a consequence of the 1985 Plaza Accord’s currency realignments that entailed a significant appreciation in the yen and subsequent appreciations in the currencies of East Asia’s first generation NICs. The USA’s withdrawal of its Generalised System of Preferences (GSP) status from the latter in 1989 provided additional incentive for East Asia-based companies to relocate further south. The varying stages of development between ASEAN economies have led to a vertical integration of transborder production systems, with Singapore, Malaysia and increasingly Thailand responsible for most high value-added activities while the remainder play host to lower-end production. Horizontal linkages have also been facilitated by guanxi networks that connect Chinese business

Notes: 1 Hong Kong, Korea and Taiwan. 2 Excludes Taiwan for this year. 3 Includes the Caribbean states.

Source: IMF Direction of Trade Statistics Yearbook, various editions.

Table 3.1 Geographic breakdown of ASEAN’s international trade (percentage per trade partner, 1960–97)

40 The EU and ASEAN

communities across Southeast Asia. The region’s export processing zones (EPZs) still play an important role in attracting inward investment8 and have become building blocks for the sub-regional economic zones (SREZs), or ‘growth triangles’, that have emerged more recently (see Chapter 8). In brief, these comprise the Southern Growth Triangle or SIJORI (Singapore, Malaysia, Indonesia), the Eastern Growth Triangle (Malaysia, Indonesia, the Philippines), the Northern Growth Triangle (Malaysia, Thailand, Indonesia) and the Mekong River SREZ (Thailand, Vietnam, Cambodia, Laos, Myanmar, China—Yunan and Guangxi provinces), each involving contiguous states in joint transborder development projects that are frequently geared to promote or extend international subcontracting networks (Thambipillai 1998). However, the momentum behind Southeast Asia’s economic development was significantly abrupted by the 1997–8 East Asian financial crisis. Among those ASEAN states that experienced severe financial difficulties were Indonesia, Thailand, the Philippines and Malaysia. These were triggered by speculative attacks upon newly floated currencies, beginning with the Thai baht in July 1997, which later exposed and exacerbated economy-wide liquidity problems. Indonesia and Thailand both received assistance from the International Monetary Fund (IMF) in the form of respective $37.0bn and $17.2bn rescue packages, but these failed to prevent a currency collapse and a widespread loss of confidence in Southeast Asia’s financial systems. Japan and Korea’s financial difficulties at the time compounded the region’s own. Consequently, short to medium-term economic growth estimates for most ASEAN states were downgraded, while far-reaching structural reforms were prescribed as a solution to Southeast Asia’s ailments. The origins and evolution of ASEAN The Bangkok Declaration, ASEAN’s founding document, was signed on 8 August 1967 by its five original members—Malaysia, Singapore, the Philippines, Indonesia and Thailand (the newly independent Brunei joined in 1984). The initiative was conspicuously promoted by the USA which was seeking to coalesce a group of ideologically compatible regimes in Southeast Asia to act as a bulwark against further communist advance in the region. Thus, Sum (1996) concludes that ASEAN’s inception was ‘threat-driven’, yet it was also an attempt by its members to put their own past conflicts aside and forge an inter-state alliance. Despite such overt political motivations behind forming ASEAN, the organisation’s main stated objectives were to facilitate co-operation in economic, social and cultural matters. Yahuda (1996a:72) argues that this was to ‘minimise communist and non-aligned possible suspicions about its orientation.’ With the exception of the proposal to create a Zone of Peace, Freedom and Neutrality (ZOPFAN) in 1971, which envisaged the creation of a neutralised security zone in Southeast Asia, ASEAN lay more or less dormant up to 1975. However, after the communist victory in the Vietnam War that year, ASEAN was prompted into organising its first summit which was held at Bali in February

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41

1976. Members agreed that their economic ministers should meet regularly to develop and implement economic co-operation proposals. The most important of these were the Preferential Trading Arrangements (PTA) which commenced operation in early 1977, entailing a reduction of tariff levels on intra-ASEAN trade. Yet widespread exclusions meant that by the mid-1980s the PTA only affected at most 5 per cent of this trade. Moreover, the ASEAN Industrial Projects (AIPs) and ASEAN Industrial Joint Venture schemes, both initiated around the same time, proved just as disappointing. The Treaty of Amity and Cooperation was also introduced at Bali in which ASEAN states reaffirmed their political loyalties to each other. A second summit soon followed in August 1977 at Kuala Lumpur that saw the start of ASEAN’s ‘dialogue partner’ framework. This brought together foreign ministers from ASEAN, the EC, USA, Japan, New Zealand, Australia and South Korea in a forum to discuss Southeast Asian security matters. Regional security continued to dominate ASEAN’s agenda throughout the 1980s, with particular focus on Vietnam’s occupation of Cambodia that lasted from 1979 to 1989. The USA maintained its considerable financial and political support for ASEAN during this period. At ASEAN’s third summit at Manila in 1987, its members also considered the growing economic influence of Japan in Southeast Asia and a five-year plan to extend PTA coverage to 90 per cent of intraASEAN trade, although this never materialised. Such matters were, however, precursors of substantial change to come. Up until the 1990s, ASEAN’s raison d’être had been primarily political, but the end of the Cold War together with the growing trend towards globalisation and regionalism presented new challenges. Central to establishing a clearer economic rationale was a proposal tabled at the group’s fourth summit held at Singapore in January 1992 to create an ASEAN Free Trade Area (AFTA) within fifteen years. This was an ambitious plan given ASEAN’s previous record on economic co-operation. Moreover, the AFTA project has only partially eclipsed ASEAN’s security concerns. Although US military presence in Southeast Asia has been substantially downscaled, security threats persist, especially concerning multiple territorial claims in the South China Sea, e.g. over the Spratly Islands. In 1994 the ASEAN Regional Forum (ARF) was established as an enhanced ‘dialogue partner’ framework with new partners (Russia, China, Vietnam and Laos) added to the original list (the EU, USA, Canada, Japan, South Korea, Australia and New Zealand) with India joining later in December 1995 (Simon 1998). Vietnam actually acceded to ASEAN membership in July of the same year year, while Myanmar and Laos joined in July 1997 and Cambodia is due to join shortly.9 Given ASEAN’s underachievements, especially on matters of economic cooperation, it had done well to survive into the 1990s. As Redmond (1992) notes, ASEAN’s success as an organisation, when compared to its counterparts in other developing regions, owes much to the dynamic economic development of its members and not the dynamic of the organisation itself. Nevertheless, ASEAN’s future success is likely to be judged on its implementation of AFTA, not just between long incumbent members but also new, relatively less developed members.

42 The EU and ASEAN

The ASEAN Free Trade Area (AFTA) While the AFTA proposal constituted the basis for ASEAN’s new economic rationale in the post-Cold War era, it can also be understood as a response to external pressures. Both prolonged delays in the GATT’s Uruguay Round and intensified regionalist activity in both the developed and developing world during the early 1990s presented a future possible scenario of entrenched protectionism and trade bloc proliferation. Furthermore, many of ASEAN’s economic rivals could anticipate preferential access to important regional markets: Mexico to NAFTA and the Central and East European (CEE) economies to the Single European Market (SEM). AFTA therefore constituted a risk-averse strategy in the face of such challenges that confronted ASEAN members. Internal pressure has also come from Southeast Asia’s business sector that has long been a significant promotive force in calling for further regional integration and of AFTA itself (Lim 1996), seeking to exploit the opportunities that an integrated market of around 470 million people would offer. The centrepiece of AFTA is the Common Effective Preferential Tariff (CEPT) scheme which originally aimed to reduce intra-ASEAN tariffs on manufactures and processed agricultural products10 to between 0–5 per cent by 2008. At the ASEAN Economic Ministers meeting of 1994, it was agreed to bring this date forward to 2003 and also to expand the coverage of the CEPT by phasing in the original ‘temporarily excluded’ products into the scheme’s Inclusion List by the year 2000.11 This means that by this time around 98 per cent of intra-ASEAN trade will be subjected to no more than 5 per cent import tariffs, and by 2003 about 79 per cent of intra-ASEAN trade will be completely tariff free.12 Vietnam does not have to comply to CEPT targets until 2006, while ASEAN’s newest members—Laos and Myanmar— were initially to remain outside the scheme. Of paramount importance to creating a free trade zone within ASEAN has been AFTA’s objective to promote the region’s efficiency as an export production location in order to attract further inward investment from third countries. Thus, the recently introduced ASEAN Investment Area (AIA) concept, which runs parallel to AFTA, can be seen as part of the same process. Tariff rates vary greatly across ASEAN, being comparatively high in Thailand, Indonesia, the Philippines and Malaysia but notably low in Brunei and virtually non-existent in Singapore.13 There has, therefore, been much debate about the relative distribution of AFTA’s benefits within the group. Singapore stands to gain not just because of its comparatively liberal tariff regime but also owing to its highly internationalised production interests in Southeast Asia. Moreover, Singapore’s facilitative role played in the region’s commercial transactions means it benefits further from any increased intraregional trade AFTA induces. Yet Singapore’s small size implies that it will not receive the largest absolute portion of benefits. Other countries, which like Singapore have relatively high ASEAN-based trade ratios, will also gain proportionately more from AFTA’s trade liberalisation. However, intra-

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43

ASEAN trade remains around only 20 per cent of total ASEAN trade, a relatively low figure for a prospective trade bloc14 and a common predicament for regional groupings of developing countries whose main export markets and import sources lie in advanced industrial economies. Furthermore, views differ over the impact AFTA will make. For instance, Imada (1993) concluded that the CEPT scheme would lead to a significant increase in intra-ASEAN trade, while both Kumar (1992) and Santos (1993) contend that non-tariff barriers (NTBs) may prove to be more significant barriers to intra-regional trade than ASEAN’s current tariff regimes. Creating a free trade area within ASEAN has been seen by some as serving another end, this being to promote the region’s efficiency as an export production location so as to attract further inward investment from third countries. Bowles and MacLean (1996) have argued that AFTA is aimed more at outward-looking investment creation than inward-looking trade creation. Thus, AFTA may be perceived as a collective EOI strategy, or simply a method for enhancing other more informal but perhaps more significant forms of regional economic integration taking place in Southeast Asia. Tariff liberalisation will work to reduce the transaction costs of the region’s SREZs and other forms of transborder networked trade. Future challenges Notwithstanding the considerable problems presented by Southeast Asia’s recent financial crisis noted earlier, ASEAN faces a series of important challenges elsewhere (Dosch and Mols 1998). The ASEAN group should still be considered as a collection of nation-states whose economic integration owes far more to corporate and sub-regional driven initiatives than institutional design. This is likely to remain the case for some time. Even if AFTA has profound effects on ASEAN’s institutional framework and political economy (Pelkmans 1992), its participating states are expected to resist moves to extend ASEAN’s organisational structure beyond the permanent Jakarta-based secretariat level towards any EU-modelled supranational agencies, for this is not the ‘Asian way’ (see Chapter 8). However, it remains to be seen if AFTA can function effectively under ASEAN’s current governance structure. As we noted earlier, ASEAN’s future success as an organisation will be judged largely on its ability to realise AFTA’s objectives. In addition to the important political and security-related challenges facing the ASEAN states, they must also come to terms with other emerging economic challenges. The CEE economies continue to rival the Southeast Asian NICs in both international markets and attracting inward investment. Moreover, the accession of some to EU membership will confer further ‘Single Market’ advantages. We have also noted Mexico’s relative access advantages to the US market over the ASEAN states. This will be broadened to other Latin American NICs under the forthcoming Free Trade Area of the Americas agreement, albeit on comparatively less preferential terms to NAFTA. Closer to home, the

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ASEAN economies must also consider how to respond to the potential trade and investment diversionary effects of a booming China, as well as the new source of commercial opportunities it presents (Chia and Bifan 1992; Zhang and Hock 1996). Returning to the issue of AFTA, there has been much debate concerning its place within the broader APEC regional initiative to create a free trade and investment zone across the Asia-Pacific by phased-in 2010 and 2020 deadlines (Crone 1992; Soesastro 1995; Parrenas 1998). The decision taken by the ASEAN states to bring forward AFTA’s intended completion by five years to 2003 was interpreted by many as motivated by fears that the APEC process would overtake or subsume ASEAN’s own regionalist endeavours. Yet the ASEAN states must achieve a balancing act between creating AFTA while prescribing to APEC’s ‘open regionalism’ principle, whereby trade liberalisation is conducted on a MFN-consistent and therefore non-exclusory basis. This would naturally undermine the purpose of maintaining AFTA if it were to become essentially ‘permeable’. However, it is still debatable whether the APEC zone will ever materialise and the ASEAN states are committed to the 2020 deadline, a full seventeen years after AFTA’s own. As also noted in Chapter 8, the APEC process could assist the AFTA project by helping ASEAN to reach common positions on future tariff liberalisation. Finally, the ASEAN state’s interest in realising AFTA is also founded on enhancing their collective bargaining leverage in international affairs. Attempts at converting AFTA into political capital can therefore be anticipated in the future. It may also provide a firmer basis to extend ASEAN’s inter-regional affairs, which began with its Co-operation Agreement with the EC in 1980. However, for these objectives to be realised ASEAN must come to terms with two main structural problems (Buszynski 1998). The first relates to its Indochina enlargement which could potentially dilute cohesion within the group. This would generally stem from a more diversified membership which raises the proclivity for sub-group coalitions to form within ASEAN. The international dispute over the legitimacy of Myanmar’s military regime could provide a catalyst for such cabalistic behaviour, exposing the historic division between mainland and maritime Southeast Asia. The second problem is partly related to the first and concerns the future of economic co-operation within ASEAN. We previously noted how the Indochina members’ lower level of economic development has forestalled the full extension of AFTA across ASEAN territory. Moreover, the organisational structure of ASEAN is principally geared to manage political issues. The elevation of economic issues during the 1990s has often revealed the inadequacies of ASEAN current inter-governmental mechanisms. An example of this was the problem of co-ordination that arose between ASEAN foreign and economic ministers at the ASEAN-EU meeting at Karlsruhe in 1994 where, because of their relative lack of influence within the ASEAN framework, the latter were ill-informed regarding matters of economic co-operation being discussed. It is now to ASEAN’s economic relations with the EU that we shall turn.

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EU-ASEAN economic relations The first direct commercial linkages between Europe and Southeast Asia were forged from the fifteenth century onwards by the eastward excursions of the European maritime powers. From these developed the series of colonial relationships noted earlier that persisted into the post-war era. Over this period, European firms dominated many aspects of Southeast Asia’s economy. In more recent times, ASEAN has become one of the EU’s most dynamic trade and investment partners and the cornerstone of its New Asia Strategy. Despite the new impetus to EU-ASEAN economic exchange that was apparent from the early 1990s, economic diplomacy between the two regional groups has been soured by recent political disputes over East Timor and Myanmar. However, the new Asia-Europe Meeting (ASEM) framework has provided some distraction to these disputes and enhanced the existing framework in which EU-ASEAN relations are promoted. The following sections analyse the development of EU-ASEAN economic relations. We shall first examine the initial diplomatic contacts made between both sides, as well as the exploration of mutual interests that followed. The shift from dependence to greater interdependence is then examined. Finally, attempts made in the 1990s to recast the institutional basis of the EU-ASEAN economic relationship are considered with extensive reference to parallel developments during the decade. First contacts and exploring mutual interests The centrepiece in the framework of ASEAN-EU relations remains their 1980 Co-operation Agreement. At the time, it constituted a significant event for both parties. The Agreement represented the first inter-regional pact that each had made with another distinct regional bloc of countries.15 For the EC member states, the Agreement also provided an opportunity to recast their framework of relations with ex-colonial countries and promote European interests in the world’s most dynamic developing region. The ASEAN states hoped the Agreement would help diversify their external relations beyond the confines of the Asia-Pacific region and bolster links with an emergent economic superpower. Let us first plot the events and developments that led to the signing of the 1980 Agreement. While ASEAN’s initial interests concerned the dual process of nation building and reaching mutual reconciliation within the group, a key objective of the Bangkok Declaration of 1967 stated that ASEAN members would strive to ‘maintain close and beneficial co-operation with existing international and regional organisations with similar aims and purposes’. The first indication of ASEAN’s interest in establishing close links with the EC came at the group’s fourth Foreign Ministers Meeting in March 1971. This principally derived from Malaysia and Singapore’s concerns of the potential adverse effects the UK’s then impending accession to the EC would have upon its producers: Britain’s entry

46 The EU and ASEAN

into the Community would lead to an effective dismantling of its Commonwealth trade preferences system and an adoption of the EC’s Common Commercial Policy (CCP).16 Furthermore, as no ASEAN country appeared eligible for inclusion into the Community’s existing Lomé Convention arrangement,17 securing improved access to the wider EC market was also a general ASEAN objective.18 In June 1972, ASEAN set up the Special Coordinating Committee of ASEAN Nations (SCCAN) which consisted of ASEAN trade ministers whose collective task was to improve the group’s standing in the EC’s hierarchy of preferential trade partners. Also in the same month the ASEAN Brussels Committee (ABC), comprising ambassadors from diplomatic missions to the EC posted at the Belgian capital, was created to assist SCCAN’s work and met regularly with European Commission officials to discuss key issues (Table 3.2). Similar committees were subsequently established in London, Paris and Bonn, which also currently assist in conducting and maintaining EU-ASEAN dialogue. The EC’s response to these initiatives was generally positive. Britain’s accession to the EC had prompted a re-evaluation of the Community’s links with Southeast Asia as part of a broader re-assessment of its relations with developing countries in general. In July 1971, the EC had become the first commercial power to adopt a Generalised System of Preferences (GSP) scheme19 and as a consequence offer more favourable trade concessions to poorer trading nations which were not eligible for Lomé Convention membership.20 Furthermore, the EC’s apparatus for conducting economic and political relations with third countries was beginning to take shape through the recently inaugurated European Political Cooperation (EPC) framework and the embryonic CCP (see Chapter 2). The EC was therefore looking to develop its role as an actor in international affairs at this time. Nurturing ties with ASEAN provided a useful opportunity for the EC to help achieve this. Southeast Asia represented the most stable developing country region with promising economic growth potential and was also key mediators in the NorthSouth dialogue. Both the economic and political gains of partnership, albeit an imbalanced one, thus seemed attractive. However, relations with Asia, along with Latin America, were a relatively low priority in the EC’s foreign policy objectives during the 1970s and, moreover, were perceived to be more in the US sphere of influence than Western Europe’s (Regelsberger 1989). Hence, when the EC offered ASEAN a mutual commercial agreement in 1974, the former was reluctant to include a political dimension requested by the latter. The proposal was duly rejected by ASEAN,21 whose search for new assurances from its allies intensified in the mid-1970s as its international relations entered a precarious phase. The collapse of the Bretton Woods exchange rate system in 1971, the subsequent US dollar devaluation and 1973–4 oil crisis all combined to raise ASEAN’s fears of increased Western protectionism that would follow as a consequence of these ‘shocks’ to the international economic system. The US withdrawal from Vietnam in 1975 caused ASEAN more seriously to consider diversifying its external relations with the Western global powers so as to broaden its anti-Communist alliance. This became the central issue of discussion at ASEAN’s Bali Summit of 1976.

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Table 3.2 EU-ASEAN relations: the institutional framework

Source: European Commission.

The EC was an obvious target for alliance building given its growing economic and political significance and an unexplored potential for partnership (Mols 1990). West European states could also empathise with ASEAN in facing a proximate communist threat. Although Japan was an important economic partner for the ASEAN states (see Table 3.1), political relations were hampered by the former’s constitutional restraints on conducting a proactive foreign security policy and memories of its war-time involvement in the region.22 The Australasian countries were too weak and ASEAN was aware of developing too skewed a dependence on the USA. Hence, promoting closer relations with

48 The EU and ASEAN

the EC would serve as a valuable counter-weight to the assertive interests of both capitalist and communist powers alike. After the failure of the EC’s 1974 commercial agreement initiative, ASEANEC relations moved forward again with the creation of a Joint Study Group in July 1975 which prepared the path for future agreements between ASEAN and the EC. This marked the first step towards formalising EC-ASEAN relations. Additional momentum came from a new dialogue framework established between the ABC and the COREPER23 in 1977. This became a precursor to the first ASEAN-EC Ministerial Meeting (AEMM) convened at Brussels in November 1978 in which a structured political dialogue was established. In the following year, economic dialogue was initiated and both channels were institutionalised by the 1980 EC-ASEAN Co-operation Agreement signed in March at the Second AEMM in Kuala Lumpur. In EC jargon, the 1980 Agreement was classified as a ‘second generation’, in contrast with the wider ranging ‘third generation’ agreements made later with some Central and East European and Latin American countries. This included provisions on trade and development co-operation, promoting investments, joint ventures and other miscellaneous economic issues such as technological transfers. Although it is a co-operation rather than a trade agreement, the EC extended most-favoured nation (MFN) treatment to the ASEAN countries. This was intended to complement the GSP concessions which they already enjoyed, with the EC extending its eligible product list as part of the 1980 Agreement so that tobacco and a number of processed agricultural products were now included. The original framework and provisions of the Agreement were intended to run for five years with subsequent biannual reviews to be conducted thereafter. Its general objectives comprised: • strengthening regional organisations committed to economic growth, social progress and cultural development; • developing EC-ASEAN trade and economic relations on the basis of comparative advantage and mutual benefit; • contributing to the expansion of international trade; • facilitating the development of both parties’ human and material resources. Despite references to promoting closer inter-regional economic ties, the main substance of EC-ASEAN relations leading up to, and soon after the signing of the 1980 Agreement was predominantly political (Indorf 1983; Luhulima 1984). Vietnam’s invasion of Cambodia in 1978 and the 1979 Soviet invasion of Afghanistan were the core issues of discussion at the first two AEMMs. Enhancing political co-operation continued to dictate the agenda of other AEMMs held during the early 1980s.24 Early criticism of the 1980 Agreement focused on its lack of effective provisions to resolve the outstanding trade disputes between the EC and ASEAN (Redmond 1992). More generally, there was frustration over the Agreement’s failure to create a new framework for EC-ASEAN economic relations, even

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though it carried provisions on technical assistance, economic and commercial co-operation. In an early evaluative analysis, Reyes (1982:2) commented that ‘ASEAN-EC economic relations may be regarded as an aspect of the ongoing, albeit periodically stalemated North-South dialogue’. As we note later, this was despite the gradual increase in both trade and FDI flows between the two groups. A more positive approach emerged in 1985 when the first ASEANEC Economic Ministers Meeting was convened in 1985 at Bangkok (Table 3.3).25 However, while this yielded some practical outcomes, such as an initiative to make a detailed examination of investment conditions in the two regions, these too were received with limited enthusiasm. Moreover, in Schiavone’s (1989) view, the European Commission had failed sufficiently to engage the European business community in an interchange of views with its ASEAN counterpart across a range of related issues covered at the Meeting. He further argued that these issues lacked both breadth and significance. There was also subsequent disappointment over the ad hoc and infrequent basis on which these meetings were convened: the second Economic Ministers Meeting was not held until 1991 after the ninth AEMM at Luxembourg while the third and most recent was convened at Bangkok in 1995. From dependence to interdependence In its formative years, the basis of the EU-ASEAN economic relationship was essentially one of respective donor and recipient. Thus, there was an initial focus on developmental issues and attempts by ASEAN to improve its position within the CCP hierarchy of trade relations. The ASEAN states received a considerable degree of financial aid from EU member states which was often in excess of inward FDI flows from European firms. Given the relative economic weights of each regional group, ASEAN’s dependence on the EU was further apparent in respective trade partner shares. In 1980, the EU 15 represented ASEAN’s third most important external trade partner with 14.1 per cent of its total export and import trade (see Table 3.1), whereas ASEAN was responsible for only 3.0 per cent of extra-EU15 exports and 2.7 per cent of extra-EU15 imports (see Table A.3). Furthermore, EC-ASEAN trade flows had traditionally conformed to the typical North-South pattern of comparative advantage with ASEAN exporting labour-intensive products and receiving the EC’s capital-intensive products, thus reflecting Southeast Asia’s technological dependency on European companies. However, by the advent of the 1980s a more intra-industry pattern was emerging.26 In 1973, ASEAN manufacture exports to the EC as a share of its total EC exports was 25.5 per cent, but this had risen to 54.4 per cent by 1980 (Figure 3.1). This, of course, reflected the rapid industrialisation achieved by the ASEAN states, which to some extent relied on imported technology and capital goods supplied by European companies. While the ASEAN states had originally looked to the EC as a model for regional co-operation, the onset of ‘Eurosclerosis’ in the 1970s switched their

50 The EU and ASEAN Table 3.3 EU-ASEAN economic relations: main co-operative activities

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51

Source: CEC, DG1B.

attention to its deficiencies (Rajendran 1985; Rieger 1991). In subsequent years, a considerable body of literature has amassed that contrasts the emergent Asian-style regionalism with European-style regional integration. This issue is explored in greater detail in Chapter 8. However, it is useful to make a brief analysis here, including its bearing on the evolution of EU-ASEAN economic relations. First, the EU’s approach has been essentially contract or treaty based and managed with the assistance of supranational institutions, whereas ASEAN is founded on a consensus-building, inter-governmental model of regionalisation. Such dissimilarity is primarily due to politico-cultural differences and their manifestation in institutional structures, processes and interactions within each region, as well as the approach to external relations pursued by each group (Palmer 1991; Langhammer 1997; Palmujoki 1997). We shall note later how ‘value-system friction’ has significantly hampered the progress of EU-ASEAN economic diplomacy in recent years. In addition, the relatively heterogeneous composition of ASEAN membership has not been conducive to the group aspiring to or realising deeper integrative links between themselves. Such factors have also made it difficult for the EU and ASEAN to forge closer economic relations at a politico-institutional level. The very fact that both the EU and ASEAN are regional blocs has, nevertheless, worked to bring them closer on certain co-operative issues. In 1975, the EC applied cumulative rules of origin provisions to imports from ASEAN and other developing country RIAs.27 This has promoted transnational export-oriented production within these regions and hence de facto regional integration itself, particularly at a corporate and subregional level (i.e. Southeast Asia’s SREZs) but not at the institutional level per se.28 More recently, the success of the SEM programme revitalised ASEAN’s interest in European integration and had some part in inspiring the AFTA project. In the years that followed the 1980 Agreement, the EC and ASEAN witnessed a gradual rise in their mutual trade flows. Over the 1980–85 period, EC exports to ASEAN increased by 84.4 per cent from Ecu5.32bn to Ecu9.81bn, while ASEAN exports to the EC increased by 44.7 per cent from Ecu6.89bn to Ecu9.97bn (Figure 3.2). During this time, their investment relationship was also expanding with the cumulative stock of FDI from EC firms rising by 83.5 percent from $4,183m to $7,675m (see Table A.6). This represented an increase in the EC’s share of total inward FDI in ASEAN from 18.7 per cent to 21.7 per cent, second only to Japan whose own share rose by a smaller degree from 25.3 per cent to 26.0 per cent, while the third-

52 The EU and ASEAN

Figure 3.1 ASEAN’s exports to the EU by sector (1980, 1987, 1997)

placed US share rose fastest of all from 12.7 per cent to 17.5 per cent. Accompanying the expansion of EU-ASEAN economic exchange were various persisting trade disputes which particularly arose from the range of EU protectionist regimes that faced ASEAN exports:

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Figure 3.2 EU-ASEAN merchandise trade (1975–97) Source: Eurostat.

• • • • •

the treatment of ASEAN exports within the GSP scheme; the Multi-Fibre Agreement (MFA); the EC’s Common Agricultural Policy (CAP); various EC-level NTBs; EC member state protectionist measures that were permissible under Article 115 of the Treaty of Rome and thus outside the CCP.

Under the EC’s original GSP scheme, selected exports from beneficiary countries could enter Community markets tariff free, but subject to quantitative restrictions (QRs). These became more stringent in accordance with the degree of ‘sensitivity’ of the products concerned. Special arrangements for textiles were made in co-ordination with the MFA. The ASEAN countries have been significant beneficiaries of the EC’s GSP owing to its encompassing a broad range of sectors in which the Southeast Asian countries have a comparative advantage29 and also because it conferred greater advantages to the more competitive developing country producers.30 One would therefore expect that the GSP scheme helped to facilitate the significant import penetrations made by ASEAN producers in the EC’s ‘sensitive’ and ‘semi-sensitive’ product markets. However, research conducted by Langhammer (1982a) revealed that ASEAN export performance appeared to be better in the USA, where no GSP privileges were forthcoming until 1976, than in the EC during the initial years of the EC’s own scheme.31 Although Langhammer conceded that a range of other determining factors might explain this, it nevertheless cast doubt on the effectiveness of the EC’s GSP to promote ASEAN exports. Corbet (1982) and Ariff (1989) also criticised the EU’s GSP scheme for its

54 The EU and ASEAN

restrictive rules of origin, low quota provisions and high administrative costs incurred upon beneficiaries. Such factors explained why the utilisation of GSP quotas were under-optimised by the ASEAN states and most other qualifying countries.32 While ASEAN members were constantly seeking better access for particular product lines within the scheme (e.g. tapioca, palm oil and plywood), their paramount concern was to approximate the trade concessions bestowed upon rival ACP exporters under the Lomé regime. However, changes to the GSP scheme introduced in the late 1980s were to narrow further the scope of benefits enjoyed by ASEAN, especially the ‘accentuated differentiation’ provisions that limited GSP concessions to non-sensitive sectors. Consequently, ASEAN exports to the EU enjoying GSP status fell from 70 per cent in 1989 to around a third by 1994. The EC’s MFA regime had also been a point of significant contention for ASEAN. Under the MFA, which has been operative since 1974,33 developing country textile and clothing producers agree to restrain export production so as to enable their developed country counterparts to make structural adjustments within the industry in response to more intensified competition. The basic rules of the MFA were negotiated at a multilateral level, although developed country powers could determine how these rules were implemented. The MFA1 (1974–7) was most the liberal regime with 6 per cent growth allocated for export quotas and a significant degree of flexibility built into the quota provisions themselves.34 However, a new MFA regime was renegotiated in 1977 amid the global recession of the mid-1970s. Under MFA2 (1978–81), a global quota was introduced that effectively limited the growth of imports from all sources.35 Indonesia and the Philippines became subject to restrictions for the first time.36 Table 3.4 also shows a declining trend in the utilisation of MFA quotas by East Asian producers over 1979–82 period. To Langhammer (1986), this was indicative of the increasing informational costs and uncertainties borne from the administrative complexities of the regime. The MFA3 (1982–6) saw a continuation of new restrictions, such as the ‘anti-surge’ clause which aimed to counter sharp increases of imports from previously unused quotas. In addition, ‘reasonable departures’ provisions were introduced in the EC’s protocol arrangements that meant it could reduce the quota levels of a number of exporters, with East Asian producers being particularly targeted for this treatment. While the EC’s MFA regime offered more opportunities to developing country exporters in comparison with the US regime, from 1981 to 1987 only Indonesia and Thailand gained in their shares of EC textile and clothing imports, while Malaysia and the Philippines experienced no change and Singapore’s share declined. Under MFA4 (1987–91), the EC claimed to have liberalised its regime since it had made a 25 per cent reduction in the number of categories subject to quotas and removed the ‘anti-surge’ clause. However, as Pangestu and Hasni (1991) note, quotas were removed on under-utilised categories and the aforesaid clause had been inoperable. In a broader criticism of the EC’s regime, Langhammer (1986) argued that short-term discretionary

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55

Table 3.4 Average utilisation rates of quotas by East Asian countries in EC imports of textiles and clothing under the MFA, 1979–82 (%)

Source: GATT (1984).

changes in MFA market access conditions had discouraged investment in developing Asia’s textile and clothing sectors. Moreover, newcomer exporters were discriminated against in favour of established producers, thus impeding sectoral relocation and restructuring across East Asia. Like other developing countries, the ASEAN group has been highly critical of the EC’s Common Agricultural Policy (CAP). This not only relates to its inherent protectionism of the CAP (e.g. variable levies, QRs) but also the dumping of surplus EC agricultural stocks that result in unstable and depressed price levels in world markets. The more resource-intensive ASEAN economies have naturally been greatly affected by the CAP’s excesses. The Philippines particularly took issue with the EC over subsidies granted to European sugar producers which have had injurious effects upon its own industry. Both Indonesia and Thailand suffered significantly after QRs were placed on cassava in the early 1980s. As a consequence, the volume of Thailand’s cassava exports to the EC fell by 40 per cent after 1982, entailing a loss of $329m or 11 per cent of Thailand’s total earnings from exports to the EC. ASEAN’s agricultural producers were additionally disadvantaged by the discriminatory regime maintained by the EC in tropical products, such as cocoa, palm oil, tobacco, fruits and coffee, which granted the ACP group preferential access.37 During the 1980s, similar trade complaints from ASEAN arose concerning other industries where the EC has experienced deep structural decline. This not only applied to EC-level restrictions but also at a national level, where EC member states could invoke the Treaty of Rome’s Article 115 ‘escape clause’ and impose their own protectionist measures if the imports in question were having an injurious effect upon domestic producers. Table 3.5 shows how ASEAN and other East Asian producers (i.e. Hong Kong and Korea) were affected by various EC-level NTBs in the mid-1970s. Singapore was particularly targeted by export restraints, licensing obligations and quotas, the Philippines by health and safety regulations and Thailand by variable levies. However, it is also apparent that ASEAN exporters were not subject to the same degree of protectionism as their East Asian NIC counterparts, largely due to the less significant competitive threat posed by the former to EC industry. A similar

56 The EU and ASEAN Table 3.5 EC non-tariff barriers against imports from selected East Asian countries, 1974 ($m affected)

Source: UNCTAD (1979)

situation also applied to the EC national-level import restrictions placed on East Asian countries. As Table 3.6 illustrates, the total number of such restrictions on the ASEAN5 group during the 1981–5 period was exceeded by every East Asian counterpart listed. After the installation of the SEM in 1993, these were either removed or harmonised at the EU level to uphold the integrity of the enhanced CCP. Over the 1970s and 1980s, the EC’s trade disputes with the ASEAN states mainly concerned high tariff rates and the expanding range of ‘internal’ barriers to international trade affecting European exports in Southeast Asian markets.38 However, these did not constitute a significant source of anxiety within the EC for various reasons. We have seen how the EC was able effectively to mitigate the competitive threat posed by Southeast Asian exporters through Table 3.6 Applications approved under Article 115 against imports from selected East Asian countries, 1981–5

Source: Official Journal of the European Communities, Series C, Information and Notices, various issues.

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the trade policy regimes analysed above. The ASEAN states also lacked both the individual and collective geopolitical power to challenge EC protectionism in either bilateral or multilateral channels. Furthermore, by the early 1980s the EC-ASEAN trade balance was moving towards the EC’s favour (see Figure 3.2) which generally abated the pressure upon EC trade negotiators to secure market access gains. Moreover, their attentions towards East Asia were attracted elsewhere by Japan’s burgeoning trade surplus against the EC which become a major politicised issue at this time.39 However, the European perception of ASEAN as a minor economic partner was to change over the course of the 1980s. Southeast Asia’s dynamic industrial development during the decade had made the EC increasingly aware of the growing interdependent economic relationship that was evolving between itself and ASEAN. In this context, a number of trends are worth noting. By 1990, ASEAN’s share of extra-EU15 exports had risen to 4.8 per cent, thus becoming a larger export market than the whole of Latin America, while its share of extraEU imports had increased to 4.0 per cent, making it a more important source of imports than Canada and Australasia combined (see Table A.3). As Figure 3.2 indicates, the acceleration of EC-ASEAN trade flows was especially apparent from the late 1980s onwards: EU imports from ASEAN increased by 66.8 per cent over 1987–90, rising from Ecu10.0bn to Ecu16.8bn by the end of the period. Meanwhile, EU exports to ASEAN had increased even faster at 80.5 per cent, rising from Ecu8.9bn to Ecu16.1bn. Furthermore, Table 3.1 shows that the EU 15’s position as an ASEAN trade partner had improved slightly, with its share of total ASEAN imports and exports standing at 15.5 per cent and 15.9 per cent respectively by 1990. A growing interdependence was also manifest in sectoral trade trends with ASEAN manufacture exports to the EC as a share of the group’s total EC exports increasing from 54.4 per cent in 1980 to 58.4 per cent by 1987 (Figure 3.1). Among the group, the highest individual rates were attained by Singapore (86.4 per cent), Malaysia (83.7 per cent) and the Philippines (83.0 per cent). In addition, Southeast Asia had become a new strategic location for outward EU direct investment by the end of the 1980s, with a growing number of EC companies relocating their labour intensive sub-assembly and full assembly manufacturing activities to the region. Over the 1985–9 period, the stock of FDI from EC firms in the ASEAN5 group increased by 57.2 per cent from $7.7bn to $12.1bn, thus maintaining the EC’s position as the second largest inward investor in Southeast Asia after Japan. Moreover, in the structure of EU financial assistance to ASEAN there was a notable switch of emphasis towards economic co-operation and away from development co-operation and humanitarian assistance over the 1980s (Table 3.7), a further reflection of ASEAN being perceived by the EC as a more capable economic partner. Thus by the end of the 1980s, there were calls for a more equal partnership to be established within the institutionalised framework of EC-ASEAN economic relations (Wannamethee 1989). This was to set the tone for a new phase of EU-ASEAN economic relations in the 1990s.

58 The EU and ASEAN Table 3.7 EU financial assistance to ASEAN by category and time period (Ecu million)

Source: European Commission. Note: 1 Up to 04.1998 and includes ASEAN10.

Recasting the partnership Moves towards establishing a ‘partnership of equals’ in EU-ASEAN economic relations during the early 1990s were occurring within a broader context of change. At the multilateral and global level, the completion of the Uruguay Round, a growing consciousness regarding globalisation and the post-Cold War détente had produced both a general shift from geopolitics to geoeconomics. A greater emphasis on economic affairs in EU-ASEAN relations was to emerge as a result of these and other factors. At the regional level, ASEAN had to consider how the EU’s post-SEM trade policy would evolve, as well as the external impact of a future European economic and monetary union (EMU). Central and Eastern Europe’s market reformation also posed a new challenge to ASEAN by the region’s potential to distract EU trade and investment interest away from Southeast Asia. Similarly, the trade diversionary effects of the forthcoming AFTA and ASEAN’s participation in APEC were potential causes of concern for the EU. Furthermore, preparations for ASEAN’s Indochina enlargement were resonant of the EU’s own plans eventually to expand eastwards. In the face of deepening transpacific integration, the EU had to re-evaluate its strategic position vis-à-vis the wider

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East Asia region, and hence the role that its established ASEAN links would play. As Chapter 8 discusses in more detail, the new ASEM framework essentially grew out of the EU-ASEAN inter-regional link but which also encompassed Japan, Korea and China. At the industrial level, we have already commented on how Southeast Asia’s continued rapid industrialisation had brought about significant structural changes to EU-ASEAN economic exchange by the end of the 1980s. These trends showed no signs of abating into the early 1990s, with manufactured goods as a share of ASEAN’s exports to the EU rising from 58.4 per cent in 1987 to 78.6 per cent by 1993.40 The intra-industry trade ratios of ASEAN country trade with the EU had all risen over the 1989–94 period: Indonesia from 11.7 per cent to 26.3 per cent; Malaysia from 42.2 per cent to 46.2 per cent; the Philippines from 28.9 per cent to 44.7 per cent; Singapore from 45.3 per cent to 47.1 per cent; Thailand from 32.1 per cent to 34.1 per cent. While this offered broader scope for EU-ASEAN industrial co-operation, the EU was simultaneously under pressure to maintain or even extend its protectionist regimes against Southeast Asian producers. Economic diplomacy The above issues thus provided the initial background to EU-ASEAN economic relations in the 1990s and the objective of recasting the economic partnership. This was first attempted via institutionalised channels at the ninth AEMM in 1991, but negotiations became deadlocked owing to the persisting conflict between Portugal and Indonesia over East Timor. Indonesia had annexed this former Portuguese colony in 1975 and had been subsequently accused of human rights violations in the territory. Portugal was therefore unwilling to ratify any new agreement with ASEAN that might confer advantages upon the Suharto regime. However, at the following two AEMMs some progress was achieved in adapting the economic provisions of the 1980 Agreement to new realities.41 This was most notably achieved at the eleventh AEMM held at Karlsruhe, Germany in September 1994 which produced a number of significant outcomes: • the consensus that EU-ASEAN economic relations should be founded on the principle of greater equality and partnership; • the creation of an ASEAN-EU Eminent Persons Group (EPG), partly modelled on APEC’s equivalent42 (see Table 3.3); • a mutual commitment to implement the provisions of the Uruguay Round of GATT; • with respect to development co-operation, the need to prioritise human resource development, environmental issues and better targeting of poverty alleviation. In addition, Karlsruhe provided the momentum for the first ASEAN-EU Senior Officials Meeting (SOM) held at Singapore in 1995, the twelfth ASEAN-

60 The EU and ASEAN

EU JCC (see Table 3.2) in Brussels in October 1995 and the second SOM Meeting convened at Dublin in 1996 where more frank and open discussions on a wide range of issues took place, including those of a sensitive nature such as human rights. The ‘Karlsruhe drive’, as it subsequently became known, also coincided with the 1994 launch of the EU’s New Asia Strategy and helped pave the way for the first ASEM summit of 1996. However, it was the newly established EPG which was specifically charged with generating ideas on how a ‘partnership of equals’ in EU-ASEAN economic relations could be advanced. With this in mind, the main recommendations proposed in their first report published in 199643 were: • more regular convening of ASEAN-EU Economic Ministers Meetings; • EU and ASEAN governments to adopt more positive measures to assist trade facilitation and investment promotion between the two regions; • to establish a stronger and more effective ASEAN-Europe Business Council to promote corporate links between EU and Southeast Asian firms. In July of the same year, the European Commission published its own policy document entitled, Creating a New Dynamic in EU-ASEAN Relations (CEC 1996b) which echoed many the ideas presented in the above report. Within the document, the Commission considered two future directions that EU-ASEAN relations could take. The first was a protocol to the 1980 Agreement with an emphasis on inter-regional level objectives and mechanisms. The second was the signing of a New Joint Declaration, entitled ‘An Active Partnership’, which would entail a redefinition of general aims, an action plan to ensure the dynamic implementation of the original Agreement and the development of new actions within domains other than those identified in the Agreement. This approach stressed the need for closer private sector involvement within the current framework of institutionalised relations. Moreover, the Commission emphasised its relative flexibility as greater latitude was available here for inter-regional mechanisms and bilateral dialogues to coexist. Both approaches, though, aimed to broaden the scope of these relations into specific sectors of economic activity (e.g. transport, telecoms) as well as horizontal matters (e.g. IPR, industrial standards). However, neither option would place the ASEAN states on the same level of co-operative engagement with the EU as enjoyed by other Asian and Latin American countries which were signatories to ‘third’ generation agreements. As previously mentioned, the 1980 Agreement was a ‘second’ generation arrangement, but its upgrading could not be achieved while the ASEAN states maintained resistance to the incorporation of a human rights clause into a revised agreement. In the event, the European Commission stated its preference for the second option and after a somewhat difficult ratification at the Council of Ministers it tabled the proposal at the twelfth AEMM held in February 1997 at Singapore where it was duly accepted. Other outcomes from the meeting included an agreement to initiate co-operation on customs matters, the launch of ISQAP’s

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second phase and support for the ASEAN-EU Partnenariat scheme that promoted strategic alliance formation between EU and ASEAN small firms. Despite these positive developments, EU-ASEAN economic diplomacy fell victim to the ‘value-system friction’ identified earlier. The long-standing dispute over East Timor has already been noted, but this was joined in the mid-1990s by the Myanmar débâcle. For some time, the EU had imposed economic sanctions upon the country because of its human rights abuses. When Myanmar— a new ASEAN member since January 1997—sought official observer status with ASEAN backing at the then forthcoming November 1997 EU-ASEAN Joint Cooperation Committee meeting, the EU refused to concur.44 The ASEAN states made clear their view that European hypersensitivity over such issues was hindering the progress of their relationship. After the EU’s compromise of permitting an ‘informal and passive presence’ for Myanmar representatives was rejected by ASEAN, it was decided to postpone the November JCC where the adoption of a work programme designed to implement the ‘New Dynamic’ initiative was to have taken place. The persistence of this dispute led to a curtailment of EU-ASEAN diplomatic contact thereafter. However, interactions continued at the more informal level through various EU-ASEAN working groups and co-operative projects, the network having expanded during the 1990s (see Table 3.3). It was here that most progress in building a more equal partnership had been made. The different objectives apparent within the ASEAN group regarding their economic relations with the EU are also worth noting. Singapore’s position as a small, but highly developed and internationalised economy meant that it was concerned more with broader geoeconomic issues. Thus, the EU’s longer-term position in East Asia as a strategic counter-balance to other major powers (i.e. USA, Japan and China) was of greater importance to Singapore as an issue than the sectoral trade disputes that preoccupied ASEAN’s less advanced states. Singapore has also expressed greater interest in the EU’s regional integration agenda (i.e. the SEM, EMU and the anticipated eastern enlargement) than most of its Southeast Asian neighbours. To some extent Malaysia has also adopted a broader geo-economic perspective to its economic relations with the EU. Its desire to promote closer bilateral ties with Europe is strongly associated with Prime Minister Mahathir’s aspiration to establish Malaysia as a significant player in the international community. Furthermore, Malaysia’s relatively strong advocacy of the ASEM framework has been interpreted as further scepticism towards APEC, with Mahathir believing it to be essentially a US-driven process. The prime concerns of other ASEAN countries relate to EU sectoral protectionism which is perceived as a significant hindrance to their economic development. Trade relations The difficulties experienced in the institutional dimension of EU-ASEAN economic relations during the 1990s were compounded by both ongoing and new trade disputes. Although the Uruguay Round had helped temper the

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protectionist excesses of the EU’s Common Agricultural Policy, ASEAN’s criticism of the regime hardly diminished. Heavily subsidised sectors such as oilseeds were especially targeted by Southeast Asian trade negotiators (Lim 1997). The reclassification of oleochemicals (e.g. palm oil) and dry fruit products within the EU’s customs framework, which led to higher tariffs being placed on these goods, was a further cause of ASEAN concern. In October 1995, Thailand also requested WTO consultations with the EU over its import duties on rice. In textiles and clothing, the ASEAN states still faced considerable protectionism from the EU under its MFA quota arrangements, although under the terms of another Uruguay Round accord all MFA regimes were to be gradually phased out by 1 January 2005. While the EU was thus obliged to raise its quota limits by increasing increments leading up to this date, the sectors to which they applied were not reduced. Moreover, two extra product lines were added to the EU’s quota arrangements with Indonesia from 1995 onwards. A new significant problem for Southeast Asian producers arose during the 1990s concerning the EU’s anti-dumping regime. Dumping is said to occur if an export’s price is lower than the normal value of the product, whereby its normal value may be based on the domestic price in the country of origin or export, on the supplier’s export price to a third country, or on the cost of production in the country of origin. While dumping is seen to be an aggressive commercial practice, the European Commission only undertakes an antidumping investigation where it is causing or threatening to cause material injury to an EU industry and that the imposition of an anti-dumping duty (ADD) complies with EU interests. Such injury—which must at least afflict a major part of an industry—is judged according to various criteria, including the loss of EU market shares to the imports in question, unemployment, depressed EU market prices, loss of profits and low capacity utilisation.45 Two kinds of ADD exist, these being provisional and definitive. Provisional duties are applied for a limited period which allows the European Commission to consider its proposal to the Council of Ministers as to whether a definitive duty should be imposed.46 Alternatively, the culpable exporter may be offered the ‘undertakings’ option whereby the company promises to increase its prices to a level that eliminates either the dumping margin or, if less, the injurious effects of dumping.47 Between 1985 and 1990, the ASEAN5 were subject to only eleven antidumping investigations from the European Commission, representing 5.3 per cent of all EU investigations. However, in the following 1991–7 period, this had risen to forty-seven investigations and 20.9 per cent of the total (see Table A.8). Thailand, Malaysia and Indonesia had been particularly singled out for attention with sixteen, thirteen and eleven investigations undertaken against them respectively over this period. While these are high figures for any EU trading partner, relatively few investigations led to the actual imposition of ADDs. Table 3.8 shows that by November 1998 Thailand was subject to ten definitive ADDs, Malaysia eight, Indonesia five, Singapore three, the Philippines one and Vietnam one; Thailand was also subject to one

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Table 3.8 EU anti-dumping duties on ASEAN products (at November 1998)

Source: DG1C, European Commission. Note: A definitive countervailing duty (CVD) had also been in force on ball-bearing imports from Thailand since 06.07.93 up to this period.

provisional ADD.48 These were well below China’s own figures (thirty-two definitive) but comparable on average to those for Korea (nine), Taiwan (seven and one provisional) and Japan (seven). However, the ASEAN states have criticised the EU’s anti-dumping regime for being generally unpredictable and too susceptible to lobbying pressure from European industry representatives. In the EU’s defence, the European Commission maintains that its ADD procedures are WTO consistent and thus comply to a judicial process. Changes made by the EU to its GSP scheme during the mid-1990s were another cause of concern for the ASEAN beneficiaries.49 The group still enjoyed considerable advantages from participating in the scheme, receiving around 30 per cent of its total concessions in value terms in 1993.50 However, in 1995 the system of fixed and flexible QRs on industrial products was replaced by preferential CET duty concessions granted according to ‘sensitivity’ classification. Unlimited market access was also offered to GSP imports, although safeguard measures were still applicable under certain circumstances. These revisions meant that GSP imports were no longer eligible for automatic zeroCET rates, but attracted a Modulated Preferential Duty (MPD) commensurate with the degree of sectoral sensitivity associated with the products in question. Four types of classification exist:

64 The EU and ASEAN

• Very sensitive: a MPD equivalent to 85 per cent of the CET. Examples mainly include textiles and ferro-alloys. • Sensitive: a 70 per cent MPD rate. A wide range of products are covered, including chemicals, consumer electronics, cars and footwear. • Semi-sensitive: a 35 per cent MPD rate. A similarly diverse range of products in less sensitive sectors than the above, e.g. jewellery, calculators, watches. • Non-sensitive: a zero MPD rate applied to products deemed to not to possess any degree of sectoral sensitivity. Furthermore, the new scheme incorporated a ‘graduation’ mechanism which allowed the EU gradually to phase out GSP benefits for certain products from the more advanced countries. This is determined by criteria indices representing both the level of development and product specialisation found in a beneficiary country.51 For industrial products, specified benefits were phased out over 1995– 8, while those for agricultural products occurred over July 1996 to June 1999.52 Within the ASEAN group the following withdrawn benefits consisted of: • Thailand: plastics and rubber; leather and furskins; clothing; footwear; jewellery and precious metals; miscellaneous products (chapters 94–96); seafoods; vegetables, fruits, nuts and horticultural products; miscellaneous prepared foods. • Malaysia: plastics and rubber; wood; clothing; consumer electronics; cereals; oils, fats and waxes. • Indonesia: wood; footwear; oils, fats and waxes. • Singapore: electro-mechanical equipment. • Brunei: jewellery and precious metals • Philippines: oils, fats and waxes. • Vietnam: unaffected However, the withdrawal of ASEAN’s sectoral benefits was not as drastic as that experienced by China, Korea and Hong Kong. Moreover, Korea and Hong Kong were completely to graduate from the EU’s scheme in May 1998, admittedly along with Singapore—by far ASEAN’s most advanced economy.53 Nevertheless, these changes did have some significant impact on Southeast Asia’s less advanced economies whose dependence upon the EU’s GSP concessions was naturally more pronounced. The ASEAN states were also sceptical of the new social and environmental clauses that had been incorporated into the scheme which were to take effect in 1998.54 Under the respective terms of the clauses, beneficiary countries, in complying either to certain International Labour Organisation conventions or International Tropical Timber Organisation standards for sustainable forest management, would be eligible for lower MPDs. While this represented an award-based approach, the ASEAN states and other developing countries were cautious of any attempt by Western powers to embrace such issues within the framework of trade relations. As Palmujoki (1997) observed, the basis of ASEAN’s concerns had already been

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established with the publication of two European Parliament reports—one by the Committee on the Environment, Public Health and Consumer Protection (CEPHCP) and other by the Committee on Development and Co-operation (CDC) —both of which argued for the introduction of punitive social clauses in any forthcoming new EU trade agreement with ASEAN. Moreover, the CEPHCP proposed that a similar environmental clause be incorporated while the CDC defended the principle of conditionalising development and cooperation agreements in accordance with human rights and democracy records. Although such views were not adopted as part of EU policy towards ASEAN, the potential for ‘value-system friction’ was nevertheless relevant by once again demonstrating how EU-ASEAN economic relations were highly susceptible to such politico-cultural discordance. This is also applicable at the multilateral level where developed and developing countries are contesting the form and direction of the emerging WTO agenda. As discussed in Chapter 2, the EU and other developed powers have advocated the expansion of this agenda to include various new traderelated issues that, by their nature, encroach on traditional domain of domestic policy. The less advanced ASEAN states have been critical of this approach which in their view has helped consign the liberalisation of agriculture, textiles, clothing and other labour-intensive sectors to a slow track by comparison. As in the 1980s, EU disputes over ASEAN trade policies and practices in the 1990s have hardly registered. As ASEAN does not conduct a common external trade policy, disputes that have arisen continue to be managed between the European Commission and each separate ASEAN state. Because no one state has become a significant international power during the decade, these disputes have not been politicised as those with larger EU trading partners (i.e. Japan, China and Korea). Nevertheless, various commonalities exist regarding EU trade disputes with the ASEAN group. For example, the European Commission has expressed concern over the high tariff rates that persist in Indonesia, Malaysia and Thailand on both industrial and agricultural goods. It has been more concerned, though, over the prevalence of certain non-tariff barriers in most ASEAN states, most importantly: import licensing, public procurement practices, IPR and TRIMs violations, customs procedures and miscellaneous import prohibitions. A singular dispute of significance did arise over Indonesia’s car policy in which the EU, joined by the USA and Japan, complained that it breached the Trade-Related Investment Measures (TRIMs) Agreement and various WTO rules. This specifically related to Indonesia’s alleged discriminatory trade practices that permitted those companies investing locally to import their products under preferential conditions. The EU and Japan requested WTO disputes panel negotiations with Indonesia in June 1997, with the USA demanding the same two months later. This matter lay unresolved for over a year. Meanwhile, EU-ASEAN economic exchange continued to expand rapidly in the 1990s. The EU’s imports from ASEAN rose from Ecu16.8bn in 1990 to Ecu45.7bn by 1997, and its exports from Ecu16.1bn to Ecu45.5bn. Figure 3.2

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indicates how the relative balance in EU-ASEAN trade continued with ASEAN maintaining a minor surplus against the EU in most years. The ASEAN states’ share of EU imports and exports had also risen to 6.9 per cent and 6.3 per cent respectively by 1997 (see Table A.3), although the EU’s share of ASEAN imports and exports dropped to 14.7 per cent and 14.5 per cent in the same year (see Table 3.1). However, the East Asian financial crisis had a dramatic effect upon EU-ASEAN trade over the 1997 to early 1998 period, with Table A.7 showing a sharp decrease in EU exports to ASEAN (-Ecu7.6 bn) and a significant increase in EU imports from ASEAN (+Ecu3.6 bn). Regarding the distribution of ASEAN member state trade with the EU, Malaysia overtook Thailand to become the second most important trader among the group during the 1987–97 period, with Singapore remaining the most important (Figure 3.3). Figure 3.4 shows that Germany and the UK remained ASEAN’s most prominent EU trade partners over the same period. France and the Netherlands also have close trade ties with ASEAN. Trends in sectoral trade patterns showed a continued shift towards intra-industry exchange with the share of ASEAN manufactures as a percentage of total ASEAN exports to the EU rising from 78.6 per cent in 1993 to 84.6 per cent by 1997 (see Figure 3.1). A significant shift to more technology-intensive ASEAN exports was also apparent. In 1997, ASEAN exports of office machinery and computers to the EU accounted for 25.1 per cent of the total, electrical machinery 14.6 per cent, and telecoms and audio-visual products 7.8 per cent. During the 1990s, European FDI flows into Southeast Asia also accelerated. This particularly occurred over the mid-1990s where the stock of EU direct investment in the ASEAN5 group increased sharply from $23.3bn in 1993 to $66.2bn by 1996 (see Table A.6). Consequently, the EU’s share of the total FDI stock in the group rose from 16.7 per cent to 25.3 per cent over the period, thus making it the largest extra-regional investor in the region (Figure 3.5). By the mid-1990s, Singapore had also become a major European investor from the East Asian NIC group with an accumulated $3.057m worth of investment in 1995. Much of this investment was acquisitional, concentrated in the financial sector and located in the UK. Moreover, the general smallscale nature of Singaporean FDI projects in Europe explains why they have received less media attention than the multi-billion dollar manufacturing projects initiated by Korean firms in Europe during the mid-1990s55 (see Chapter 7). In the structure of EU financial assistance granted to the ASEAN group there was a continued shift of emphasis away from development co-operation to economic co-operation projects during the 1990s (see Table 3.7). Figure 3.6 shows that over the total period of EU assistance, the Philippines, Thailand, Indonesia and Vietnam have been the main beneficiaries. Since the mid1990s, the EU extended its European Industrial Bank (EIB) loan facilities to Asia and Latin America. As a result, the EIB were able to finance natural gas transport projects in Indonesia and Thailand and the extension of Davao Airport in the Philippines.

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Figure 3.3 ASEAN member state shares of EU-ASEAN trade (1987, 1997)

The impact of intensified regionalism Given the ambitious regional agendas of both the EU and ASEAN during the 1990s, each side expressed a clear interest in how the other’s agenda would be realised. According to Sengupta (1992), the initial concerns of the ASEAN states over the SEM programme could be summarised as: • the enhanced efficiency, and hence competitiveness of rival European producers; • the introduction of stricter product standards and the associated costs of compliance; • the removal of bilateral concessions given to ex-colonial ASEAN countries by EU member states; • increased levels of EU-wide protectionism (‘Fortress Europe’) and more stringent local content rules to help internalise the benefits yielded by the Single Market; • the diversion of potential FDI to the EU or CEE countries that may have been destined for Southeast Asia.

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Figure 3.4 EU member state shares of EU-ASEAN trade (1987, 1997) Source: Eurostat.

Figure 3.5 Inward FDI stocks in ASEAN by geographic origin (1996) Source: UNCTAD database.

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Figure 3.6 EU financial assistance to the ASEAN 10 group (1976–9 Source: European Commission. Note: Up to April 1998.

However, as Wagner (1991) observed, ASEAN would also benefit from the growth-induced demand for ASEAN imports and the simpler uniform standards now operating in the EU as a consequence of the SEM programme. However, the overall balance of the SEM’s effects upon ASEAN are difficult to quantify. The superior Single Market access enjoyed by Southeast Asia’s close industrial rivals in Central and Eastern Europe nevertheless remains a primary concern. This is currently embodied in the CEE countries’ ‘Europe Agreements’ with the EU and plans for an eastern enlargement in the early twenty-first century that will eventually confer their full access to the SEM. In the meantime, the CEE countries still have to contend with a level of EU protectionism similar to that faced by ASEAN states in certain areas, such as anti-dumping duties. The East Asian financial crisis has raised ASEAN’s interest in EMU and its potential to restructure aspects of the international financial system. The ASEAN states must also consider whether the euro is a viable reserve currency alternative to the dollar and yen. While EMU will further enhance ASEAN perceptions of the EU as an important global power, there are concerns that it could make the EU even more introspective than before. In comparison to its other trading partners, the EU had done little to promote the euro to the ASEAN group or explain to Southeast Asian companies how they would be affected by EMU in general. The EU has, though, taken an interest in how European companies will be affected by AFTA. In its initial 1996 report on EU-ASEAN relations, the EPG stated that countries which establish bilateral or regional free trade arrangements with potential diversionary effects should reduce tariffs for non-member countries concomitant to reducing those between participating countries. It went on to suggest that ‘alternatively and preferably, countries which wish to form free trade areas should also simultaneously undertake unilateral

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liberalisation on an MFN basis’ (CEC 1996b:5), a reference to the notion of ‘open regionalism’ which is explored in some detail by Chapter 8. As I have argued elsewhere, AFTA’s potential impact upon EU industry could take many forms (Dent 1998c). Regional integration arrangements such as AFTA are generally treated with some degree of caution by third country trading partners owing to the potential for new RIAs to have trade diversionary effects. Trade diversion arises when third country producers which offer a more competitive product than producers within the RIA are subsequently disadvantaged by relative tariff changes incurred by the RIAs internal liberalisation that is not matched by similar external liberalisation. For example, we have noted how AFTA aims to create a zero or minimal tariff zone within ASEAN. As with all free trade area agreements, each participating country retains the ability to determine its own external tariffs (i.e. on third country imports). Hence, some ASEAN members may decide to maintain relatively high tariffs on competitive EU imports if this enables their own comparatively uncompetitive producers to exploit the advantageous tariff position they now enjoy in other ASEAN markets. The ensuing increase in market shares achieved by these ASEAN producers at the expense of their competitive EU rivals will result in a negative welfare outcome. This is because ASEAN’s tariff regimes help support inefficient production as well as deny consumers the same tarifffree access to more competitive product alternatives. Conversely, economic theory suggests that the negative welfare effects of trade diversion are offset by the positive welfare effects generated by trade creation. This arises when the same internal tariff liberalisation allows more competitive RIA-based producers to expand their own share of the RIAs markets once held by their less competitive neighbouring rivals. While it is not the aim here to present an ex ante quantitative analysis of what AFTA’s tariff liberalisation would imply for EU business, we can make a number of important qualitative assertions. First, AFTA is supposed to comply with the principle of ‘open regionalism’, and hence ASEAN is committed simultaneously to liberalise its internal and external tariff regimes. This is reinforced by APEC’s even stronger advocacy of open regionalism which its Southeast Asian members are also obliged to support. Depending on how closely this is adhered to, the trade diversion effects of AFTA on the EU and ASEAN’s other trading partners should be thus minimised. It should also be noted that current tariff levels vary greatly across ASEAN, being comparatively high in Thailand, Indonesia and Malaysia but low in Singapore and Brunei, so most anticipated trade diversion effects will be attributed to the former subgroup. Second, trade diversion will affect those European operations located outside AFTA. European firms that have acquired ‘insider’ status through foreign investments should therefore enjoy the same benefits as their indigenous ASEAN counterparts. Most Southeast Asian economies have a notable capital dependence on inward FDI flows which implies that many foreign multinationals are positioned to take advantage of the CEPT scheme. As previously noted, the stock of EU direct investment in ASEAN is relatively

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high (see Figure 3.5; Table A.6). Thus, ASEAN-based EU multinationals stand to benefit or lose from the AFTA’s trade creation and any longer-term dynamic effects that tariff liberalisation will bestow upon ‘insider’ firms.56 Third, we acknowledged earlier in the chapter the mutually reinforcing relationship between the AIA and AFTA and how ASEAN is using AFTA to attract further foreign investment into the region. The emphasis on promoting FDI will particularly appeal to multinationals whose Southeast Asian operations are configured and co-ordinated across more than one country, and hence benefit the most from CEPT liberalisation. However, as previously discussed, there exists much debate over the degree to which AFTA will stimulate intraASEAN trade. Fourth, assuming that AFTA enhances ASEAN’s economic growth potential, its trade partners can anticipate an increase in the demand for their imports. This demand could arise through efficiency gains that consequently improve production factor incomes (e.g. wages, profits), which in turn lead to higher import expenditures, or through the need for ASEAN firms to acquire foreign capital goods in order to expand into a more unified regional market. The EU is a major provider of capital-intensive and technologyintensive products for Southeast Asian countries, as well as many of the luxury ‘boutique’ goods that their emerging middle-class consumers aspire to possess. ASEM: an extension of inter-regionalism Another important development in EU-ASEAN economic relations has been the ASEM dialogue framework which was created in March 1996. As Chapter 8 discusses at some length, ASEAN’s position within ASEM has been critical. Its original conception can be attributed to a 1994 Singaporean initiative to create a new inter-regional framework between the EU and East Asia that encompassed not just the ASEAN group but also Japan, China and Korea. The EU-ASEAN link provided some form of model on which ASEM was based, whereby a wider inter-regional exchange would be promoted in economic, political and cultural fields. The inclusion of the latter two dimensions ran the risk of aggravating ‘value-system friction’, and some ASEAN observers were indeed puzzled over why the EU was so keen to develop a political dialogue in particular when the associated issues were so contentious.57 Given that the new framework offered an alternative regime for conducting inter-regional relations, there was also the issue whether ASEM would dilute or strengthen the EU-ASEAN bond. In considering this, Pelkmans (1997) argued that the latter case was more likely owing to a number of factors. First, ASEM provides a new summit-level dialogue between the ASEAN and EU member states which has consequently raised the level of political contact between both regional groups. Second, the ASEM process is managed more in accordance with Asian-style principles of consensus and informality that are in some contrast to the more contract-based features of 1980 ASEAN-EC Agreement. Third, ASEM offers a broader framework in which wider regional issues can be addressed, an illustrative example being the first ASEM Economic

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Ministers Meeting held at Tokyo in September 1997 where finding possible solutions to the East Asian financial crisis was at the top of the agenda. Conclusion The major themes running through this chapter have included whether the post-colonial legacy of dependence has persisted in the EU-ASEAN economic relationship, how the EU has managed the Southeast Asian competitive threat, ‘value-system friction’ and difficulties experienced at the politico-institutional level of economic relations, the role of state and non-state actors, and the impact of each group’s respective regional agendas. These are analysed from different IPE theoretical perspectives in the analysis that follows. Neo-realists would stress the primacy of the nation-state in the structure and process of EU-ASEAN economic relations, despite their inter-regional dimension. The diversity of foreign policy interests of EU member states in Southeast Asia, to a large part determined by post-colonial links, has led in the past to coalition building within the EU on some issues (Regelsberger 1989). For example, Spain has given strong support to Portugal’s stance against Indonesia over the East Timor issue. Contrasting national interests among the ASEAN states have also been identified in this chapter, such as Singapore’s broader geoeconomic perspective on the EU-ASEAN relationship, Malaysia’s wish to develop more distinct bilateral ties with Europe and the less advanced state’s preoccupation with EU protectionist regimes. The variance of national interests within ASEAN explains why consensus on matters relating to the EU has often been elusive. At an organisational level, ASEAN’s relatively loose inter-governmental framework does not compromise national sovereignty in the same way as the EU’s supranationalism, thus allowing greater scope for nation-state objectives to be pursued. Neo-realists admit that this may prove counter-productive, especially where the achievement of relative gains within the ASEAN group based on an independent state strategy takes precedence over attaining higher absolute gains borne from a common group strategy. This helps explain why lowest common denominator objectives have prevailed both in ASEAN’s internal affairs and its external economic relations with the EU and others. Moreover, we can attribute ASEAN’s frequent failure to apply greater collective pressure upon the EU (e.g. in making favourable adaptations to its trade policy) to this predicament. In addition, Indorf (1983:105) made the observation in the early 1980s that EC-ASEAN relations in general were hindered by ‘the complexity of their organisations, the lack of procedural mobility and the stagnating effects of diverse national standpoints’. Neo-realists would argue that little has changed since then. They further point out that where the ASEAN states have collaborated closely, this is because structural changes to the international economic system have conditioned such behaviour, the AFTA project being a prime example. Maintaining close links with ASEAN has been important for the EU because

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of the continuity they represent with an important East Asian economic partner. The relatively harmonious nature of the EU’s longer-term economic relations with ASEAN in comparison to other East Asian partners has made this more so. Yet, neo-realists would argue how the EU has been willing to jeopardise this objective for the sake of upholding higher political principles. By adopting a tough stance on the human rights issues pertaining to East Timor and Myanmar, the EU places the development of its economic relations at the politico-institutional level at some risk. Furthermore, ‘value-system friction’ is simply a manifestation of interstate conflict according to neo-realism, whereby opposing socio-cultural values have helped influence the state’s foreign policy objectives. The neo-realist concept of hegemonic stability has also been applicable to EU-ASEAN relations. We noted earlier in the chapter that the EC was initially reluctant to develop ties with ASEAN owing to the perception that Southeast Asia lay more in the US sphere of ‘hegemonic’ influence. Despite Europe’s extensive post-colonial links with the region, the neo-realist argument follows that the EC did not want to compete with US interests over ASEAN and thus risk disturbing American hegemonic stability, which by the mid-1970s was already looking vulnerable. This situation persisted to some degree up until the 1980s when security matters continued to dominate the ASEAN agenda. However, the 1990s have seen a relative shift from politics to economics. As ASEAN’s largest extra-regional source of inward FDI and major trading partner, the EU’s potential to exploit this agenda shift is considerable. However, while the EU is an ARF dialogue partner, it nevertheless lacks the comprehensive security relationship with ASEAN that neo-realists emphasise underpins US economic relations with the group. Neo-liberals acknowledge the shift to a more pluralist agenda in EU-ASEAN relations but also stress the importance of other developments. For example, the role of non-state actors has become pivotal in the economic relationship, especially given the débâcles over East Timor and Myanmar at the politicoinstitutional level. Failures in the diplomatic realm contrasted with the rapid expansion of EU-ASEAN economic exchange witnessed in the 1990s. More extensive commercial linkages have been forged between European and Southeast Asian firms as a consequence of these trends and also from the numerous business-related contact groups and collaborative activities promoted by the lower politics of EU-ASEAN co-operation (see Table 3.3). Thus, business representatives and other transnational non-state actors have taken greater responsibility for maintaining the momentum of EU-ASEAN economic relations at a time of a diplomatic impasse. At the outset of formalised attempts to promote the EU and ASEAN’s economic relationship, we noted how both sides were criticised for failing effectively to engage a wider range of non-state actors, and particularly business representatives, in this process. A visible complex interdependence applies not only to the mix of state and non-state actors in the management of a more transnationalised EU-ASEAN economic relationship, but also to the wider range of interconnected issues that define it. According to neo-liberals, this is evinced by the broadening of the

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EU-ASEAN economic agenda to include technology, the environment, human resource development, labour standards and other issues in addition to trade, investment and financial assistance. Moreover, the expansion of this agenda demonstrates an impulse from both sides to create a co-operative framework of economic relations rather than accept conflict as an inevitable outcome. However, we have seen how conflict has invariably become a feature of EU-ASEAN relations. Most ASEAN states have been suspicious of the EU’s policy to include environmental and social clauses within its GSP scheme, as well as its role in shaping the WTO’s new trade agenda. Consequently, ‘valuesystem friction’ has applied not just to human rights but also to the multilateralisation of domestic economic policy which many ASEAN states have resisted (see Chapter 2). More traditional instances of trade conflict have also been evident where EU surplus capacity problems have arisen, and hence where ardent protectionist regimes still face ASEAN producers, e.g. in agriculture, textiles and other labour-intensive manufacturing sectors. Both the EU and ASEAN, though, have embraced the neo-liberal notion of ‘open regionalism’ whereby external and internal free trade are simultaneously promoted by the regional group. Notwithstanding the surplus capacity problems noted above, Southeast Asian fears of a ‘Fortress Europe’ have subsided as more general access to the SEM has improved (Hanson 1998). Conversely, progress towards installing AFTA entails a retreat of neo-mercantilist trade policies still conducted by many ASEAN states. This chapter has considered the balance of AFTA’s effects on EU firms. A Marxist perspective would emphasise how EU firms continue to govern a post-colonial division of labour in Southeast Asia. As the largest extra-regional investors in the region, European multinationals play an important determining role in the ASEAN economy. Thus, according to Marxists, the link of dependency and subservience between the EU and ASEAN member states remains essentially intact. Southeast Asia still depends on European firms as crucial sources of imports, investment, finance, technology and capital. However, we have shown that a clear shift towards interdependence in the EU-ASEAN economic relationship was apparent from the 1980s onwards. Intra-industry trade between the two regions has grown as Southeast Asia industry has become more capital intensive. Moreover, the AFTA project demonstrates how ASEAN is confident in promoting a greater regional selfsufficiency. It has also turned more to other East Asian NICs as partners in the group’s future economic development. We have noted how these developments pose certain challenges for the EU Marxist explanations of ‘value-system friction’ arising from tensions between capital and labour interests are somewhat limited. Although it may be interpreted as an attempt by European firms to raise the level playing field of competition to suit their interests, the reformist emphasis on socio-cultural determinants is perhaps more appropriate. A Marxist critique of changes made by the EU to its GSP scheme would similarly question the motives behind its new environmental and social clauses and the graduation mechanism. From the East Asian group,

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less developed ASEAN and China will experience most difficulty in complying with these changes. To Marxists, the developed countries’ pushing of new trade issues onto the WTO agenda ultimately serves to reinforce their dominant position against developing countries, as compliance erodes the competitive advantage of many ASEAN and other developing country producers. Moreover, we have noted concerns within ASEAN over the evolving WTO agenda and its preoccupation with capital-intensive sector liberalisation at the expense of promoting freer trade in labour-intensive sectors, e.g. agriculture and textiles. Consequently, developments at the multilateral level have been to the EU’s advantage. At the inter-regional level, Marxists perceive arrangements like the ASEM as part of consolidating the international capital alliance by helping align the interests of European and Southeast Asian capital. Further transnationalised links between EU and ASEAN private and public sector representatives have certainly been forged by the ASEM dialogue framework. The growing momentum behind ASEM may prove vital to EU-ASEAN economic relations as it provides a parallel conduit through which high level politico-institutional contacts can be maintained.

4

The EU and Japan

Introduction Japan remains the EU’s most important economic partner in East Asia, but also that with which its most problematic economic relations have been maintained. The country’s ascendancy to economic superpower status has been at the relative expense of European industrial power. During the postwar period, the EU has had to come to terms with the Japanese competitive threat on various fronts. Consequently, the EU-Japan economic relationship has been mostly characterised by persistent trade conflicts. Japan’s rise has also altered the global balance of power and thus the nature of the international economic system in which the EU operates. The emergence of a tripolar structure of economic power, or Triad (i.e. the USA, Japan and the EU) became evident by the late 1980s with the demise of the Soviet Union and longer-term decline in American hegemony. We shall discuss later how Triadic relations provided the essentially context for EU-Japan economic relations during the 1990s. It will also be shown how the recent escalation of Japanese foreign direct investment (FDI) in Europe has significantly transformed the complexion of these relations. Before analysing these issues in some depth, we shall examine the nature of the Japanese economy. Japan: East Asia’s hegemon This section considers four broad themes. We shall first examine the emergence of Japan as a new economic superpower, analysing the development of the Japanese economy both from a historical and structural perspective. A study of Japan’s role in East Asia will follow that acknowledges its part in generating greater economic interdependence in the region. Our third theme focuses on Japanese outward FDI, highlighting both its general determinants and the growing internationalisation of the Japanese firms. Finally, a consideration of the main future challenges facing the Japanese economy are made, with particular reference to Japan’s recent recessional and financial problems.

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The emergence of a new economic superpower Japan was the first Asian country to embrace modern capitalism. The origins of this process can be traced to the so-called ‘Meiji Restoration’ of 1868 which broke two centuries of isolationism under the preceding Tokugawa regime. Renewed contacts with the West revealed Japan’s comparative industrial and military weakness and subsequently galvanised the nation into pursuing a catchup strategy under the Meiji slogan of ‘rich country, strong army’. Wide-ranging economic and social reforms followed and Western industrial practices were emulated. By the 1930s, Japan had developed a broad and powerful industrial base with its large, family-based zaibatsu conglomerates playing a crucial part in realising the country’s expanding international trade and investment interests. Japan’s pre-war colonisation of East Asian countries, euphemistically phrased the Greater East Asian Co-Prosperity Sphere, was partly driven by the need to satisfy the burgeoning resource demands of its rapidly growing industries. After defeat in World War II, Japan began the reconstruction of its shattered economy under the stewardship of the US caretaker administration (1945–53), benefiting from the considerable resources and assistance it conferred. US capital was particularly directed towards enhancing Japan’s export-oriented industrialisation. Although Japanese exports were initially synonymous in the West with poor quality, such perceptions began to change as innovative production and management techniques (e.g. ‘just-in-time’ delivery, lean production and total quality management) pioneered by Japanese companies gradually provided their products with a competitive advantage over foreign rivals. The implementation and adaptation of new industrial systems were largely made possible by Japan’s highly skilled and disciplined workforce. There has also been a commitment in Japan to what Thurow (1992) terms ‘producer economics’, whereby manufacturing activities and the development of process technologies enjoy pre-eminence over rent-seeking, service activities. As a consequence, Japan’s best graduates have entered careers in industry as opposed to accountancy, finance or law—the favoured path of many of their Western counterparts. Japan’s industrial prowess has been very clearly manifested in its share of world export trade, which rose from 3.2 per cent in 1960 to 8.4 per cent by 1990, although this share fell to 7.7 per cent in 1997 (see Table A.9). Consistent and sizeable trade surpluses through most of the post-war period have generated huge foreign exchange reserves for the country. By the 1970s, the Japanese economy had overhauled every Western industrial rival with the exception of the USA. In 1965, Japan’s nominal GDP was 10 per cent of the USA but by 1996 this had risen to 70 per cent and currently stands as the world’s second largest national economy (see Table A.1). A definitive feature of the Japanese economy’s post-war success has been its underpinning structural relationships, the most important being the keiretsu industrial groups, the special collaborative relationship between government and business, employment relations and Japan’s distribution systems. The keiretsu1 evolved out of the handful of zaibatsu company groups that dominated the economy in the pre-war years.2

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These were usually vertically organised with a holding company at the centre that controlled a number of core operating companies and their subsidiaries. The zaibatsu were formally dissolved by the US caretaker administration but the keiretsu emerged in the 1950s in the shape of former zaibatsu-affiliated companies with most closely associated with a major bank. For the six major keiretsu these were the Fuji, Dai-ichi Kangyo, Mitsubishi, Mitsui, Sanwa and Sumitomo banks. These six keiretsu groups have together accounted for around a quarter of Japan’s post-war GDP. Keiretsu can be distinguished either by their vertical integration, such as the major automobile assemblers, or by their inter-market, horizontal integration.3 Each keiretsu group has a general trading company (sogo shosha) which in addition to providing commercial services to associated companies also developed the group’s extensive intelligence networks: these sought to identify potential export markets and cheap import sources. Although the links between keiretsu members were looser than their zaibatsu predecessors, they were connected by both interlocking share ownership and company directorships. This gave each stakeholder a part to play in meeting the group’s ‘shared destiny’ (unmekyodatai) corporate objectives. The specific role of the group banks was to provide financial capital for the group on favourable terms. As an outcome, Japan’s capital markets have developed in a contrasting manner to the ‘Anglo-Saxon’ model, aligning more closely the interests of finance and industry while also producing a relative absence of takeovers, particularly of the hostile kind. The above arrangements have encouraged longer-term planning, technological transfer, elaborate subcontracting relationships and general synergetic linkages across the group. Not all of Japan’s large firms grew in such a way (e.g. Sony and Honda) while the vast majority of Japan’s businesses consist of small and medium-sized enterprises (SMEs) that are mostly independent of keiretsu links. While a high level of competitive rivalry exists between Japanese firms in both domestic and international markets, the keiretsu have been accused of cartelisation and other forms of restrictive practices. Such criticism has especially come from the USA and EU which have expressed concern over Japan’s ‘structural impediments’ to foreign competition. These have been defined by the European Commission as ‘the protracted and unpredictable technical certification and registration procedures and above all the habits and attitudes bred of Japan’s vertically and horizontally integrated industrial, commercial and financial groups’ (CEC 1985a). Thus, the perceived discriminatory contracting between keiretsu members to the frequent exclusion of foreign counterparts has been an often cited example of the above. The formation of the keiretsu helped to co-ordinate the policy of partnership that post-war Japanese governments wished to engender with big business and their representative associations—collectively referred to as zaikai (business world). This formed an essential part of Japan’s ‘developmental state’ whose origins date back to the Meiji period, where an initially underdeveloped private sector led to the government orchestrating Japan’s catch-up with the Western powers. Strategic investment programmes were managed by the government in close collaboration

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with the emerging zaibatsu groups, whose scale advantages were promoted and exploited by the state. The legacy has continued through the bonds nurtured between the state bureaucracy, zaikai and the Liberal Democratic Party (LDP), which itself had consistently held power from 1955 to 1993 and remains Japan’s most singularly powerful political party. According to Johnson (1982, 1987), Japan’s post-war developmental state entailed the formation of developmentoriented political elites, which were essentially responsible for devising development strategies, and whose actions tended to be market conforming rather than market displacing. The most powerful of these elites have been ensconced within Japan’s Ministry of International Trade and Industry (MITI) and Ministry of Finance (MOF). Komine (1993) contends that both MITI and the MOF have worked to three basic objectives in compliance with their developmental state partners: • to forecast the way that the economy ought to and can develop; • to indicate the fundamental direction that government medium-term and long-term economic policy should take, as well as identify their priority objectives and methods; • to provide ‘administrative guidance’ for both corporate and household decisions. The state bureaucracy, in addition to its direct links with the keiretsu, also meets with zaikai through several industry associations, most notably the Keidanren (Federation of Economic Organisations), the Nikkeiren (Federation of Employer’s Associations) and the Keizai-Doyukai (Committee for Economic Development). These have been joined by a number of deliberative councils (e.g. the Industrial Rationalisation Council and Industrial Structure Advisory Council) that also play a role in forging Japan’s industrial and commercial policy. The developmental state partnership is further reinforced by various informal ties such as amakudari, whereby some retiring government officials take up high-level executive positions in business or an industry association. Over time, MITI has adjusted its policy approach to suit the contemporary needs of the Japanese economy. During the 1950s and 1960s, when the economy was more fragile, it used extensive protectionist measures to insulate key infant industries from foreign competition as well as strict controls over foreign exchange and the licensing of imported technology. As the economy transformed, the focus of policy soon began to shift away from low-tech, labour-intensive industries and their markets to more high-tech, capital-intensive activities. From 1974 onwards, MITI began to collaborate with industry in fabricating the consensual ‘long-term visions’ to which the economy could commit itself. In more recent times, the internationalisation of the Japanese economy has become an important preoccupation. However, this very process, together with the reining back of the developmental state approach during the 1990s, has diminished the power of MITI’s ‘administrative guidance’ over the private sector. Another key structural relationship of the Japanese economy has been its

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framework of employment relations. Whitehill (1991) summarises the main defining characteristics of these relations as being: • • • •

lifetime employment agreements, especially in large companies; consensus decision-making; seniority wage and promotion; ‘enterprise unionism’ —single company-based unions that adopt a less adversarial stance towards management.

In return for worker devotion to the company, Japanese employers have offered their employees a reward package designed both to provide security and inspire further self-sacrifice. Large firms will more than likely agree to a lifetime contract of employment for certain new recruits. Even in times of recession, Japanese firms are reluctant to dispose of excess personnel, believing that releasing in particular a young employee is a lost investment for the future. Within a keiretsu group, personnel in overmanned sections in one company member are simply redeployed to companies elsewhere within the group that can more easily absorb extra employment. This may involve a temporary move (shukko) or a permanent one (tenseki). Our final structural relationship studied, Japan’s distribution systems, is characterised by interlocking wholesaler-retailer networks that are often difficult for outsiders to penetrate. Furthermore, government restrictions on sales space and business hours have hindered the progress of Western ‘scale’ retailers (e.g. superstores) in Japan. While both domestic and foreign latecomers are disadvantaged, the latter, lacking familiarity with Japan’s cultural and social environment, are naturally more so. In addition to distribution factors, foreign firms have attributed the comparative impenetrability of Japanese domestic markets to a relatively low consumption propensity (and hence a low import propensity in general) and the overtly chauvinistic tendencies of Japanese consumers. However, two points should be noted in response to these criticisms. On the first matter, Japan’s economic success owes much to the high saving rates of its people which have been essential in facilitating the country’s rapid investment-driven industrial growth. Second, the Japanese are among the world’s most discerning consumers, demanding high standards on product quality, choice and service which only Japanese-made products are perceived to deliver. We should conclude by noting that since the early 1990s’ recession of the Japanese economy, there has been mounting pressure upon these underpinning structural relationships to adapt to new realities. For example, many Japanese companies have retracted offers of lifetime employment contracts for new recruits while also cutting back on their intake of graduates. Another legacy of the recession has been the weakening of the keiretsu enterprise networks as members have sought to improve corporate flexibility by linking up with more competitive outsiders. This has sometimes manifested itself in the form of international strategic alliances that have been established with Triad counterparts. As we shall discuss later in this chapter, there has also been increasing foreign pressure (gaiatsu) on Japan to make adaptations to its domestic distribution systems and markets in

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order to raise its import propensities. Furthermore, in attempts to eradicate market-distorting state practices, the relationship between government and business has been somewhat emasculated. Japan’s role in East Asia Japan’s position in the East Asian economy has been the subject of much analysis (Korhonen 1994; Funabashi 1995; Mendl 1995). There are several reasons for this. As the region’s economic hegemon, other East Asian countries have looked to Japan for leadership and hence championing their region’s cause against competing regional powers. Attempts by Malaysia’s Prime Minister Mahathir to persuade Japan to lead his East Asian Economic Caucus (EAEC) initiative, a rival to the US-involved Asia-Pacific Economic Cooperation (APEC) forum is a case in point (see Chapter 8). Japan has also been a developmental role model for other East Asian newly industrialising countries (NICs), with the Japanese state providing an exemplar that many developing country bureaucracies have tried to imitate (Francks 1992). Furthermore, the Japanese economy’s rapid industrial growth and development have had positive multiplier effects on the regional economy. Japanese companies have stimulated the export growth of the East Asian NICs, provided them with capital and technological resources, demonstrated their innovative ergonomic techniques in transplanted production and service facilities, participated in East Asia’s many sub-regional economic development projects4 and promoted the development of East Asian companies through strategic alliance agreements. These processes are analysed within the ‘flying geese’ model of regional development, whereby the leader alleviates the resistance to economic progress made by those that follow in its slipstream (Akamatsu 1962; Blomqvist 1996). Japan has also become the major donor of overseas development assistance for many of its region’s less developed countries (Feldsieper 1997). However, the economic relationship is reciprocal. East Asian NICs have provided Japan with material and component supplies, new market opportunities and location-specific FDI advantages, enabling the Japanese economy to make important structural changes over time (Kojima 1995). For example, the offshore relocation of Japan’s more labour-intensive industrial activities to host East Asian countries has helped maintain the cost competitiveness of Japanese firms. In addition, Simon and Jun (1995:221) state that ‘Japanese firms in aggregate have begun to create regional sources of national competitive strength and capability through their expanding access to and ability to harness the technological assets of Asian economies.’ The extensive transborder systems of production and distribution developed by Japanese multinational enterprises (MNEs) across East Asia have also been instrumental in creating a de facto economic integration in the region. This, in turn, has enhanced the yen’s position as a regional reserve currency, though the predominance of the dollar in East Asia’s trade and capital transactions is likely to persist for some time (Frankel 1993; Ito 1993; Kwan 1994).

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Notwithstanding the advantages that regional economic interdependence has conferred, Japan has been cautious in promoting certain of its aspects. Japanese firms are understandably averse to imparting too much technology transfer for fear of undermining their own competitive position (Dobson 1993). Recipient East Asian countries are also circumspect, not wishing to become too technology dependent on Japan. Moreover, despite the leading intellectual role played by Japanese academics in formulating the ideas that have shaped East Asia’s, and the Asia-Pacific’s regional economic identity, Japan has been somewhat reluctant in assuming the mantle of political leadership in East Asia (see Chapter 8). This can be accredited to various factors. Funabashi (1995) notes that for historical and cultural reasons Japan has traditionally seen itself as part of yet separate from Asia: a parallel that can arguably be drawn with Britain and Europe—a shared ‘island resistance’ to continental forces. Much of this stems from the legacy of the Tokugawa period’s self-imposed isolationism. Japan has also avoided the possible invoking of memories associated with the infamous Greater East Asian Co-Prosperity Sphere and the imperial division of labour that it imposed on weaker neighbours (Shibusawa et al. 1992). As Chapter 8 reveals, Japan’s scope for assuming leadership in East Asia has also been overshadowed by the straddling presence of the USA across the wider AsiaPacific region (Rix 1993). The failure of Japan’s proposal to establish an Asian Monetary Fund (AMF) to help resolve the region’s wider financial problems is a recent case in point. Many blame this failure on American resistance to the AMF initiative because of its potential challenge to the multilateral competence of the International Monetary Fund (IMF), an organisation over which the USA exerts significant structural power. Moreover, Japan’s political upheavals of the early 1990s compromised its ability to adopt a coherent position on APEC when a more ambitious agenda was emerging within the forum. Given that APEC’s liberalisation plans imply that Japan, as a key member, will come under a wider gaiatsu to remove trade and investment barriers on a supposed MFN-driven, open regionalist basis, it must look to shape APEC’s future agenda with greater interest. Japanese outward FDI In the early post-war decades, Japan maintained a highly controlled FDI regime. The US caretaker administration did not permit Japanese firms to conduct overseas investments until 1951, which thereafter were tightly regulated via the Foreign Exchange and Trade Control Act of 1949 for the next twenty years. There were two main reasons for this. First, Japan’s experienced persistent trade deficits until the late 1960s and thus its foreign exchange reserves needed to be carefully husbanded. Second, rapid industrial growth during this period diverted investment towards domestic needs, resulting in a lower priority being afforded to FDI, which averaged at a mere $180m per annum over 1951–70. However, changing economic conditions led the Japanese government to undertake a five-stage liberalisation programme of outward FDI over 1969–78. Substantial increases in

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Japan’s domestic labour costs and a significant appreciation of the yen provided a rationale for relocating parts of Japanese industry overseas. Japan’s growing trade surpluses at this time improved the viability of progressive liberalisation during the 1970s. According to Redies (1990), the expansion of Japanese FDI that followed can be understood as an exercise in financial power, with overseas investments being used to re-cycle Japan’s fast-accumulating foreign exchange reserves. The rapid growth of Japanese exports over the decade is also highly relevant, with trade-supporting investments being prominent in both the EC and USA. As a consequence of the above factors, Japanese outward FDI on a cumulative basis rose from $3.6bn in 1970 to $36.5bn by 1980. There are important sectoral and structural factors which also explain the escalation of Japanese foreign investment. According to Ozawa (1991), this must be understood within the context of domestic industrial restructuring in Japan, which could be categorised into four distinct but overlapping phases of structural change: • Phase 1: expansion of labour-intensive manufacturing (1950s to mid-1960s). • Phase 2: scale-based modernisation of heavy and chemical industries (late 1950s to early 1970s). • Phase 3: assembly-based, subcontracting dependent, mass production of consumer durable products (late 1960s to present day). • Phase 4: flexible manufacturing of highly differentiated goods utilising microchip technologies (early 1980s to present day). Between each phase lay three stages of overseas investments. The ‘elementary’ stage of Japanese FDI evolved from the locational advantages of basing labourintensive production offshore in neighbouring East Asian countries. In the second FDI phase, Ozawa (1991) observed that the Japanese economy fell into a ‘RicardoHicksian trap’, whereby its shift to heavy industry production induced an unsustainable resource-dependent position. At the centre of the predicament lay the country’s own lack of natural resource endowments. The trap essentially originated from constraints born from an ‘irremovable scarcity’ of resources upon the economy’s ability to generate substantial levels of reinvestable profits. Foreign investment provided an escape from this trap by securing stable supplies of industrial raw materials, the transfer of some resource-intensive industrial activity overseas and policy-guided moves to restructure domestic industry towards less resource-consuming and more knowledge-intensive industries. Ozawa’s third ‘export-substituting-cum-surplus-recyling’ stage provided the key impetus behind the surge of FDI into North America and Europe during the 1980s. As we shall later discuss, the structural change embodied in Phase 4 enabled the keiretsus’ overseas subsidiaries to compete with effect in Triadic markets. Trends in the geographic distribution of Japanese outward FDI shown by Figure 4.1 are indicative of both continuity and change in the global strategies of Japanese firms. Asia’s high 30.0 per cent share of Japanese cumulative net investment by 1981 partially revealed the hollowing out of labour-intensive

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Figure 4.1 Stock of outward FDI from Japan by geographic destination (1981, 1996) Source: JETRO.

production in Japan, as well as the relative strategic importance of mining and other primary sector offshore investments. The almost halving of this share, together with the USA and Europe overtaking Asia as principal host regions by 1996, inferred that fundamental changes to the structure of Japanese outward FDI had occurred. From the mid-1980s onwards, it was apparent that Japanese multinationals were engaged in more proactive and globally integrative foreign investments in adapting to the new realities of global competition. This is confirmed by Mason (1992) in his deep historical analysis of Japanese FDI in Europe, who contends that there was a marked turn from basically trade-supporting FDI to a more proactive approach around this time. Meanwhile, Japanese outward FDI continued to escalate globally, rising to a cumulative $590.1bn by 1996. We shall analyse in depth the EU-Japan FDI relationship later in the chapter. Future challenges Despite the substantial achievements of Japan’s post-war economic miracle, the country faces a broad range of challenges in the twenty-first century. Although Japan enjoys productive and technological strength in key sectors, such as automotive, electrical/electronic and certain high-tech industries (e.g. biotechnology), it lags behind its Triad rivals in others (e.g. aerospace, pharmaceuticals and chemicals). In many important service sector industries (e.g. retailing), Japanese firms remain at a competitive disadvantage. The improving techno-industrial capabilities of East Asia’s more advanced NICs have also intensified competitive pressure in important Japanese industries such as semiconductors and consumer electronics. Japan’s heavy reliance on imported raw materials, especially oil and other mineral resources, constitutes another strategic industrial concern. While the country’s education system continues to produce highly numerate and technically skilled individuals, there has been increasing criticism of the

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system’s ethos and structure in light of Japan’s future industrial challenges. Intuitive and independent thought has not traditionally been encouraged in its schools and universities. Given that the new knowledge-intensive growth industries depend more upon the input of creative-minded individuals, Japan may be presented with an additional ‘scarce resource’ predicament unless alternative pedagogical methods are pursued. The country’s rapidly ageing population further compounds this problem.5 Many other future challenges stem from the lessons and legacy of the early 1990s’ recession. The speculative excesses of the 1980s, on which Japan’s socalled ‘bubble economy’ rested, were brought to an end after a tightening of monetary policy during 1990 and 1991. Japan’s worst post-war recession ensued, as did a pattern of low economic growth for most of the decade (see Table A.1). Government endeavours to stimulate economic activity failed largely because of the huge overhang of non-performing debt and deficient incentives to invest. Serious asset price deflation (the Nikkei index fell by around a half) led to a loss of confidence that pervaded the whole economy. The financial sector was particularly affected with bad debt problems currently expected to persist for some time, owing to the fact that real estate and shares have been key assets in Japanese bank portfolios.6 The recession had exposed the rigidities inherent in the underpinning structural relationships of the Japanese economy which we have analysed. In 1995 the government launched a deregulation programme that it hoped would inject sufficient flexibility into the economy. However, as we discuss later, both the EU and USA criticised the programme over its lack of ambition. Meanwhile, Japan’s financial problems were mounting with the emergence of the East Asian financial crisis in 1997. Japan had significantly contributed to the origins of the crisis and its own financial predicament was subsequently compounded by it (Dore 1998; Yamazawa 1998). After a series of financial sector bankruptcies, including a number of small banks and securities firms, the government announced plans for a far-reaching liberalisation of the financial sector over the 1998–2001 period. As part of the ongoing deregulation programme, MITI, MOF and other ministries with a role in economic policymaking have been directed to pursue a less interventionist approach. The above thus represents an attempt by Japan to find a new development model for the twenty-first century (Bevacqua 1998). The emphasis on deregulation and liberalisation is commensurate with the general shift towards the neo-liberal paradigm that was previously manifest in Europe and North America. While this has provided new market opening opportunities in Japan for foreign firms, many aspects of the country’s unique capitalist culture will also remain essentially unchanged (e.g. keiretsu dynamics). Finally, now that Japan has become a mature industrial power of some considerable stature many expectations surround its ability to convert its economic power into commensurate political power. However, we have already commented on Japan’s hesitancy to assume a regional leadership role and this may extend to the wider international community.7 It must also be noted that it usually takes

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time for ascendant nations to acquire relational and structural power in international relations, just as it takes time for declining nations to relinquish it (see Chapter 1). Furthermore, while Japan’s significant trade surplus position makes it an important global creditor, it also continues to be an obstacle to establishing cordial economic relations with its main international partners. This has been a recurrent theme in Japan’s economic relations with the EU. EU-Japan economic relations The analysis that follows examines both the sequential and thematic development of the EU-Japan economic relationship. We shall begin by exploring the pre-war origins of this relationship and how Japan posed its first competitive threat to the European industrial powers. Early post-war developments reveal the continuation of trade conflict as the underlying theme of Euro-Japanese economic relations which persisted until the 1980s. However, by the 1990s a more co-operative framework of relations had been established, brought on partly by the growth of Japanese FDI in Europe. Moreover, the Triadic context of the EU-Japan economic relationship had become increasingly relevant during the decade. This is also studied in some detail. Japan and Europe: the pre-war years Economic ties between Japan and Europe date back to the sixteenth century. Not long after the Jesuit order had established a base on Japanese soil in 1542, a growing number of Portuguese, Spanish and Dutch traders came to explore the commercial opportunities which Japan had to offer. However, by 1641 the new and isolationist Tokugawa regime had expelled virtually every European from its shores. Some 200 years later, Japan came under pressure from both the USA and a number of European countries to open up its markets for international trade. The Tokugawa regime was thus forced to sign new commercial treaties in 1858 and 1866 that obliged Japan to make substantial tariff concessions, consequently leading to a flood of Western imports entering the country. The inauguration of Meiji rule in 1868 produced a modernising and more outward-looking Japanese state whose expansionist aspirations would inevitably bring it into eventual conflict with Europe’s colonial powers in Asia. Along the way, though, Japan was to make alliances with certain European powers, most notably with Britain, that lasted from 1902 to 1923. Japan’s government and its companies were also eager to learn from Europe’s industrial and technological successes. It is with some irony, then, that Wilkinson observed: In the nineteenth century, Europeans regarded Japan as an exotic playground, the ultimate in sophisticated tourism, while the Japanese regarded Europe as a disciplined, group-oriented society possessing the secrets of industrial production. Today, it is the Japanese who flock to

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Europe for exotic tourism and it is the Europeans who increasingly regard Japan as a disciplined society with amazingly efficient industries. (Wilkinson 1983:154) By the 1930s, relations between Japan and Europe had somewhat soured. Japan’s colonial interests were increasingly perceived to challenge Europe’s own in Asia. Meanwhile, European countries continued to complain about Japan’s aggressive trade practices, such as the dumping of textile products in European markets, regular breaches of intellectual property rights and the maintenance of a highly protected domestic market. Yet by now Japan was a modern industrial state, confident of challenging the Western powers on their own terms. However, its attempt to realise this militarily was to end in an humiliating defeat by the Allies in World War II. Coming to terms (1945–68) In the early post-war years, European nations were wary of re-establishing trade links with Japan, not only on account of it being a former Axis power but also because of its pre-war neo-mercantilist policies. For its part, the US caretaker administration sought Japan’s re-assimilation into the international community as part of its reconstruction strategy for the country. Thus, the USA rigorously supported Japan’s 1952 application to GATT membership which it secured in 1955, although not without encountering some resistance. A British White Paper published earlier that year argued that Japan’s accession to the GATT would result in a bilateral trade war. Furthermore, fourteen incumbent GATT members, including the UK, Netherlands, France, and Belgium, refused Japan MFN status on its entry by invoking Article 35, allowing them to erect trade barriers against Japanese imports without compensation on the grounds of ‘injurious’ competition. There was indeed little doubt that Japan’s post-war ‘developmental state’ was adopting neo-mercantilist policies. Although Japan began to liberalise its tariff regime on GATT entry, it simultaneously enacted compensatory measures such as weakening its anti-trust laws and readjusting its import licensing scheme. At around the same time, Japan’s long-serving Prime Minister Ikeda (1960–69) initiated a foreign economic policy founded on promoting trilateralist cooperation between Japan, the USA and EEC.8 This policy was hampered by both European antagonism towards Japanese trading practices and, to a lesser degree, the debate among Japan’s ministries over what approach to economic diplomacy with West European countries would prove the most effective.9 Those agencies responsible for formulating and conducting Japan’s foreign economic policy eventually agreed that the country’s interests would be best served by exploiting European disunity and challenging the rationale of Europe’s discriminatory trade policies. Without a functional Common Commercial Policy (CCP), the EEC were vulnerable to Japan’s attempts to play off one member state against another. The trade negotiation ‘offensive’ of autumn 1962, whereby Japan sent high-level representatives from its ministries and other agencies

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(e.g. the Keidanren) on visits to major West European countries, was a key stage in this process. Rothacher (1983:132) comments that the initiative ‘was conceptually simple: to flood Europe with successive waves of polite, modest and well-briefed top politicians and business leaders’. The varied nature of EEC member state attitudes to trade policy (e.g. Germany and the Netherlands as free traders, France and Italy as protectionist) was also exploited to effect by Japanese ministerial officials.10 By 1964, Japan had succeeded in persuading all West European countries to grant it MFN status in return for what transpired as essentially symbolic safeguard clause agreements that had more political than economic significance.11 The manifest desire of the EEC member states to secure relative gains at ultimately the other’s expense and not the higher absolute gains potentially yielded from co-ordinated action towards Japan was to the continued frustration of the European Commission. Such action would have entailed a loss of sovereignty over national trade policy well before the EEC’s customs union arrangement came into operation. Most member states, especially traditional protectionists, were not yet willing to make this sacrifice. Thus, the Commission’s endeavours during 1963–4 to orchestrate a common trade policy,12 and hence a united front against Japan, ended in failure. In the meantime, on an individual and collective basis, European countries had to come to terms with Japan’s growing international stature both economically and through its integration into global power structures. Japan’s attaining of OECD membership in July 1963 and its ascendance as a major contracting party within the Dillon and Kennedy Rounds of GATT were clear demonstrations of this. By the mid-1960s, Japan also began to view the EEC as less formidable than initially perceived as a result of its revealed lack of unity. France’s withdrawal from Community proceedings over 1965–6 and the UK’s failure to accede in both 1961 and 1967 only served to reinforce this belief. During the early post-war period, the EEC continued to represent a minor trade partner for Japan, accounting for only 3.2 per cent of its total trade in 1956 and 2.0 per cent in 1964, although this rose to 5.9 per cent in 1968 (Table 4.1).13 The UK was Japan’s most important trade partner in Europe up until the late 1960s, then overtaken by Germany which was the only EEC country not to sustain trade deficits with Japan by this time. The Community as a whole has run continuous trade deficits with Japan since 196814 and these began to expand rapidly, rising from $78m in the aforementioned year to $309m in 1970, $1,344m in 1972 and to $3,615m by 1976. It is worth noting that the EEC’s trade balance with the rest of the world was in surplus during most of these years. The EEC’s worsening trade position with Japan constituted, both in industrial and diplomatic terms, a belated recognition by the major European powers of Japan’s economic significance and the challenges that lay therein. It also led to the reluctant and haphazard development of a common EEC policy towards Japan up to this point, although the Community’s incomplete customs union arrangement naturally impeded this development. Moreover, Nester (1993) argued that Japan’s threat to West Europe over the period was perceived more as geopolitical than geoeconomic. Significant concern existed regarding Japan’s

Notes: 1 Comprises ASEAN10 and Taiwan. 2 Central and Eastern Europe, excludes former Yugoslavia. 3 Includes the Caribbean states.

Source: IMF Direction of Trade Statistics Yearbook, various editions

Table 4.1 Geographic breakdown of Japan’s international trade (percentage per trade partner, 1960–97)

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neutrality and its possible future alignment with China, and the effect this would have on the Cold War balance of power. Japan and ‘One Europe’ (1969–90)? The completion of the EEC (hereafter referred to as EC) customs union arrangement in July 1968 formally established a CCP between member states, requiring them to adopt the EC’s common external tariff on third country imports.15 In theory, the CCP strengthened the Commission’s executive powers over managing EC external trade policy. This was soon tested at the first official EC-Japan level trade negotiations which began in 1970. In the talks, the Commission resisted Japanese pressure to resolve the growing number of trade disputes that had arisen between them through GATT’s mechanisms and procedures. Instead, the Commission pressed for assurances from Japan that certain administrative and other non-tariff barriers (NTBs) be removed. These demands were similarly resisted by Japan which furthermore had no incentive to comply to EC-wide agreements given the proven success of its ‘divide and conquer’ strategy. It therefore proceeded to confound the Commission’s endeavours by still consorting with a multiplicity of European agencies, such as industry groups, member state governments and national antitrust groups in addition to EC external trade representatives. Indeed, during the first EC-Japan trade negotiations, the Commission’s stance was undermined by the insistence of France and the Benelux countries on maintaining their own bilateral safeguard clauses against Japanese imports. From the early 1970s onwards, EC-Japan economic diplomacy also began to be conducted more at a corporate level. Europe’s industry groups were by this time aware of the concentrated market penetrations that Japanese producers were making in certain industrial sectors, such as consumer electronics, cars, motorcycles, ships and steel (Shepherd 1982; Ishikawa 1990). In October 1971, Keidanren representatives met with European business leaders to discuss the application of voluntary export restraints (VERs) on those Japanese imports deemed to have the most injurious effects on European industry. These measures were favoured by Japanese business as these conferred some voice and representation on European protectionist decisions and actions taken. Moreover, by shortening their supply to European markets, it also enabled them to exact higher economic rents from European consumers due to the relatively low price elasticity of demand enjoyed by many Japanese imports. A year later, the first VER on Japanese consumer electronics imports was negotiated between some European countries and Japan. Others were to follow on various products, the most profiled of which was on automobiles. In the context of Japan’s growing trade surplus with Europe and the stagflatory conditions caused by the 1973–4 oil crisis, EC member states began to exert their demands in unison. On his visit to Europe in October 1976, Toshio Doko, President of the Keidanren, met with consistent and similar calls for Japan to open its markets to foreign competition.16 Encouraged by this development, the Commission sought to take bolder initiatives. At the Tokyo Round negotiations

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of GATT, it took a much tougher stance against Japan on a range of issues (Kudo 1994). In February 1977, and without prior consultation with the Japanese government, the first EC anti-dumping duty (ADD) was applied on a Japanese import (ball bearings). A number of others followed: acrylic fibres, saccharin and stereo cassette heads in 1979; automobiles, numerically controlled machine tools and colour televisions in 1981; cathode ray tubes, light commercial vehicles, quartz watches; hi-fi equipment, fork lift trucks and video cassette recorders over 1982–3; electronic typewriters in 1985.17 Over 1983 to 1989, the EC investigated a total of twenty-two anti-dumping cases against Japanese imports with seventeen leading to the application of ADDs, the highest number for any EC trading partner over the period. During the late 1970s, the Japanese government became increasingly weary of the EC’s defensive, protectionist stance. In his visit to Brussels in October 1978, Prime Minister Fukuda expressed his regret over the poor state of ECJapan relations. This did nothing to induce a more conciliatory approach from the Community. In March 1979, the EC’s Commissioner for external relations, Wilhelm Haferkamp, stated that ‘Japan has a special responsibility towards her trading partners to eliminate or lower existent restrictions. And we do not like the idea of negotiating every year with the same list of specific complaints.’ Such blunt language was just the harbinger of worse to come. In an addendum to the original text of a Commission working paper it was commented: Japan’s trade expansion was due to hard work, discipline, corporate loyalties, and management skills of a crowded, highly competitive island people only recently emerged from a feudal past, a country of workaholics who live in what Westerners regard as little more than rabbit hutches…There is as much propensity to import as there would be carnival spirit on a rainy Sunday morning in Glasgow…Japanese exporters operate like soldiers venturing out from a fortress, and create havoc in concentrated areas of industry in the Community with major regional unemployment problems. (CEC 1979) This marked the nadir of EU-Japan economic diplomacy. The Commission formally apologised over this statement,18 although the document’s main text was a critique of Japan’s neo-mercantilist policies and called for the EC to adopt a tough stance in future trade negotiations. The uproar caused in Japan only served to unite the nation to reciprocate in kind. In January 1980, MITI announced that Japan’s automobile producers were to increase production by 10 per cent with similar targets set for consumer electronics and the subsequent offensives on European markets. Once more in its endeavour to pre-empt separate policies being conducted by individual EC member states, the Commission constructed a four-point common policy, subsequently approved by the Council of Ministers in November 1980, which proposed that: VERs should be uniform as possible throughout the Community; a stronger yen was required to reflect more accurately Japan’s

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economic strength; various NTBs protecting Japanese markets should be removed; and the EC’s right to similar treatment afforded by Japan to the USA should be upheld. However, EC member states continued to insist upon bilateral trade policy actions against Japanese imports, the most famous example being the French government’s decision in 1983 to route all imported video cassette recorders through a small customs office at Poitiers, staffed by only eight people.19 The Commission’s 1980 policy plan nevertheless enabled it to stake further ground in conducting the EC’s trade relations with Japan. In February 1983, a Commission delegation visited Tokyo to commence negotiations that were to lead to the first EC-level VERs being applied on Japanese imports later that year.20 At the politico-institutional level, the EC’s troika foreign ministerial meetings with the Japanese also began, albeit in an ad hoc manner, in March 1983, although these were actually suspended over 1986–90 owing to Japan’s internal political problems. The increasingly higher profile of the Commission in EU-Japan economic diplomacy coincided with a more cordial environment of relations evolving between the two powers as the 1980s progressed.21 Various bilateral and global factors could be attributed to this, including the end of the early 1980s’ world recession which helped ease international relations between the developed nations in general, while a further framework for dialogue and policy co-ordination was established within the Plaza Accord agreement signed at the historic G7 meeting in 1985. At the meeting, Japan agreed to revalue the yen in an attempt to depress its substantial trade surpluses22 held against both Triad partners. Although Japan’s tariff regime was notably liberal,23 it also resolved to make more convincing and proactive efforts to open up its own markets to imports,24 largely at the behest of the US ‘market-oriented, sector-specific’ (MOSS) negotiations of the mid-1980s and the economy-wide ‘Structural Impediments Initiative’ (SII) of 1989–90 (Tyson 1995). The EC also adopted a more concessionary approach with the number of nationally imposed quantitative restrictions (QRs) on Japanese imports falling from 466 in 1962 to 113 by 1989.25 Another 42 restrictions were removed by March that year in negotiations orchestrated by the Commission as a response to engender a more open trade environment between them.26 EC-Japan relations were further enhanced by the initially favourable view that Japan took towards the EC’s Single European Act (SEA) of 1986 and its blueprint for creating the Single European Market (SEM). Envisaging the potential opportunities which the SEM presented for ‘insider’ firms, the SEA precipitated a huge surge of Japanese direct investment into Europe during the latter 1980s. However, there was simultaneous concern about the SEM’s potential to induce autarkic behaviour from the Community that led to mounting fears of a ‘Fortress Europe’ emerging as the Single Market coalesced. Furthermore, Japan acknowledged that the SEM would inevitably commit EC member states to conduct a more integral CCP, and hence increase the Community’s weight within the international economic system. As we discuss later, deepening European integration and the influx of Japanese firms into the EC were significantly to recast the bargaining structure of EC-Japan economic diplomacy.

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Around this time, the Community’s trade deficit with Japan began to stabilise, with EC exports to Japan actually increasing almost 50 per cent faster than Japanese exports to Community markets in 1988 (Figure 4.2). In preparations made for the SEM programme, the Commission announced its intentions to substitute national level QRs with Community-based measures but that ‘these measures would not result in a higher level of protection than exists at present’ (CEC 1988). A similar arrangement was made for VERs on Japanese automobile imports whereby bilateral measures that had been separately applied by France, Spain, Italy, Portugal and the UK were replaced with an EC-level equivalent.27 Slower Japanese export growth to the Community could at this point be partly ascribed to the trade-displacing effects of rapid Japanese FDI growth in Europe. However, the arrival of increasing numbers of Japanese multinationals within the Community gave rise to other concerns. Some saw the strategy as a means to circumvent protectionist measures imposed upon them by installing low value-added ‘screwdriver’ assembly plants within the European market. The first so-called ‘screwdriver’ regulations were introduced by the Commission in 1987, which enabled ADDs to be deployed on foreign imports now produced in the Community that once previously attracted ADDs. Related and associated products could also be targeted for similar treatment in accordance with stated criteria, while local content rules applied the same measures against lower valueadded foreign assembly plants. Under the general rules of this regulation, foreign assembly plants were obliged to acquire at least 40 per cent of their materials and components from domestic EC sources. Earlier investigations had revealed that the effective local content found in some Japanese assembly plants varied from 4 per cent to 25 per cent, and in one case the only local materials used was the

Figure 4.2 EU-Japan merchandise trade (1975–97) Source: Eurostat.

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packaging for electronic typewriters. The regulations were first invoked in July 1987 against Japanese ball-bearing producers. When a string of other cases followed,28 Japan made a formal complaint to GATT on account that they contravened the ‘national treatment’ principle of Article 3, while also negating the Anti-Dumping Code procedures of Article 6.29 In March 1990, a GATT panel upheld Japan’s complaint and the Commission had to adjust its policies accordingly. Further consternation for the Japanese was caused by the EC’s new emphasis on ‘reciprocity’, which became a guiding principle of the CCP during the latter 1980s. At the start of the GATT’s Uruguay Round talks, the European Commission President Willy de Clerq stated: The Community feels that many of the present tensions affecting world trade find their origin in the fact that concessions negotiated between the various contracting parties have in reality not resulted in effective reciprocity. It is therefore essential that the Ministerial Declaration should establish the objective of achieving a genuine balance in the benefits accruing to contracting parties from the GATT. (CEC 1986:15) At the European Council meeting at Rhodes in 1988 the reciprocity principle was more euphemistically defined as one being founded on a ‘balance of mutual advantages’ (CEC 1988). Put alternatively, guarantees of similar or at least nondiscriminatory opportunities for EC firms in foreign markets would be sought that approximated those benefits which foreign firms enjoyed in EC markets. This had particular reference to the anticipated gains that a harmonised European marketplace would not only bestow upon EC companies but also their non-EC rivals, especially those foreign multinationals operating as ‘insiders’. Thus, the SEM programme’s associated ‘reciprocity’ directives in banking,30 capital movements and public procurement caused particular concern to Japanese companies and their US counterparts. In an evaluative analysis of EU-Japan economic diplomacy over this period, a number of points should be made. For Hosoya (1979), the trials and tribulations experienced during the 1970s were indicative of a ‘perception gap’: the EC saw its trade deficit with Japan as a political problem, whereas Japan viewed the situation in economic terms. The EC’s position was essentially defensive in that it attempted to repress the impact of Japan’s expanding competitive advantages rather than finding positive solutions to enhance Europe’s own. However, European frustrations could also be attributed to Japanese passivity, especially regarding the slowness with which Japan implemented the provisions of commercial agreements signed with the EC. This apparent bureaucratic prevarication has been excused on the grounds of the Japanese consensual approach to decision-making. Hanabusa (1979) also notes how this explains Japan’s passivity with regard to taking the initiative in international economic affairs. For Yamane (1990), it was the perception of Japan’s ‘insular expansion’

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which was at the root of European hostility at this time. In analysing the 1980s, Woolcock and Yamane (1993) contended that discord in EU-Japan economic relations mainly originated from different perceptions over the fundamental ‘rules of the game’. They argued that EU’s position continued to be based on equivalent competitive opportunities for both European and Japanese firms whereby bilateral protectionist measures are applied in those sectors possessing an imbalance against them, e.g. machinery, electrical products, automobiles. For the Japanese, the apparent demise of Europe’s industrial prowess during the 1970s was symptomatic of eikokubyo: the economics of decline and Great Power decadence that derives from labour troubles, productivity lags and cumulative economic rigidities. In a comparative historical analysis, Masaru (1986) drew similarities between EC-Japan commercial disputes and the AngloGerman trade conflicts of the early twentieth century, where Britain’s relative economic decline was blamed on German industrial practices. Masaru argued that, like Britain, Europe as a whole faced its own ‘crisis of capitalism’ and was looking to attribute culpability to the commercial practices of an ascendant Japan. Although the USA was also suffering a chronic trade deficit with Japan, it was nevertheless seen as a more proximate industrial competitor owing to US perceived technological and entrepreneurial superiority over Europe. Given the proven success of its ‘divide and conquer’ economic diplomacy with the Community, Japan continued its efforts to polarise EC trade politics and was reluctant to negotiate at an EC level. This approach became increasingly untenable, especially after the signing of the SEA. The gradual implementation of the SEM programme from the late 1980s onwards not only necessitated third countries and their companies to think more in terms of ‘one Europe’, but also improved the relational and structural power of the EC in international economic affairs. The enhanced competence granted to the Commission by member states in the realm of EC external trade policy was an important part of the latter process. Although never utilised to effect, the ‘reciprocity’ principle was a demonstration of how the EC at least considered converting the SEM into political capital. According to Nuttall (1996:109), this was a significant missed opportunity at leveraging influence over Japanese trade negotiators, stating that ‘the Japanese would not have abandoned a strong position so easily, and took some convincing that the Europeans had’. As it transpired, the EC probably gained more from the externality effects of the MOSS and SII negotiations in terms of making Japan more generally compliant to eradicating its NTBs, although the bilateral market sharing deals which the negotiations yielded (e.g. semiconductors in 1986) would compromise EC manufacturers. EC-Japan economic diplomacy also benefited from the moderate shift from ‘low’ politics (bureaucratic-driven) to the ‘high’ politics (elected leader-driven) of G7 summits which, especially in the more favourable world economic conditions of the late 1980s, helped promote more amicable relations between the EC and Japan. Moreover, according to Bourke (1996) the bargaining structure of EC-Japan economic diplomacy was significantly recast by the escalation of Japanese FDI

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into Europe in the latter 1980s. This particularly related to how globalisation was creating new patterns of loyalty across national boundaries. Bourke contended that the growing number of Japanese firms ensconced within the EC led to a ‘commercial symbiosis’ between themselves and sub-state or nonstate actors in Europe. These included regional authorities which had attracted Japanese investment and subcontracted firms that had been incorporated into the European-based production networks of ‘insider’ Japanese firms. This development gave both a more direct stake in the economic diplomacy process and furthermore made them a potential ally of Japan in commercial negotiations with the European Commission, giving rise to what Bourke refers to as ‘internalised co-operative tension’.31 Gradually, EC member states began to acknowledge the net advantages of hosting Japanese FDI, in terms of improved domestic competitiveness (e.g. from infused Japanese production and management techniques, technology transfers, etc.), employment creation and new capital formation. Perhaps not surprisingly, the UK led the way since it attracted around 40 per cent of inward Japanese FDI into the EC. These new Anglo-Japanese commercial links were to make the UK a valuable advocate of Japan within Europe.32 As Nuttall (1996) observed, this was to have a significant effect on Community opinion during the late 1980s, with especially more liberal-minded member state governments such as Germany and the Netherlands adopting a more positive and less confrontational attitude towards Japan. Although divisions between member states persisted over what approach EC economic diplomacy with Japan should take, there was now a clearer consensus for more co-operative relations to be nurtured with the Japanese. Towards trilateralism (1991 to present) At the beginning of the 1990s, the international community stood at an important geopolitical and geoeconomic crossroads. The Cold War was thawing, Europe was on the verge of creating its single market and Japan had become the world’s most important creditor nation. While the USA was seen to have won the ideological contest with communism, it simultaneously faced a more direct challenge to its economic hegemony from its Triadic counterparts. Furthermore, globalisation was blurring the demarcations of territorial-based loyalties across the Triad powers and requiring closer trilateral co-operation on a wider range of issues. This sets the general context of EUJapan economic relations during the 1990s. In theory, the greater geoeconomic weight now afforded to the EU and Japan and associated structural changes to the international economic system had created new opportunities for these relations to develop beyond an agenda dominated by commercial conflicts.33 As we shall later discuss, while closer dialogue and co-operation were consequently to emerge between the two powers, the USA continues to play the pivotal role in Triadic relations. Moreover, the persistent problem of advancing the EU-Japan relationship beyond the unidimensional realm of

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commercial issues34 has somewhat impeded the development of economic relations themselves for reasons we shall analysis below. A closer economic partnership? We should begin, though, by considering the important steps forward which have been made during the 1990s in developing closer EU-Japan dialogue and co-operation. In July 1991, both powers signed the landmark EC-Japan Declaration which was partly modelled on the previous year’s EC-US transatlantic equivalent.35 Notwithstanding new ideas on how to enhance ECJapan relations, for example, on conferring a higher priority to political dialogue and promoting both industrial co-operation and cultural exchange, commercial issues dominated both the content of the agreement and subsequent outcomes. The European Commission was keen to emphasise the ‘equitable access’ aspect of the Declaration with its objective of seeking to eradicate any structural impediments to trade, thus echoing old demands. Those impediments especially highlighted were: • the keiretsu business groups whose interlocking corporate relationships reduce the scope for foreign competition; • an ineffective competition policy that overlooks the potential and actual welfare reducing outcomes from the above; • the lack of independent dealership networks and underdeveloped retail sector; • a particularly idiosyncratic trade financing system and business associations that enjoy government support and occasional protection; • a convoluted system of multiple layers of wholesalers that has advantaged domestic producers at the expense of foreign rivals; • Japan’s predilection for savings-led growth as opposed to consumption-led growth which leads to low import demand. This initial emphasis on resolving outstanding commercial disputes is due partly to difficulties arising within the EC-Japan Joint Working Group on Trade Problems which first met in July 1990. The Europeans tabled eighteen issues for discussion while the Japanese submitted only three, a reflection on the burgeoning trade deficit which the EC still carried with Japan.36 The slow progress made by the EC at this meeting had not engendered the most positive of European attitudes in preparation for the Declaration’s summit meeting. However, the new dialogue framework established by the Declaration agreement enabled the EU to cultivate a more co-operative and concessionary response from the Japanese. An important part of this framework was the annual EU-Japan summits which provided a firmer basis for conducting ‘high’ political relations and gave momentum to the development of certain key initiatives. From a commercial point of view, the most important were the Trade Assessment Mechanism (TAM), various industrial co-operation initiatives,

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economic policy co-operation and co-ordination and Japan’s deregulation programme. The TAM was established in 1993 as a mutual attempt to identify respective underperforming exports in each other’s markets via a comparative analysis in third economies. Although essentially concerned with statistical analysis, it has been particularly useful to the EU in highlighting those sectors of the Japanese economy most resistant to import penetration. In terms of economic diplomacy, the TAM has also improved the EU’s position with Japan by putting trade negotiations on an explicitly objective and reciprocal basis, as well as providing a permanent forum for such negotiations (Nuttall 1996). Japan has remained actively participative in the scheme owing to the TAM’s relative benefits over a less impartial, more unilateralist assessment method. Since the late 1970s there had been discussion at Community level over how economic co-operation with Japan could benefit the EC (Taylor 1990). The ECJapan Centre for Industrial Co-operation, which trains European business personnel in Japanese methods and promotes bilateral investment, has been operative since 1987. However, growing interdependence between Japanese and European firms through new investment links and other network relationships had provided a much stronger rationale for prioritising industrial co-operation by the 1990s. The first round of the annual EU-Japan Industrial Policy and Industrial Co-operation dialogue talks commenced in 1993 between the European Commission and MITI. This consists of three working groups on information policy, industrial standards and biotechnology. Roundtable discussions between European and Japanese business leaders have also been held since February 1995 with sub-groups working in various sectoral areas. In addition, policy cooperation and co-ordination between EU and Japanese representatives have extended into the field of competition, transport, social and labour issues, energy, science and technology, the environment, development assistance and education (Table 4.2). At the November 1994 EU-Japan Ministerial Meeting it was agreed that formal negotiations on Mutual Recognition Agreements (MRAs) would begin with the objective of establishing conformity in standards, testing and certification practices between the two partners. The main advantage of an MRA is that it reduces the delivery time of exports to product end users by allowing conformity to host market norms to be tested in home-based laboratories. Many of these initiatives have fostered a more co-operative environment and given new breadth to EU-Japan economic relations. In light of Japan’s structural impediments to import noted earlier in the chapter, both the EU and USA welcomed the Japanese government’s undertaking of a three-year deregulation programme which, it was hoped by Japan’s trading partners, would remove many of these barriers. The EU was quick to respond to Japan’s open invitation for views on this exercise and established a dialogue with the Japanese government in 1994. It was a rare occasion where Europe took the initiative ahead of the USA, which was at the time preoccupied with negotiating their ‘Framework Agreements’ with Tokyo. Like many other trading partners, the EU was initially sceptical of Japan’s

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Table 4.2 EU-Japan consultation frameworks

Source: Japanese Mission to the EU.

resolve to deregulate over the longer term. However, the depth of the early 1990s’ recession, globalisation’s exposure of certain structural weaknesses in the Japanese economy and the encroachment of neo-liberal ideas into even the most ‘controlled’ of East Asia’s economies combined to provide a consensus within Japan for economic liberalisation measures to be implemented. In March 1995, the deregulation programme was officially launched by the Japanese Government. Under the terms of their agreement, the EU-Japan dialogue on deregulation was supposed to be a two-way process and the Japanese have submitted their

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proposals for EU deregulation over time. In reality, though, this process has been essentially uni-directional, with the EU making the most of its securing of a regular channel of discussion through which Japan’s deregulatory issues could be considered and reviewed.37 The priority which the EU afforded to this exercise was somewhat greater than the Japanese government first anticipated. In November 1995, the European Commission sent a list of 180 deregulatory proposals to Tokyo that covered matters on transport, industrial standards and certification, sanitary and phtyosanitary regulations and various sectoral issues. Dissatisfied with the speed of implementation in the programme’s initial phase, a high-level mission from the EU visited Japan in February 1996 to persuade the Japanese government to deregulate more quickly, although it acknowledged that certain vested interests in Japan were resisting the process of economic reform. Furthermore, as Ishikawa (1990) argued earlier, previous attempts to remove structural impediments in the Japanese economy required either the deconstruction or reconfiguration of Japan’s socio-economic infrastructure and network relationships. This, it was contended, is never an easy task. Nevertheless, pressure was sustained by the EU on the deregulation issue with the European Commission releasing a press statement in March 1997 which expressed its opinion that programme had made ‘slow but significant’ progress. A few months later a new indicative list was prepared by the European Commission in August 1997, pre-empting the end of the three-year programme in March 1998 in an attempt to maintain the momentum of deregulation. In the same document, it was proposed that a further pluriannual, broad-based deregulation programme be introduced in addition to a mechanism to monitor those measures announced thus far. These were forthcoming in a new threeyear programme introduced in April 1998. The European Commission gave a cautious welcome to its provisions and objectives, acknowledging both the achievements of the Japanese government and those areas where outstanding issues remained. By the late 1990s the deregulation dialogue had become an increasingly high priority in EU economic diplomacy with Japan. This may be attributed to the positive effects that economic reform in Japan was deemed to have on the EU’s trade balance with Japan. In 1992 the EU’s trade deficit with Japan reached its highest level to date at Ecu34.1bn, with Japanese imports at Ecu56.3bn and EU exports Ecu22.2bn. However, by 1997 this deficit stood at Ecu23.2bn, with Japanese imports at Ecu59.2bn and EU exports Ecu36.0bn. Figure 4.2 also shows that 1997 saw an increase in the EU’s deficit with Japan, thus reversing the 1992–6 trend. Notwithstanding this point, the deregulation programme was not the only contributory factor behind the general improvement of the EU’s trade balance. The TAM scheme had been instrumental in resolving many of Japan’s low import propensities. More proactive endeavours have also been made by the European Commission, EU governments and firms to penetrate Japan’s markets. National and EUlevel export promotion schemes specifically targeting Japan were first introduced in the early 1990s.38 European firms in general have become

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more confident in exporting to Japan, although the EU continues to stress a range of horizontal and sectoral market access problems that are perceived to hamper their efforts. In a summary report of these problems produced in June 1996, the European Commission identified over forty separate sectors in Japan where market access for foreign firms was believed to be particularly restricted. Various horizontal issues were also highlighted, namely public procurement, competition policy, standards, testing and certification, Japan’s distribution systems and the keiretsu. This provided another opportunity for the EU to confront Japan over the structural impediments to import issue. Furthermore, the EU’s persisting trade disputes over Japan’s discriminatory liquor tax regime, tariffs and quantitative restrictions on leather products, fish, pigmeat imports and harbour practices were raised by the document. While the European Commission achieved a positive result from a World Trade Organisation (WTO) panel decision on the liquor tax issue in November 1996,39 the other disputes remained outstanding. Japan’s ‘divide and conquer’ approach of playing off EU member states against each other and the European Commission continues to be practised here, although admittedly to far less effect.40 In contrast, the Japanese government has had very few bilateral complaints with the EU during the 1990s. As Table A.8 shows, Japanese firms were subject to only ten EU anti-dumping investigations over the 1991–7 period, compared to nineteen during the earlier 1985–90 period. By November 1998, the number of actual definitive ADDs in force against Japanese exports to the EU had fallen to seven (Table 4.3). The only major quantitative restriction imposed on Japanese products entering the EU by this time was the VER on cars. Moreover, Japan tended to resolve its main trade disputes with the EU through multilateral channels. Yet even here the EU has also used the WTO’s disputes settlement mechanism against Japan on far more frequent occasions. These related to its liquor tax regime, telecoms and navigational satellite procurement practices, sound recordings rules and pork import regulations. Since the inauguration of the WTO, Japan is yet to use its disputes settlement mechanism against the EU. Table 4.3 EU anti-dumping duties on Japanese imports (at November 1998)

Source: DG1C, European Commission.

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Furthermore, the EU’s involvement in the recent Fuji-Kodak dispute between the USA and Japan at the WTO is indicative of the growing trilateral context of EU-Japan economic relations. The US company Eastman Kodak alleged that its access to Japan’s photographic film and paper market was being restricted by both government regulations (i.e. the Large-scale Retail Store law) and Fuji’s dominance of retail distribution channels. Consequently, the USA took the matter to the WTO disputes panel in October 1996 on the basis of Japan’s failure to pursue appropriate competition policy measures to this case. In April 1997 the EU expressed its own concern to the WTO on this market access issue, thus reinforcing US pressure on Japan in a hope of acquiring positive externalities as an outcome.41 A press statement released by the European Commission in February 1998 further urged Japan to reform its economy’s distribution system as part of the deregulation programme. An analysis of EU-Japan sectoral trade patterns during the 1990s reveals that there was a further shift in the technological balance of trade towards Japan. Figure 4.3 shows that a relatively high proportion of EU exports to Japan in 1997 consisted of primary products at 11.9 per cent, compared to only 0.7 per cent of Japanese exports to the EU. Moreover, a high proportion of EU exports to Japan is concentrated in lower technology sectors (e.g. textiles and clothing) while the share of Japan’s high-tech exports to the EU has continued to rise. Thus, the Japanese competitive challenge to the EU remains significant. Over the 1990s the EU’s importance as a Japanese trading partner had also diminished slightly, accounting for 13.4 per cent of total Japanese imports and 15 per cent of Japanese exports (see Table 4.1), Finally, Figure 4.4 shows that Germany and the UK are Japan’s most prominent EU member state trading partners, with France, Italy and the Netherlands also having close trade ties.

Figure 4.3 Japanese FDI flows to Europe and USA (1981–96) Source: JETRO.

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Triadic relations: competition, coalitions and co-operation Relations between the core Triad powers—the EU, USA and Japan—became increasingly important in the 1990s, both in global terms and to each individual power. We can analyse these relations from three perspectives: competition, coalitions and co-operation. At the turn of the decade, there was much debate and speculation concerning which power would emerge as the hegemon of the early twenty-first Century (Hart 1992; Thurow 1992; Albert 1993). Discussions on Triadic competition mainly centred on relative performances in high-tech industries and the potential leverage each could exert within the future international economic system. Many were predicting that the US then current hegemonic position would be seriously challenged by the EU and Japan by the end of the 1990s. As it transpired, the US economy outperformed its two contenders on macro-economic criteria and also retained or improved its lead in a broad range of high-tech industries. Furthermore, as Strange (1987, 1994) has argued, the fundamental basis of US structural power remains strong. While the decline of US hegemony has perhaps been overstated, there has nevertheless been a more discernible shift towards a tripolar balance of power over the post-war period. Although Japan’s economic weight in GDP terms is least of the three, its commercial and financial strengths are arguably the most formidable, as demonstrated by its large trade surpluses with both Triadic rivals and the EU-Japan sectoral trade patterns examined earlier. Despite its industrial weaknesses, the EU’s own geoeconomic weight has itself increased as a consequence of dynamic integration and enlargement. To some degree, globalisation has made the Triadic competition debate somewhat redundant. The proliferation of transnational production, distribution and service systems across the Triad has made geoeconomic loyalties increasingly difficult to distinguish. Thus, in the context of EU efforts aimed at improving its competitive position vis-à-vis Japan and the USA, Bourke (1996) highlights the point that EU firms, by entering into strategic alliances with Japanese partners, challenged the concept of competitiveness in terms of the EU versus Japan. Furthermore, by playing host to a significant number of Japanese firms some member states were willing to ‘side with Japan in political economic bargains’ which ‘created a counter-force against the assumed bond between territoriality and competitiveness’ (p. 86). However, it is easy to exaggerate the case here. Japanese investment in the EU as a percentage of total EU investment is very small, and moreover the level of European investment in Japan is far smaller. The territorial imperative remains strong among the Triad powers and thus also the sense of acquiring a competitive or other advantage over the other.42 Given the persistence of the tripolar power structure, game theory would suggest that there are occasions where either ‘two against one’ coalitions or trilateral co-operation outcomes will arise. The former of these has long been recognised as a feature of Triadic relations (Ostergaard 1993; McIntyre 1994). With the USA invariably taking the initiative in applying gaiatsu, the Japanese

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Figure 4.4 Sectoral structure of EU-Japan trade (1980, 1997) Source: Eurostat.

government have been wary of generating any premise that would lead to the EU reinforcing this pressure.43 However, the close alignment of transatlantic interests in tackling Japan’s structural impediments to import has made this impossible to avoid. Even when the EU disapproved of the American MOSS and SII initiatives, it had nevertheless agreed with its broad aims and moreover was a significant indirect beneficiary. More recently, EU and US pressure has worked to some degree in tandem over Japan’s deregulation programme. Yet the USA has often not required European support to achieve its objectives as its relational and structural power over Japan have frequently sufficed. By contrast, the EU’s lower degree of leverage meant it regularly had to follow in the slipstream of US bilateral agreements brokered with Japan44 by attempting to match such deals retrospectively.45 However, the signing of the EU-Japan ‘national treatment’ agreement in 1994 helped to negate this problem, although the European Commission continues to monitor all US-Japan agreements closely to ensure that any market opening measures are MFN

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Figure 4.4 Continued.

compatible. In March 1997, for example, the EU requested formal consultations with Japan at the WTO regarding Japan’s alleged exclusion of European suppliers from a $40m government contract for a global satellite navigation system. This arose because the Japanese government restricted suppliers to the use of US technical specifications, thus disadvantaging EU companies and risking violation of the EU-Japan agreement and the WTO’s own Government Procurement Agreement (GPA). Generally, though, Japan has adopted a more impartial market opening approach in recent years and has been increasingly reluctant to make significant bilateral concessions to the USA.46 In addition, there have been occasions where the EU has denied support to the USA in its attempts to multilateralise gaiatsu upon Japan,47 most recently demonstrated in the USA-Japan autos and auto parts disputes of the mid-1990s. The mutual need to contain US unilateralism and other hegemonic excesses has provided the strongest basis for an EU-Japan coalition. New trends in global interdependence apparent from the 1980s onwards have also offered

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greater opportunities for the EU and Japan to explore positions of common interest, facilitated by recent growth in the EU-Japan foreign policy network (Ginsberg 1989). The new Asia-Europe Meetings (ASEM) dialogue framework has provided a wider inter-regional dimension to this process. Yet the potential for EU-Japan coalition building has rarely been exploited. Various reasons have been forwarded to explain this. Although the EU acts increasingly as a unitary actor on commercial matters, the same does not apply on matters of ‘high politics’.48 This is an important US advantage over the EU concerning relations with Japan, enhanced further by a close security relationship that underpins Washington’s economic and political ties with Tokyo. The relative lack of substance to EU-Japan relations outside commercial issues thus accounts for why the EU ranks below the USA in the division of ministerial responsibilities within the Japanese government. Furthermore, the psycho-cultural distance between both Pacific powers has steadily decreased during the post-war era while that between Europe and Japan remains pronounced and has closed little. EU member states have been too preoccupied with developing relations with each other rather than distant countries from other continents, despite Japan’s status as a key commercial partner. The EU’s ambitious integration agenda of the 1990s has naturally exacerbated this introspection, although this has simultaneously made Japan more aware of the need to develop a firmer ‘European’ policy. Like the USA, Japan’s interest in the global impact of European economic and monetary union (EMU) is considerable, especially regarding its effects on patterns of Japanese trade and investment, as well as its impact upon the global financial system. Towards the end of the 1990s the predilection for ‘two against one’ Triadic coalitions generally diminished while the practice of trilateral co-operation increased. We noted in Chapter 2 how the first concepts of trilateral co-operation were developed by Brzezinski (1973), Smith (1974), Ullman (1976) and Sklar (1982), although their analysis was primarily focused on issues of high politics and the work of the public policy elites within the Trilateral Commission. Since the mid-1980s in particular, co-operation on economic issues between the EU (or EU member states), Japan and the USA have evolved gradually through plurilateral and multilateral regimes. The G7 framework has provided a useful forum in which important international economic concerns and the sometime co-ordination of macroeconomic policy are discussed. This has most recently centred on the 1997–8 East Asian financial crisis. The OECD forum is also relevant here. At the WTO, the Triad powers have jointly spearheaded the launch of various sector-based trade accords such as telecommunications, maritime transport, financial services and electronic commerce. At the Rio de Janeiro (1992) and Kyoto (1997) eco-summits, the USA, EU and Japan were primarily responsible for establishing new multilateral environmental agreements. Globalisation has also generally underlain the need for improved Triadic co-operation through its creation of greater economic interdependence between the Triad powers. The incentive to find trilateral solutions to common problems is born from the deepening interpenetration of production, supplier

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and service provider structures across the Triad, hence presenting an a priori case for closer trilateral co-operation between economic policymakers. EU-Japan foreign direct investment: a closer examination Thus far, we have made several references to the impact that Japanese FDI in Europe has made to EU-Japan economic relations. In this section, a closer study of the FDI relationship between the two powers is made which also includes an analysis on EU investment in Japan. We shall mainly concentrate, however, on considering theoretical explanations that have been proposed regarding why the EU increasingly played host to Japanese firms from the mid-1980s onwards. The reader may wish to re-read the earlier section on Japanese outward FDI as the contextual background to what follows. Japanese FDI in Europe Japanese investment in Europe has not just been a post-war phenomenon. In a historical analysis on the subject, Mason (1992) notes that during the pre-war period Japanese FDI in the West was primarily based on trade-supporting or technology-acquiring motivations. This remained the trend in the early post-war years, although investment levels were very low until the 1970s. From 1951 to 1965, cumulative Japanese FDI in Europe stood at a mere $25m, representing only 2.6 per cent of total overseas investments made by Japanese firms.49 However, by 1971 both figures had risen sharply to $988m and 16.3 per cent. The relaxation of FDI rules from the late 1960s onwards and the contemporaneous surge of Japanese exports to the EC, both noted earlier in this chapter, largely explain this trend. Much of Japanese investment at this time was trade-supporting in nature with the sogo shosha expanding their commercial distribution networks within Europe, while the newly arrived finance, banking and insurance companies of various keiretsu groups also helped facilitate Japan-based exporting activities. Overseas investment was also a means to recycle Japan’s accumulation of financial capital generated by the substantial trade surpluses which it was beginning to register against the EC. Furthermore, Darby (1997) argued that the initial growth of Japanese manufacturing investments in Europe can be linked to Japan’s environmental crisis of the late 1960s and early 1970s. This especially applied to chemicalrelated industries and the negative externalities generated by Ozawa’s (1991) ‘Phase 2’ restructuring (scale-based modernisation of heavy and chemical industries) that led to the transplantation of certain activities to Europe and elsewhere.50 The extent to which this argument can be applied to all Japanese manufacturing investments in Europe during this period is debatable. Moreover, most Japanese FDI in Europe was concentrated in service sector industries, a trend which has persisted with these industries accounting for just over twothirds of the total.51 While Japanese FDI in Europe continued to rise during the 1970s, standing

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at a cumulative $3.9bn by the end of the decade, its share of total Japanese outward investment fell. This could be attributed to the rapid expansion of mining and labour-intensive manufacturing investments in Asia, spurred on by the respective needs of Japan’s resource-hungry industries and of its firms in low value-added sectors to preserve cost competitiveness. By the mid-1980s, though, Europe had once more become the focus of Japanese investment interests. In 1981 cumulative Japanese FDI in Europe was $5.3bn and 11.6 per cent of the total (see Figure 4.1) and by 1985 had more than doubled to $11.0bn with the annual flow of investment at $1.9bn for that year. Over the following four-year period, the cumulative amount was to quadruple to reach $45.0bn in 1989 with the annual inward flow in this year at an historic peak of $14.8bn. Figure 4.3 shows that Japanese investments in the USA were also expanding at a similar rate. The escalation of Japanese FDI in Europe during the latter part of the 1980s generated much academic debate. Initially, the process of European integration was strongly associated with the signing of the SEA in 1986, which was seen as a catalyst for both reactive and proactive Japanese inward investments as previously acknowledged. By this categorisation, reactive investments were a response to the anticipated emergence of ‘Fortress Europe’ in which heightened EC protectionism was intended to retain the benefits of market integration for EC-based firms (Hanson 1998). Thus, the ‘insider’ status that Japanese firms sought was motivated by the need to circumvent any future high tariff walls erected around the Single Market (Heitger and Stehn 1990). We have already discussed how the concentrated penetrations made by Japan’s consumer good producers (Ozawa’s ‘Phase 3’ of restructuring) in EU markets had already elicited a comprehensive protectionist response against their imports. Similar responses that were manifest elsewhere, most notably in North America, had already provided a considerable spur to the internationalisation of Japanese firms. Although more recent research undertaken by Belderbos (1997) suggested that Japanese FDI in both the EU and USA remained significantly motivated by ADD circumvention in particular, Nicolaides and Thomsen (1991) argued that proactive factors were more relevant. These included the exploitation of Japanese firms’ ownership-specific advantages within more systematic global strategies and the repercussions of industrial restructuring back home. In a later work that drew on the product life cycle theory of FDI, Thomsen (1993) proposed that by the 1990s Japanese FDI in the EU was primarily motivated by the need to: • • •

defend market shares threatened by intensified global competition; release resources back home in order to develop and market new products; draw closer to larger markets within a coagulating SEM.

Thomsen went on to state that technological rivalry between major Japanese assemblers created a perpetual need to develop new products for the home market, with the consequence of outdated product technologies being quickly

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Figure 4.5 EU trade with Japan by member state (1987, 1997) Source: Eurostat.

transferred to overseas production plants. Yoshitomi (1996a) concurred with this, proposing that Japanese manufacturing investments in Europe were part of a wider process of relocating more standardised, high volume products abroad while domestic-based activities were left to concentrate on highest value-added manufacturing and improving flexible automation systems. Moreover, Wakasugi (1994) observed that the improving rate and quality of innovation permitted Japanese firms to undertake such a strategy on an increasingly broad scale. Although Kume and Toksuka’s (1991) emphasis on trade friction as a determining factor behind Japanese FDI in Europe complied with Heitger and Stehn’s hypothesis, they also argued that factor and market access were key motivations. In addition, these investments could be seen as integral to a wider global ‘risk-management’ strategy to minimise both actual and unanticipated costs. For Akimune (1991), the general expansion of the world economy and domestic asset price inflation were principally instrumental in driving Japanese investment into Europe and other regions by the late 1980s.

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As the 1990s progressed, JETRO annual surveys and other studies consistently testified to globalisation strategies being the prime determinant behind Japanese FDI in Europe. In the analysis by Morris (1991) he made the distinction between how Japanese firms in Europe had moved from ‘simple globalisation’, in which FDI comprised of ‘final assembly operations closely controlled by the parent in Japan, where few components are sourced locally and little R&D are carried out’ (p. 2), to ‘global localisation’, whereby firms are engaged in a ‘full manufacture’ configuration of activities. This is typically characterised by greater subsidiary control and integrated product and locational strategies. In addition, empirical research conducted by Nitsch (1995) found that defensive or ‘reluctant investors’ had performed poorly, suggesting that reactive investment strategies are most likely to yield sub-optimal outcomes. Additional references to Dunning’s O-L-I (ownership-locationalinternalisation) analytical framework provide other perspectives on Japanese FDI in the EU (Dunning 1993). Some ownership-specific advantages are dependent on certain structural features of the Japanese economy. For example, the potential to emulate or transfer multi-layered systems of subcontracting, on which the practice of ‘lean production’ is partly based, may be limited in the host country. So too may be the positive feedback effects that originate from sophisticated demand expectations, which Japanese companies usually enjoy from home consumers. On the other hand, the early introduction of flexible manufacturing techniques, as embodied in Phase 4 of Ozawa’s (1991) ‘industrial restructuring’ model, helped empower Japanese firms to compete successfully across Europe’s multi-domestic52 market conditions. The need closer to observe the nuances of European consumer cultures, combined with the ability to ‘mass customise’ products to satisfy them while remaining cost competitive, provided a significant impetus for investment. According to Yamawaki (1993), location-specific advantages have played the incisive role in the decision-making process of Japanese investments in Europe. From a detailed empirical analysis, he concluded that a host country’s provision of relatively low labour costs, a substantial R&D capability and a large domestic market were the most effective combination of factors in attracting inward Japanese FDI. The UK has perhaps shown that it possesses the best combination of these advantages and has maintained its position as the major host nation with 38.3 per cent of the post-war cumulative share in 1996 (Figure 4.6). This position is now reinforced by certain agglomeration effects enjoyed by investing Japanese companies in the UK, such as an established and large Japanese business community and the network links that lie therein. Moreover, UK suppliers have been at the forefront of embracing Japanese-style production and management methods in Europe. Yamawaki further stressed the dual function of Japanese FDI, that is to serve the local market while acting as a springboard into the wider European market. Interestingly, this implied that Japanese firms did not yet perceive the EU as one unified marketplace, as aspired to by the SEM programme. His findings also concurred with Lamoriello’s (1992) observation that strong investment

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Figure 4.6 Stock of Japanese FDI in Europe by host country destination (1996) Source: JETRO.

inflows correlated in those sectors where Japanese firms already enjoyed large market shares in Europe, e.g. automobiles and consumer electronics. A related theme explored by Balasubramanyam and Greenaway (1992) concerned how the inroads made by investing Japanese firms in European markets have increasingly been achieved through internalising transactions that reduced the costs and risks of arm’s-length dealings. For example, direct selling and a more proximate position obtained to end markets bestowed a number of benefits that the external transactions associated with distance exporting could not. Other instances where Japanese firms were using FDI either to exploit or avoid market failure are also pertinent. The above analysis of Japanese FDI in the EU has focused on international production theories, but let us return to the domain of political economy. We noted previously how the expansion of the EU-Japan FDI relationship had profound effects upon their economic relations in general. By ensconcing themselves within Europe, Japanese firms were able to develop alliance relationships with EU state and non-state actors that to some extent altered the matrix of loyalties in EU-Japan economic diplomacy to Japan’s general advantage. While this was convincingly argued by Bourke (1996) and Nuttall (1996), Encarnation and Mason (1994) contended that while the EU policy model towards Japanese FDI which was emerging during the early 1990s promoted synergetic co-operation between European and Japanese firms, it also emphasised the need to continue regulating the latter’s investments.53 Even liberal member states such as the UK maintained various restrictions on Japanese firms which covered local content and related performance requirements aimed at extracting optimal value-added outcomes from their transplanted activities. Moreover, many of these restrictions were blatantly discriminatory in nature with other foreign investors not being made subject to such a tough regulatory regime. As Mason (1994) details, this emerging EU policy was most clearly articulated

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in the automotive sector. Under the terms of the July 1991 ‘Elements of Consensus’ document on EU-Japan automobile trade and investment, both parties were committed to fulfilling three general objectives. The first of these obliged the EU to progress towards full liberalisation of its markets by 31 December 1999: thus, the VERs of five separate EU member states would finally disappear by this date. The second objective called for an avoidance of EU market distortion in the meantime. This implied that Japanese auto transplants in Europe were not permitted to concentrate their intra-EU exports on these restricted member state markets. In addition, the third objective committed Japanese firms to make an appropriate contribution to both generating high value-added activities locally and improve European competitiveness. Protracted negotiations followed with a final agreement signed in 1993. This represented a continuity in the EU’s policy of ‘containment’ with respect to Japanese firms. To conclude this section, we should note that the accumulated stock of Japanese FDI in Europe stood at $113.0bn by 1996, representing 19.2 per cent of the total outward FDI from Japan (Figure 4.1). Most of this, $100.6bn, was located in the EU itself. European FDI in Japan The relative brevity of the analysis that follows on European FDI in Japan reflects both the low level of this investment and the paucity of academic research conducted on the topic. Thus, the question of ‘imbalance’ in EU-Japan commercial exchange has applied not just to trade but also to FDI. By 1996 the total stock of EU direct investment in Japan amounted to $5,792m which represented just 5.1 per cent of cumulative Japan FDI in Europe at the time. However over the 1989–96 period, the EU’s share of total inward FDI in Japan rose from 16.6 per cent to 27.6 per cent, although this was more than

Figure 4.7 Inward FDI stocks in Japan by geographic origin (1989, 1996) Source: UNCTAD databse.

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matched by the USA’s increased share from 23.5 per cent to 60.4 per cent (Figure 4.7). Of the EU’s investors, UK firms have been responsible for the largest share of investment in Japan, followed by those from Germany, the Netherlands and France (Figure 4.8). The general level of inward investment in Japan has been persistently low by international standards with its share of the world’s total inward FDI stock rarely rising above 1 per cent. A number of possible causes for Japan’s low propensity of inward FDI have been cited. These include regulatory obstacles, the failure to harmonise standards and testing procedures with international norms, convoluted distribution networks, market access problems and keiretsu business structures. At the same time, EU firms are at least equally culpable for not having familiarised themselves adequately with Japanese business culture, distributive practices and the government’s regulatory framework. This being said, Figure 4.7 suggests that they have performed better than their nonAmerican counterparts at overcoming Japan’s inward investment barriers. Furthermore, Mirza et al. (1995) observed from their empirical studies that European firms have become more proactive with respect to their direct investments in Japan. Bourke (1996) attributes part of the reason for this FDI imbalance to the Japanese government’s somewhat passive role regarding the surge of Japanese FDI into Europe, which subsequently failed to produce a linked bargain over reciprocal investment access for European firms in Japan. However, Japan did begin to liberalise its inward FDI regime from the early 1980s onwards. Most recently, an objective of the deregulation programme has been to stimulate inward foreign investment. Its success ultimately depends on the breadth and depth of response which it has been devised to elicit from economic agents and organisations within Japan’s domestic economy. We have already acknowledged that many of those impediments possess defining characteristics that are essentially structural or cultural in nature. Hence,

Figure 4.8 EU direct investment in Japan: net stock invested by member state (1996) Source: UNCTAD database.

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efforts completely to remove them may take a very long time to accomplish or, in some cases, prove fruitless. This will be reinforced by actions of resistance to gaiatsu from the perception that Japan’s economic as well as societal identity is being threatened. Consequently, the imbalance seems set to remain unless European MNEs in general are able to construct more innovative investment strategies in Japan or work in closer collaboration with Japanese firms through strategic alliance arrangements. The increasing significance of the East Asian region as an investment centre will undoubtedly provide some of the impetus required with Japan providing the location and resources for the more higher value-added activities of European investors. Furthermore, the future restructuring of the Japanese economy as a consequence of recent financial problems should diminish some of the structural impediments to inward FDI. Conclusion The EU’s economic relationship with Japan continues to be the most important among those with its East Asian partners. This can be explained in terms of the volume of micro-economic exchange, the breadth of other corporate ties and the Triadic dimension to EU-Japan economic relations. While a more cooperative framework of relations has been established between both powers, we have also shown how inherent tensions within the relationship still persist. We now analyse these general themes from different IPE theoretical perspectives. To neo-realists, the state-centred aspects of Japan’s economic development and the conduct of its international economic relations have clearly been the most important. The state played the key role in orchestrating Japan’s catch-up with its Western industrial rivals both before and after World War II. Its European trading partners had first become familiar with its neo-mercantilist tendencies as far back as the nineteenth century. Moreover, the EU member states have always had to combat the unified resolve between the Japanese state and ‘peripheral’ state actors. The close state-society links in Japan have meant that the distinction between state and non-state actors has sometimes been difficult to establish. For example, the Keidanren has been a long-standing agent of Japan’s foreign economic policy, as the 1962 trade negotiation offensive in Europe and later VER arrangements demonstrated. Thus, the EU has had to conduct its economic diplomacy with ‘Japan Incorporated’, where the Japanese state extends beyond the usual parameters of government. However, it has been noted that many state-society links in Japan have weakened during the 1990s. While Japan has benefited from unified statism in its economic relations with the EU, it was able to exploit European disunity to its advantage. In the early stages of EU-Japan economic diplomacy, Japan very effectively polarised EU trade politics and played one member state off against another as each aspired to acquire relative gains in preference over absolute gains. The introduction of the CCP did begin to address this predicament, although it took some time before a convergence of joint interests could be maintained on

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substantive trade policy issues. It was only when the SEM and its mandatory removal of various national-level measures were established that a coherent CCP towards Japan was finally in place. The conflict in EU-Japan economic relations can also be attributed to the changing balance of geoeconomic power. We have discussed how the EU was slow to acknowledge Japan’s ascendancy as an economic superpower and hence anticipate its bilateral and global implications, which itself holds lessons for the EU’s current economic relations with China. The inertia among EU industries and economic policymakers in positively responding to the Japanese challenge can be blamed for many trade conflicts, as can Japan’s assertion of its burgeoning commercial strengths. Furthermore, we have shown how a tripolar balance of power provided an alternative regime to hegemonic stability in the 1990s. Despite the longer-term loss of US hegemony and the frequent descent of the USA into unilateralism which neo-realists predict, each Triadic power has proved reluctant to initiate a trade war or withdraw from the multilateral order. Moreover, the EU and US promotion of ‘fair trade’ as opposed to free trade in their dealings with Japan has been more or less accepted, as revealed in the management of the Japanese government’s recent deregulation programme. At the same time, US hegemonic power has usually sufficed in cajoling Japan into signing new market access deals for producers. Thus, while the US may welcome EU assistance in applying gaiatsu upon Japan, it is invariably not requisite to US strategy. Japan’s perception of the USA as a strong unitary actor and the broad range of high political issues in USA-Japan relations further strengthen the American position in comparison. In these respects, the EU is handicapped by its complex system of inter-governmental and supranational governance, the view held by many Japanese that Europe is destined for longterm economic decline and the lack of high political interests between the EU and Japan, e.g. on security matters. However, some Japanese believe that greater European unity and economic dynamism may stem from the SEM and EMU projects. Neo-realists would further point out that the relative shift from low to high politics in EU-Japan relations during the 1990s led to a significant improvement in their economic relations. The neo-liberal perspective offers a different set of interpretations to the above. While neo-realists emphasise the state-centricity of Japan’s economic relations, neo-liberals stress the crucial role now played by distinguishable non-state actors in this field. They also propose that Japanese MNEs have confused the process of state economic policymaking by the transnationalisation of Japan’s economic interests. The two trends are related. Japanese multinationals and organisations such as the Keidanren work to their own separate non-state agendas, especially now in the era of globalisation where the interests of the keiretsu are more determined by transnational factors and hence less by national factors. As far as they have been able, Japanese policymakers must now consider the foreign investment concerns of Japanese big business whose operations are currently dispersed across the EU and elsewhere.

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A parallel development highlighted by neo-liberals is the growing relevance of domestic-international bargains. Globalisation’s exposure of the domestic economy to international forces has further increased the participation of nonstate actors in EU-Japan economic relations. For example, the EU’s industry associations and trade unions have long lobbied national governments and the European Commission to erect defensive barriers against the Japanese competitive threat and the surplus capacity problems in Europe which it has exacerbated. Environmental groups and other non-governmental organisations have in the past expressed anxiety over the nature of certain Japanese investments made in Europe (Darby 1997). Compromises between Europe’s domestic stakeholding constituents and Japanese representatives must thus be constantly brokered by EU governing authorities. This too can be applied to Japan at the domestic level where the government’s deregulation programmes of the 1990s interfaced socio-economic adjustment with EU diplomatic pressure. However, we have seen in this chapter how FDI reconfigures the domesticinternational bargaining process by its realignment of state, sub-state and nonstate interests. As the most important host of Japanese investment in Europe, the UK has become a pivotal ally to Japan in its economic relations with the EU. It was also shown how many EU local authorities and subcontractor firms with investment links to Japanese multinationals often sided with these patrons in the bargaining structure of EU-Japan economic diplomacy (Bourke 1996; Urata 1997). In addition to new transnational economic linkages that have been forged between the EU and Japan, new transgovernmental coalitions and policy networks have emerged in the more co-operative framework of EU-Japan economic relations. We should, though, be careful not to overstate their importance, especially in comparison to their USA-Japan counterparts. Moreover, at the inter-regional level of EU-East Asian relations there appears to be some uncertainty over Japan’s function within the ASEM.54 Neo-liberal institutionalists would also stress the role played by international organisations in EU-Japan economic relations. Both powers have become central figures within the world’s multilateral trade and finance institutions, and have consequently been co-participants in international regime building. They have also increasingly conducted their economic diplomacy through the WTO and other multilateral channels. It has been generally to the EU’s advantage that it has been able to wield greater structural power at the multilateral level. We argued earlier that Japan has not yet converted its economic power into commensurate political capital within the international community to the same degree achieved by the EU. For Marxists, the continued fixation with relative geoeconomic strength is part of the struggle for supremacy between the capitalist powers. Thus, to preserve European capital interests, the EU’s economic diplomacy towards Japan over the post-war period can be characterised by endeavours to contain a significant foreign capitalist threat. This adversarial stance is symptomatic to Marxists of the deeper crisis facing international capitalism. Japan’s emergence as a new economic superpower certainly presented the best opportunities in recent decades for the

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escalation of trade conflict into a full-blown trade war à la 1930s. However, this has thus far been avoided by the Triad powers. The global shift towards the neoliberal policy agenda of domestic and foreign market liberalisation during the 1990s, together with the international consensus to strengthen the multilateral trade regime, are normally granted credit for this. Notwithstanding the frequent comparisons made between the German and Japanese post-war economic miracles, the tensions that have dogged EUJapan economic relations may derive from a clash of capitalist cultures. In this battle, the Japanese capitalist model appears to have prevailed, the pressures of the recent financial crisis notwithstanding. Japan continues to enjoy sizeable trade surpluses with the EU and the production and management techniques of its companies are widely emulated in Europe and elsewhere. The deficiencies in the European capitalist model explain its retreats to protectionism. On other matters, the Marxist belief in the primacy of both implicit and explicit economic objectives within the foreign policy agenda of states appears highly relevant to EU-Japan relations. For most of the post-war years, these have been essentially economic with little political content. However, we have seen that this is beginning to change and furthermore what impact it has made towards underpinning a broader economic partnership. The EU-Japan FDI relationship, while imbalanced, has had a similar effect, although the Marxist theory of the ‘new international division of labour’ emphasises the intensified competition between European and Japanese workforces which FDI creates and how capital exploits this to labour’s disadvantage. A counter-argument suggests that capital and labour interests between the EU and Japan have somewhat converged through FDI and strategic alliance linkages. As we have shown in this chapter, both conflict and co-operation in EU-Japan economic relations co-exist within a framework where transnationalised interactions between various state and non-state actors have become increasingly relevant.

5

The EU and China

Introduction Over the 1990s the EU’s economic relationship with China has taken on increasing significance. This relates equally to developments at the bilateral level and multilateral, or global level. By 1997, China had become the EU’s third most important extra-regional trade partner, behind the USA and Japan. Moreover, the EU’s burgeoning trade deficit with China has approached that with Japan and threatens to reach the same political proportions. As the trade relationship has expanded, so have EU’s protectionist measures deployed against Chinese imports. Arising trade frictions, however, are now managed within the considerably improved framework of EU-China economic diplomacy that has been nurtured in recent years. Both powers have come to accept the other as key partners in the new global economy, especially in light of China’s industrial transformation and its growing international impact. Thus, supporting but also guiding China’s accession to the World Trade Organisation (WTO), and hence fuller integration into the international economic system, has become a priority in the EU’s external relations agenda. This chapter considers these recent developments in EU-China economic relations in some detail. It also examines the evolution of these relations to their present state. We shall see how geopolitical factors came to shape their nature and development during much of the post-war period, and how these gave way to geoeconomic determinants as China’s reform programme advanced and Cold War tensions eased. To provide important background context to these discussions, a close examination of the Chinese economy now follows. China: an emerging economic superpower The inexorable rise of the Chinese economy over the past two decades has become a central issue in international economic relations. This section examines the path of China’s rapid economic development and its global impact. China’s economic reform process receives special attention, as does the country’s integration into the East Asian and wider international economy. Finally, we shall consider what challenges lie ahead for the Chinese economy in the twenty-first century.

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China’s impact on the world economy For many centuries China was the most advanced nation on earth, possessing many of the pre-conditions for industrial development long before the European maritime powers sought extended commercial links with the country from the fifteenth century onwards. However, China’s own commercial isolationism led to a technological and economic stagnancy which persisted well into the twentieth century. The installation of a republican regime in 1911 after the demise of imperial China did little to revive the moribund state of the economy, exacerbated further by both the long civil war between nationalist government and Chinese Communist Party forces and the contemporaneous conflict with Japan. After the communist victory of 1949, the new regime under the leadership of Mao Tsetung set about establishing the basis of a command economy. Misconceived plans to accelerate industrial development, such as the ‘Great Leap Forward’ initiative of the late 1950s, continued to repress China’s economic potential. However, this was to change in the late 1970s with the rise to power of Deng Xiaoping, who began a process of market-based economic reforms in China that were to have a profound domestic and international impact. We shall analyse the path of China’s recent economic reforms in the section that follows and briefly concentrate here on the country’s growing impact upon the world economy. In generalised terms, this stemmed from the techno-industrial transformation that has been experienced by the Chinese economy in the 1980s and 1990s. Over these two decades, China’s economic growth rate averaged at around 9 per cent per annum while its trade sector expanded at an average annual 17 per cent. In 1980, the year after the reform process began, China’s total trade turnover (i.e. exports and imports) was $39.0bn and ranked as the world’s thirtieth largest exporting country with 0.1 per cent of total world exports (see Table A.9). However, by 1997 China was ranked as the tenth largest exporter with a trade turnover of $325.1bn (3.0 per cent of total world) and a trade surplus of $30.3bn (Figure 5.1). Much of China’s economic modernisation and commercial expansion can be attributed to inward foreign direct investment (FDI) flows. This was particularly relevant in the 1990s, after an escalation of inward FDI flows (Figure 5.2) had made China the most important developing country location for overseas investment. Given China’s recent economic performance and considerable economic potential for further growth and development, there has been much debate over whether or not it will emerge as Asia’s next economic superpower (Cable and Ferdinand 1994; Harding 1994; Lardy 1994; Overholt 1994; Ash 1995; Goldstone 1995; Huang 1995). Whatever the outcome, China’s impact upon the world economy will continue to be significant and poses a number of challenges to its main economic partners and the international economic system. The reform process: opening up the Chinese economy China’s recent economic reforms have been the key to its industrial modernisation and the more prominent position it now enjoys in the

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Figure 5.1 China’s import and export trade (1979–97) Source: IMF Direction of Trade Statistics Yearbook, various editions.

Figure 5.2 Inward FDI flows in China, 1979–97 (actual realised) Source: UNCTAD database.

international economic system. The origins of the reform process can be traced to Deng Xiaoping’s return from political exile and his subsequent appointment as China’s primary leader. Seeking a break with the previous Maoist era, and the catastrophic economic policies associated with it,1 Deng and his supporters first announced their plans for reform at the Third Plenum of the Chinese Communist Party’s eleventh Congress in December 1978. Thus began a reform process oriented by twin objectives: reorganising the domestic economy along more capitalistic lines2 and integrating China back into the world economy. The nature of the reform process has been experimental and often haphazard. Moreover, it has been driven by initiatives at various levels—central, regional, local and

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individual—which have helped to create a system of industrial governance and transaction that is distinctly non-western (Boisot and Child 1996). It seemed logical for the Chinese leadership first to target the agriculture sector for reform, given its significance, low levels of productivity and potential to free up resources for other parts of the economy. The introduction of the Contract Production Responsibility System brought rudimentary market reforms to the sector in the early 1980s, while land leases were granted to farmers as part of a decollectivisation programme. Opening up China’s coastal regions to inward FDI also became an initial priority in what was to be known as the Government’s ‘Open Door’ policy. In 1979 a joint venture law was introduced and by 1980 four Special Economic Zones (SEZs) had been created at Shenzhen, Zhuhai and Shantou in Guangdong province and Xiamen in Fujian province. Their respective proximity to Hong Kong, Macao, Southeast Asia and Taiwan was no coincidence, revealing China’s intentions to develop closer transnational links with neighbouring dynamic economies. These links have been largely facilitated by guanxi (connections) business networks that have evolved between mainland and overseas Chinese.3 In return for the tax and customs duty exemptions which the SEZs offered foreign investors, the Chinese authorities hoped to induce inward technology transfers and simultaneously raise the technology-intensity of China’s exports, although these remain highly dependent on foreign multinational enterprises (MNEs). This was also an attempt to revert the Maoist bias against technology and trade that Deng recognised had previously hindered China’s economic modernisation. From this evolved a broader Coastal Development Strategy, whose overall purpose was to establish a variety of designated areas—such as the SEZs—in which foreign capital, technology and management experience would be acquired and the benefits therein gradually dispersed throughout the rest of the economy (Reardon 1996). In 1984 fourteen coastal cities were granted an ‘Open City’ status4 which was roughly based on the SEZ model. In the same year, Economic and Technology Development Zones (ETDZs) were created in most of these cities5 to serve as specialised conduits for new technology acquisition and the assimilation of advanced industrial management practices. The strategy was extended in 1985 to include the promotion of new ‘open economic development zones’ in the Pearl Delta, Yangtze Delta and southeastern Fujian Delta areas, in which further transborder economic links were encouraged.6 In 1988, a series of National Industrial Development Zones for New and Advanced Technology (NIDZNATs) were set up in twenty-one coastal city locations, which serve as science parks whose primary role is to improve China’s own indigenous high-tech production capabilities.7 By this time, the East Jiao and East Liao Peninsulas had become open economic development zones and Hainan Island had been granted full SEZ status.8 Various other economic reforms were undertaken during the 1980s to inject marketisation into the economy as a whole. These included initial reforms in China’s state-owned enterprises (SOEs), new laws and initiatives on

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shareholdings and financial markets that enabled the separation of ownership and management and widespread price liberalisation. China’s trade policy also became a prime target for reform. It had traditionally been managed by the Ministry of Foreign Economic Relations and Trade (MOFERT)9 and its twelve centralised Foreign Trade Corporations (FTCs), which performed the business functions of trade. By 1984 MOFERT’s control loosened over import trade as FTC local and provincial branches were granted greater independence, while in 1985 the Production Networks for Exports scheme was created to promote closer links between higher-tech exporting firms. In 1988 a plan for restructuring the foreign trade system was introduced, bringing more regional autonomy and deepening of integration between production and trade activities. Such decentralisation of economic and political control had become a key feature of the reform process from an early stage. By 1989 the central authorities, concerned over signs of rising inflation and emerging regional imbalances in development, endeavoured to regain control over an overheating economy by imposing price freezes and slowing the pace of reform. However, the central government’s ability to achieve this was now limited, owing to its devolution of power to provincial and local government agencies (Zhu 1992). Despite the mood of retrenchment at the centre, infamously symbolised by the Tiananmen Square massacre in the summer of that year, the momentum of the economic reform process was sustained. In 1990 two stock exchanges were opened at Shanghai and Shenzhen, while the Pudong New Area Special Economic Zone was created in Shanghai to act as a hub for the Yangtze Delta development zone.10 Deng’s ‘southern trip’ to the coastal regions in January 1992 both reaccelerated the pace of reform and broadened its agenda to encompass wider aspects of the economy. The State Planning Commission began to formulate a nationally unified industrial policy based on restructuring a range of industries. By 1994 thirteen frontier cities were opened up along China’s north-east and south-west borders, as were all provincial capitals and five more cities in the Yangtze Delta corridor. In addition, approval was given to create twenty-seven economic and technological development regions and fifty-two new and hightech development zones. Furthermore, in an attempt to emulate central government initiatives, provincial governments had between them created around 500 provincial development zones based on similar objectives, while many local municipalities established their own district or county level export processing zones, although many have remained inert. On 1 January 1994 a new unified exchange rate system was introduced, replacing a transitional dual system whereby an official rate adjusted periodically while a more depreciated market rate had been determined at Foreign Exchange Adjustment Centres. Four months later, the China Foreign Exchange Trading System was established which serves as a nationally integrated electronic system for foreign exchange trading. The more market-aligned system was intended to give greater incentives for Chinese producers to export, as was a 33 per cent devaluation of the yuan which coincided with these reforms. The early and

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mid-1990s also witnessed a series of other key market-based reforms, especially with regard to China’s taxation, legal, financial, commerce and banking systems. Together, these reforms shared the common objective of creating an economic environment in which market-oriented practices can flourish. This not only applies to domestic, private and foreign enterprises, but also to China’s SOEs and the quasi-state business organisations that have emerged from the reform process. The latter are often referred to as township and village enterprises (TVEs), which are usually controlled by a mixture of representatives from local government, private companies and foreign investors and run on a collective basis with the managers ultimately answerable to local government. The TVEs evolved out of Deng’s early agriculture sector reforms, yet the majority of them are now preoccupied with manufacturing activities. Moreover, many are located in urban areas and form part of the subcontractor networks of foreign MNEs. In recent years they have made a significant contribution to China’s economic growth (Wing and Yiu 1996) and have provided a new competitive threat to the SOEs, which have had to adapt to new commercial realities. Yeung (1995:158) suggests that these developments form part of an ‘entrepreneurial state paradigm’, in which ‘the state apparatus or its affiliated agencies engage in economic activities directly and behave like a private enterprise through having aims of entrepreneurship and profit-generation, which are contradictory to the conventional bureaucratic notion of the state and inefficiency of state-owned enterprises’. One interesting manifestation of this paradigm that was apparent from the early 1990s onwards is the new role which the People’s Liberation Army (PLA) plays in the Chinese economy. Under the pressures of contending with a diminishing role, reduced budgets and flagging morale after the Tiananmen Square massacre, the PLA began to explore ways in which it could generate extra funds and carve out a more positive and subsidiary function in Chinese society. This has entailed converting military plants to produce civilian output and acquiring established enterprises across a range of sectors. While these activities provide much needed currency to purchase foreign high-tech military hardware, they also pose a potentially significant distraction to the PLA in performing its primary function. Additional opportunities and risks have been associated with China’s ‘new economic elites’, spawned as a consequence of the reform process and consisting of state capitalists, model managers, suburban executives and new entrepreneurs. Although they form the essential middleclass strata that is necessary to sustain the shift towards greater economic pluralism, they also represent a potential source of pressure on the existing monolithic political system (Goodman 1995, 1996). According to Prybyla (1997), this outcome is the hope of many of China’s trading partners. Long before Deng Xiaoping’s death in February 1997 at the age of 92, the new regime-in-waiting, led by Jiang Zemin, had already proclaimed its commitment to maintain the pace of gradual reform at the fourteenth Central Committee Meeting where China’s ninth Five-year Plan was launched.11 China’s negotiations

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over its accession to WTO and at the Asia-Pacific Economic Co-operation (APEC) forum had also led to a 30 per cent reduction in tariff levels for around 4,000 products and the removal of 179 non-tariff barriers in 1995. However, in the wake of the 1997–8 East Asian financial crisis, the new Chinese leadership postponed the opening up of its banking system and stalled other reform measures. Even though the crisis had not spread to China, it made Beijing circumspect of more fully exposing the economy to global market forces. Integration into the East Asian and wider international economy China’s rapid economic development has, of course, been part of a broader regional development. The effectiveness of Deng’s ‘Open Door’ reforms has largely depended on the influx of foreign capital, particularly from neighbouring countries and specifically from Hong Kong (Figure 5.3). Yet China has also made a considerable impact upon patterns of trade and investment outside its immediate borders, enhancing East Asia’s own potential for dynamic economic growth by offering both a competitive production base in the regional division of labour and increasingly prosperous market of some magnitude. Thus, many of China’s neighbours take a positive view of its role in the East Asian economy (Wong, J. 1995). China’s engagement in the APEC process has thus far reassured fellow members that it can make a significant contribution to regional economic co-operation. As Klintworth (1995) observed, this derives from China’s perception of APEC as building a foundation for a golden Pacific age with itself envisaged at the centre of this movement. China has also used APEC as a vehicle to strengthen its bargaining position vis-à-vis the USA and Japan, most crucially over market access issues. For its main trading partners, APEC has been a testing ground for China with regards to WTO membership and accession to other multilateral fora. China’s bilateral economic relations with other Asia-Pacific countries have

Figure 5.3 Inward FDI stock in China by geographic origin (1987, 1995) Source: UNCTAD database.

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generally developed in a constructive and progressive manner, although a series of territorial disputes still present a source of political tension in many of these relationships, most notably with Taiwan. In addition, guanxi business networks, which interlink enterprises across the Chinese diaspora, continue to cultivate deeper interdependencies in the region. According to Segal (1996), these links may develop substantively beyond business relationships to embrace a stronger political dimension in the future. Japan, and increasingly Korea, are also seen by China as key economic partners. China’s path to development has only partially drawn on the Japanese model, and moreover it has been careful not to develop too much of a capital and technology dependence on Japan12 (Wingrove 1995). With the demise of the Soviet Union, China’s strategic importance to the USA has become more economic than political. The USA first granted China most favoured nation (MFN) status in 1979 and since the 1970s North America has absorbed large quantities of labour-intensive products from Chinese producers. Even before Deng’s reforms were initiated, China’s trade with market-based economies was unusually high for a communist country. These exchanges increased from the late 1970s onwards as Hong Kong began to play an important intermediary role for marketing and distributing China’s exports. As the 1980s progressed, China endured growing hostility from Western nations over its market penetrations in ‘sensitive’ industry sectors. This continued into the 1990s, where China not only achieved large trade surpluses against the EU and USA but also frequently against Japan. However, as Figure 5.1 indicates, China’s trade balance has swung between deficit and surplus in accordance to cyclical patterns as high spurts of domestic growth have stimulated import demand. China’s continued integration into the world economy has also been achieved via inward FDI flows, which have been the most important source of foreign capital for the country at a cumulative $220.2bn13 over 1979–97 (see Figure 5.2). Chen et al. (1995) contend that while inward FDI flows have brought significant benefits to China, they have also contributed towards the uneven development between coastal and interior provinces, a worsening income distribution and a declining ideological commitment to communist principles. Questions have also been raised over China’s dependency on foreign MNEs to produce its exports: by the mid-1990s, joint ventures between Chinese enterprises and foreign investors had come to account for around a half of China’s processing trade (Kirchbach and Aguado 1996). Indeed, no other East Asian country has become more reliant on inward investment for its exports than China. Yet, as Changzheng (1997) argues, FDI still plays an instrumental part in China’s industrial restructuring and joint ventures will continue to be lured by the country’s increasing market prosperity and relative factor advantages. Future challenges Although China has made considerable progress with economic reform and its integration into the world economy, various important challenges lie ahead for both the country and for those with a stake in its future development. There

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is still much outstanding work to be done in restructuring Chinese industry, especially regarding the 100,000 or so SOEs that employ two-thirds of the urban workforce. Almost half of these are loss-making and their mutual debt chain continues to increase. According to Wong, Y. (1995), China’s recurrent macroeconomic imbalances can be traced to the state’s cheap credit policy towards loss-making SOEs, thus hindering financial reform on which the country’s longerterm economic success depends. Furthermore, Parker (1995) argues that the longer the SOEs evade a Schumpeterian ‘creative destruction’ process, the more accumulative the drag effects upon China’s future economic growth. Yet the short-term adjustment costs incurred by withdrawing financial support for inefficient SOEs are prohibitive, at least in a political and socio-economic sense. The Chinese economy may already be containing an unemployment time bomb with the gradual labour-displacing modernisation of the agriculture sector. An improvement of China’s technological capabilities, and the industrial upgrading which this implies, hold their own structural implications for the advanced industrial economies. The impact of further such advances made in ‘sensitive’ industries may be small as traditional producers have already rationalised in response to earlier NIC competition (Michalski et al. 1996). Thus, trade tensions in these sectors are more likely to arise between China and the NICs themselves. China can also be expected to maintain its competitive advantage in labour-intensive industries, given the downward pressure large reserves of rural-based workers will exert on industrial wage levels. This, though, is contingent on overcoming structural rigidities that constrain labour mobility and outsourcing in more remote, labour surplus regions. Regional issues within China pose their own set of challenges, particularly with reference to emerging regional inequalities and the potential for regional fragmentation. The rapid industrial development of the coastal provinces has exacerbated core-periphery divides within the Chinese economy. The fostering of transborder economic linkages with other East Asian countries could be argued to constitute an additional source of division. However, there has been recent evidence that inter-provincial supply networks and markets are deepening, hence creating stronger interdependencies across the national economy14 (Womack and Zhao 1994; Lin 1996). Ethnic unity within China also remains strong, with the Han race making up 92 per cent of China’s total population. Moreover, the ideal of a unified Chinese state has a long history and continues to exert a powerful appeal. In more recent years, China’s interior provinces have also received more prominent central government support to promote their economic development, although they still encounter difficulty in attracting significant levels of FDI. Segal (1994) argues that China’s fragmentation could have an adverse external impact on most of its trading partners. On the other hand, a more realistic and constructive future dialogue with China could be best achieved by developing stronger diplomatic links at a provincial level. The enhanced degree of autonomy now enjoyed by China’s provincial authorities and the new independent role they play in the international economy make this essential. As Zweig (1995)

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notes, the ‘developmental communities’ that have emerged in China’s coastal areas have undermined centralised control over China’s foreign trade regime. This has posed a number of problems for China’s trade partners as we shall later discuss. Perkins (1996) argues that it is also in the interests of China’s Western trading partners to avoid taking a strident protectionist stance against its producers, as such an approach could jeopardise China’s reform process if its export-led growth is threatened through the aggravation of adjustment pressures and the internal tensions that this provokes. While China can expect to maintain a competitive advantage in labour-intensive products, for reasons already discussed, the EU and other advanced trading partners can anticipate a substantial demand for their higher-tech products from China. This depends, though, on the country’s continued pattern of economic growth and the extent to which it develops its own capabilities in these sectors. However, China maintains a pronounced technology dependency on the advanced industrial nations, although Yoshitomi (1996b) contends that the ETDZs, NIDZNATs and other similar initiatives have given the country a unique opportunity to develop a high-tech production base at a relatively early stage in its economic development. There is still much need in China for outside technical assistance and further inward technology transfers in key areas. That which perhaps holds most priority for other countries is the improvement of China’s environmental management systems. The country’s rapid economic development has been accompanied by severe environmental degradation. Owing to a combination of its heavy reliance on coal (with huge indigenous reserves), enormous population and potential for continued rapid growth, China poses a serious ecological threat to the planet. It is already the fourth largest generator of greenhouse gases. While the annual average growth rate of CO emissions for 2 OECD group has been estimated at 0.9 per cent over 1990–2050, China’s rate is four times higher at 3.7 per cent (OECD 1992). This implies that the country’s own cumulative global shares of CO will rise from 6 per cent to 20 per cent over 2 the same period, the highest of any one single country. These issues are in some way related to the challenge of developing a closer economic diplomacy with China. There are other more direct issues that we have not yet considered. China’s position as an increasingly powerful but yet low income economy poses a somewhat new challenge to the international economic system, made more complex by the fact that it is represented by a communist political regime in a predominantly market-driven world economy. We should also note that with ascendant economic power comes the expectation of a commensurate increase in leverage that can be exerted in international relations. China has already revealed such intentions, although as Yahuda (1996a) observed, its new assertiveness on the international stage should also be understood as an attempt to substitute the diminishing appeal of communism with an invigorated nationalism, which serves as a alternative unifying force in society. However, China is aware that its further economic progress rests on the development of harmonious bilateral and multilateral relations.

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EU-China economic relations Having thus explored various issues relating to China’s economy, we shall now consider the development of its economic relations with the EU. This initially entails a brief examination of the historic links between Europe and China, which is followed by an analysis on the early post-war development of their economic relationship. We shall show how the context of EU-China economic relations shifted from the Cold War’s bipolar geopolitics to the multipolar geoeconomics of the late 1980s. From this stemmed a more positive and expansive phase of relations during the 1990s, although the new competitive threat China posed to the EU simultaneously gained greater proportions. Incorporating China within the multilateral trading system will to some degree negate this threat, which partly explains the EU’s support for China’s accession to the WTO, an issue that is extensively discussed towards the end of this chapter. Europe and China: the historic links China and Europe are old trading partners. For centuries, the trans-euroasian Silk Route provided a channel through which commodities were exchanged. Commercial networks were extended further as the competing maritime powers of Europe set up trading posts along the Chinese coastline from the latter half of the fifteenth century onwards. The Portuguese were the first to establish seaborne trade links with China and consolidate a commercial position. By the early seventeenth century the Dutch had become the dominant European influence, although this too was soon contested by the British a few decades later. Britain’s commercial position in China vis-à-vis its European rivals improved throughout the eighteenth century. However, as British commercial interests developed, so did its disputes with the Chinese over the control of commodity trade and issues of extraterritoriality. These came to a head in the 1840s when China suffered humiliating defeat in the First Opium War. Britain’s annexation of Hong Kong after the 1842 Treaty of Nanking further served to underline its aggressive commercial intentions. As Borthwick (1992) notes, these were linked to Britain’s growing economic dependence upon China during the nineteenth century, especially for products such as tea. Competition between the European powers over Chinese trade continued up until the prewar period. Moreover, they were increasingly joined by vying US and Japanese commercial interests by the late nineteenth century onwards. Cold War geopolitics (1949–70) Radical political change in China and the country’s position in the new postwar geopolitics were to have profound effects upon its economic relations with European countries. During earlier post-war decades, Europe’s position in China’s foreign policy was largely determined by Beijing’s relations with the

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USA and Soviet Union. Relations with both West and East European states were sought insofar as promoting China’s strategic advantage against the Cold War superpowers, and thus they performed a secondary function (Shambaugh 1996). European governments were also reluctant to develop a foreign policy position towards China independent of their respective superpower ally, although there were exceptions.15 There were also indications that the newly installed Maoist regime would, if anything, adopt a belligerent stance towards the West European states, with assets of some European multinationals operating in China being seized in compensation for past colonial ‘atrocities’. Furthermore, Beijing wanted to demonstrate that China’s past subservient commercial relationship with the European powers was at an end. However, as the 1950s progressed, China’s attitude eased in response to new circumstances. The USA had cut off all commercial ties with China after Mao’s accession to power. It had also attempted to orchestrate its Western allies into restricting the export of strategically sensitive products to communist states via the Paris Co-ordinating Committee, or COCOM.16 The US total embargo thus heightened China’s interest in West Europe as a vital source of technology, capital and markets. A large Chinese delegation was sent to the Moscow International Economic Conference in 1952 to secure contacts with West European business leaders, who formed the majority group in attendance. Later on in 1954, the Geneva Conference on Korea and Indochina laid an important foundation for advancing both political and economic relations between West Europe and China. At the conference a prime objective of China’s Premier and Foreign Minister, Zhou Enlai, was further to extend commercial links with West European countries, especially in sectors where the Soviet bloc was weak.17 The building of such ties paved the way for diplomatic relations to be established between China and some West European countries18 and certain COCOM restrictions to be eased. China’s dependency on West European commerce gradually increased with the souring of relations between Beijing and Moscow during the late 1950s and eventual Sino-Soviet split in 1960. Thus, during the 1960s, West Europe played a crucial part in China’s economic diversification strategy. By the middle of the decade the region had become China’s most important trade partner, being responsible for around a quarter of its imports and exports (Table 5.1). In addition, West European companies increasingly supplied China with industrial plants from early 1960s onwards. Yet such dependency was born more out of necessity than choice owing to the state of China’s relations with the superpowers.19 It should also be noted that China offered West Europe limited commercial opportunities in general, particularly regarding consumer goods markets which were practically non-existent. As Table A.3 shows, China represented only 1.5 per cent of EU15 exports in 1960 and a mere 1.0 per cent by 1970. On a political level, relations between China and West European countries remained weak, where both geographic and cultural distances as well as ideological differences were contributing factors. Beijing was initially sceptical

Notes: 1 Comprises ASEAN and South Korea. 2 Includes the Caribbean states.

Source: IMF Direction of Trade Statistics Yearbook, various editions

Table 5.1 Geographic breakdown of China’s international trade (percentage per trade partner, 1960–97)

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of the regionalist initiatives in West Europe (i.e. the ECSC, EEC and EFTA), describing the Common Market as ‘an internal cartel organised by monopolistic groups of the six West European countries…to ease the contradictions among themselves’.20 Geopolitics nevertheless dictated that a pragmatic approach be supported at times. During 1964, France’s President de Gaulle’s attempted to develop closer ties with China as part of a strategy to push West Europe forward as a global power. Although this plan was ill-conceived and eventually floundered, China was willing to support any initiative that would lead to the ‘global encirclement’ of the Soviet Union and dislocate the transatlantic alliance (Griffith 1981). West Europe remained an important economic partner for China up to the end of the decade, but in its last few years Sino-West European diplomatic relations were strained by the events surrounding the Cultural Revolution. While this was to have some detrimental impact upon the economic relationship over the medium term, new events and developments in the 1970s were to have a much longer-term impact. Towards multipolarity (1971–89) The normalisation of Sino-US relations in 1971 had a significant effect upon China’s foreign relations with other countries. President Nixon’s visit to the People’s Republic in February 1972 provided a signal for other Western countries to re-establish contacts and exchange ambassadors that had been withdrawn in the wake of the Cultural Revolution. Some West European countries established full diplomatic relations with the PRC for the first time.21 As Dequan (1996) observed, the end of the ‘blockade and isolation’ period also offered new commercial opportunities for EC-China economic relations. Despite the new environment of détente and the promising beginnings of an economic partnership, Sino-US relations continued to be hampered by a number of complications. The US position as a guarantor of security for certain East Asian countries brought it into frequent political conflict with China, especially over developments in Southeast Asia. Moreover, the USA was more overtly opposed to China’s political regime than its Western allies and was thus viewed as a more antagonistic international partner.22 In addition, Beijing’s renewed interest in promoting a more multipolar world implied an undermining of the US hegemonic position. With the latter of these points particularly in mind, China’s view towards regional integration in West Europe was seen in a more favourable light than previously. The EC9 enlargement of 1973 was welcomed because it constituted a new bloc to challenge the bipolar status quo, although the Chinese were simultaneously aware that it would wield more economic power, but not necessarily political power, on the world stage.23 Beijing was also encouraged by the EC’s growing engagement of relations with the developing world, as demonstrated by the initiation of its Generalised System of Preferences (GSP) scheme in 1971, the Euro-Arab dialogue of 1974, the Lomé Convention of 1975

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and the commencement of talks between the EC and the Central American Common Market countries in the same year. Kapur (1986) notes that the new détente in Sino-Western relations, and more specifically China’s interest in new EC developments, led to the start of what he refers to as ‘communicatory diplomacy’ between Beijing and Brussels. This soon led to ‘exploratory diplomacy’ whereby high-level meetings between China and West European leaders were held to explore the opportunities for developing an EC-level diplomacy. In turn, this was followed by an ‘operational diplomacy’ in EC-China relations which was initiated after European Commission Vice-President Sir Christopher Soames’ visit to Beijing in the autumn of 1973. Bilateral trade agreements between individual EC member states and China were due to expire by the end of 1974. The EC Council of Ministers agreed in May 1974 that future trade negotiations with China should be led by the European Commission, partly as a means to bolster the legitimacy and operation of the Common Commercial Policy (CCP). China received the EC’s proposal in November that year and Beijing’s response was generally positive. As Yue (1993) observed, Taiwan was the main point of contention in the ensuing negotiations. China sought confirmation from the EC that it would not pursue formal relations with Taiwan in the future. This was accepted by the Commission representatives, albeit with some hesitancy.24 Formal diplomatic relations between the EC and China were established in May 1975 but a comprehensive trade agreement was not forthcoming until April 1978. The EC-China Trade Agreement of 1978 (CEC 1978) was the first that the EC had concluded with a non-market economy (NME).25 In the Agreement, it afforded China modified MFN status as it was not a member of the General Agreement on Tariffs and Trade (GATT). Thus, China could not expect to receive the same degree of benefits as GATT members. During negotiations, there was much debate as to whether the EC should treat China as a developing country or a NME within its Common Commercial Policy. It was decided that the latter would apply although China’s low income level qualified it as a GSP beneficiary in the EC’s scheme, which it joined in January 1980.26 Furthermore, the 1978 Agreement extended the list of EC imports from China that had hitherto been governed by restrictive measures applicable to NMEs under COCOM. An EC-China Joint Committee was also created to review annually any outstanding trade issues arising between both parties. The framework of EC-China economic relations was further expanded by the 1979 Textile Agreement. This was later amended in 1984 and replaced by a new agreement in 1988, both of which marked shifts to a more restrictive regime (Kapur 1990). Textiles have been a significant export industry for China but one of structural decline in the EC (Figure 5.4). In the 1979 Agreement, the EC nevertheless made concessions beyond those negotiated with other developing countries under then existing Multi-Fibre Agreement (MFA).27 However, EC protectionism on Chinese exports was increasingly manifest in other sectors by this time. This particularly related to the growing number of

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Figure 5.4 China’s exports to the EU by sector (1980, 1987, 1997) Source: Eurostat.

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anti-dumping investigations being made by the European Commission on China’s state-trading producers. The EC applied its first anti-dumping duty (ADD) on a Chinese product (saccharin and its salts) in 1979. During the 1979– 86 period, China attracted an average of two ADDs per annum from the EC, a relatively high figure for any of its trading partners. Various safeguard measures had also been deployed against low-cost Chinese exports deemed to have ‘injurious competition’ effects against EC industry. These mainly took the form of quantitative restrictions imposed on a member state basis. The intensification of EC protectionism can be strongly linked to the onset of Deng Xiaoping’s economic reforms, which began gradually to unlock China’s commercial potential from the late 1970s onwards. China’s exports to the EC increased from Ecu628m in 1975 to Ecu1,786m in 1980, and by 1985 had steadily risen to Ecu3,936m. However as Figure 5.5 shows, EC exports to China also expanded rapidly over the same period from Ecu1,089m in 1975 to Ecu1,724m in 1980, and then to a decade peak of Ecu7,181m in 1985. Although the volume of EC-China trade was growing at a vigorous rate, West Europe’s importance to China as a trade partner was simultaneously diminishing. In 1975, the EU15 countries were responsible for 25.6 per cent of China’s imports and 14.6 per cent of its exports, but these shares had fallen to 17.1 per cent and 9.0 per cent respectively by 1985 (see Table 5.1). This trend could be attributed to two main factors. First, the normalisation of Sino-American relations had allowed US companies to compete with their European rivals for Chinese trade for the first time since the COCOM restrictions were imposed. From a non-existent commercial relationship in 1970, the US share of China’s imports rose from 5.1 per cent in 1975 to 12.2 per cent by 1985, and for China’s exports from 2.7 per cent to 8.5 per cent. Second,

Figure 5.5 EU-China merchandise trade (1975–97) Source: Eurostat.

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Hong Kong’s rapid industrial development had made it a major import source for China’s economy, and in particular its newly established SEZs. Hong Kong’s share of China’s imports hence increased from a mere 0.6 per cent in 1975 to 11.2 per cent by 1985, and moreover remained the PRC’s primary re-export conduit. Over the same period, Japan continued to be China’s most important trading partner, providing around a third of China’s imports and procuring approximately a quarter of its exports. A similar trend could be observed for the EC’s investment position in China during this time. While EC direct investment in China began to increase as the reform process gathered pace, the EC’s relative position to China’s other major investment partners simultaneously weakened. The cumulative FDI of EC firms in China rose from $300m in 1984 to $1,551m in 1987, yet the EC’s share of the total inward stock of FDI in China fell from 13.6 per cent to 6.7 per cent over the period (see Table A.6). Meanwhile, Japan increased its share from 5.8 per cent to 9.2 per cent and the USA maintained the highest share among the Triad investors, although falling from 16.9 per cent to 13.1 per cent. The emergence of Hong Kong as China’s most important source of inward investment from the early 1980s onwards also contributed to the EC’s relative decline as a FDI partner. Despite these developments, the EC was still China’s main technology supplier by the mid-1980s. In 1986, EC firms were involved in 290 new technology contracts with China valued at $2.13bn, representing 47.8 per cent of the value of all such contracts China had entered into with foreign suppliers (Shiqian 1988). In the same year, China’s imports of high-tech products from the EC accounted for 51.0 per cent of the total in this sector.28 Furthermore, the EC had become an important source of financial assistance to China during the decade, with most notably Belgium, West Germany and Italy offering soft loans and grants aimed at helping modernise Chinese industry. In return, China was obliged to import a certain quotient of industrial machinery and other capital goods from the donor country.29 The value of EC-level financial aid was much lower in comparison30 to that offered by member states and was mainly concentrated in agriculture and energy projects. Developments at the political level during the mid-1980s made a positive impact on EC-China economic relations. The 1984 Sino-British Joint Declaration on Hong Kong helped to ease the post-colonial tension between the two powers. This was soon followed by the 1985 China-EC Trade and Cooperation Agreement which was effectively an extension of the 1978 Agreement but in addition carried provisions to facilitate EC-level economic co-operation with China.31 Various agreements of this kind had already been signed at the member state level in the late 1970s and early 1980s,32 with many establishing bilateral investment treaties (BITs) with China a few years later.33 More vigorous efforts to promote Europe’s commercial links with China had been made generally through an increasing number of high-level visits by EC and member state officials to Beijing. Many EC member states were also establishing their own China trade promoting agencies, such as the ChinaBritain Trade Group, the Comité France Chine and the Deutsch-Chinesische

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Wirtschaftsvereinigung.34 Under the aegis of the European Commission and the Chinese Government, three EC-China ‘Business Weeks’ were organised in 1981, 1985 and 1987, whereby thousands of executives from EC firms convened with Chinese decision-makers in the economic and trade fields to establish direct contacts, improve knowledge of business opportunities in each other’s markets, overcome obstacles in bilateral trade and eventually promote trade and other economic exchanges.35 The opening of an EC delegation office in Beijing in 1988 helped further to augment these developments in EC-China economic diplomacy. In conclusion to this section, a number of summary observations should be made. During the 1950s and 1960s, China’s relations with West Europe were almost exclusively founded on the imperatives of economic exchange. However, this changed during the 1970s when the new era of détente, among other things, led to the institutionalisation of EC-China economic diplomacy by the latter half of the decade. China’s interests in promoting both closer economic ties with the EC and the European integration process remained an important part of advancing its geopolitical objectives in an emerging multipolar world. Thus, initiatives such as the 1986 Single European Act—which carried the blueprint for the Single European Market (SEM) programme—were welcomed by Beijing if it challenged the US-Soviet bipolarity. The EC’s geopolitical interests were to some extent served by China’s economic reform process and the alternative paradigm it offered to the Central and East European countries. Yet positive developments in both the context and substance of EC-China economic diplomacy occurred simultaneously with the EC’s relative decline as an economic partner of China. As the 1980s progressed, China became increasingly diverted by the development of its economic relations across the Asia-Pacific, although the EC’s position as an important technological and financial partner remained intact. By the end of the period, China’s growing importance as an EC economic partner became ever clearer. During the 1970s, China’s share of extra-EC trade barely rose above 0.1 per cent, but by 1989 stood at 2.0 per cent of extra-EC imports and 1.5 per cent of extra-EC exports. China’s potential for new investment opportunities was being increasingly demonstrated, albeit more by non-EC firms. The rapid growth of Chinese exports to the EC, almost tripling over the 1986–9 period to reach Ecu9.1bn in 1989, also constituted the beginning of a new trade deficit problem (see Figure 5.5). The number of antidumping investigations undertaken by the European Commission on imported Chinese products rose accordingly with fourteen made during the same period, a figure matched only by Japan (see Table A.7). The EC not only had to consider China’s growing bilateral impact but also that upon the wider international economic system. This covered a broad range of issues, such as the stability of the multilateral trade order and the environment. Thus, by the end of the 1980s, the EC’s stake in China’s economic reform process had been considerably raised. However, after the Tiananmen Square massacre of June 1989 this process looked in jeopardy. In response to the event, the EC decided

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immediately to impose economic sanctions upon China, which included a suspension of military contracts and arms sales as well as a freeze on all government-backed loans. New horizons (the 1990s) Developments in EU-China economic exchange After sixteen months, the EC lifted its sanctions on China in November 1990 and the normalisation of EC-China relations was restored during 1991. However, France’s decision to sell Taiwan sixteen LaFayette frigates in 1990 (worth $4.8bn) and sixty Mirage jets in 1992 ($3.8bn) was a cause of some tension. In response, Beijing closed the French consulate office in Guangzhou and barred French companies from bidding for the contract to build the city’s new subway system. This did not deter France from selling a further $2.6bn worth of military hardware to the Taiwanese in 1994, although the new French government inaugurated that year publicly declared its support of China’s sovereignty over Taiwan.36 The issue of the EU’s economic relations with ‘Greater China’ are dealt with in more detail by Chapter 6. In the meantime, EU-China economic exchange continued to accelerate. Between 1990 and 1997 EU imports from China in value terms tripled from an annual Ecu10.6bn to Ecu37.3bn, as did its exports to China from Ecu5.3bn to Ecu16.4bn. During this period, China’s share of extra-EU15 imports rose from 2.6 per cent to 5.6 per cent and that of extra-EU exports from 1.5 per cent to 2.3 per cent (see Table A.3). By 1997 China had become the EU’s fourth largest source of imports, ninth largest export market, and fourth most important trading partner overall, with EU-China trade worth Ecu53.7bn. Meanwhile, the EU’s share of China’s imports had fallen from 20.0 per cent to 13.1 per cent and its share of China’s exports had risen from 10.0 per cent to 13.0 per cent. As Table 5.1 indicates, the EU nevertheless maintained its position as China’s third most important import source, while it fell from third to fourth place in China’s export market rankings, with the USA overtaking the EU by the early 1990s. However, both the EU and USA face significant and still expanding trade deficits. For the EU, this has nearly quadrupled over the 1990–7 period from Ecu5.3bn to Ecu20.9bn (see Figure 5.5), a deficit second only to that sustained with Japan (Ecu23.3bn in 1997) and a serious cause for concern. The USA faced a similar predicament in carrying an Ecu14.5bn deficit with China in the same year. The stock of EU direct investment in China had also risen sharply in absolute terms, from $1,551m in 1985 to $6,430m in 1993 and to $22.634m by 1996. However, in relative terms, the EU’s share of total inward FDI in China had declined from 6.7 per cent to 4.8 per cent over this period, with both Japan and the USA’s shares still ahead at 5.6 per cent and 7.5 per cent, respectively (see Figure 5.3; Table A.6). Moreover, European investments have been concentrated in a handful of industries, most notably automobiles,

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telecommunications and pharmaceuticals. The comparative paucity of EU direct investment in China presents a significant business strategy and policy challenge for EU decision-makers. In noting other trends, Germany maintained its position as China’s most important trade partner within the EU, taking 26.6 per cent of total EU imports from China in 1997 while being responsible for 31.9 per cent of EU exports to Chinese markets (Figure 5.6). The UK has consolidated its position as the EU’s second largest purchaser of China’s imports with 19.7 per cent of the EU total in the same year, although British firms were only accountable for 8.1 per cent of total EU exports to the country. France and Italy are the EU’s other major traders with China, respectively taking 12.3 per cent and 18.9 per cent, and 10.4 per cent and 13.6 per cent of total EU imports and exports. Regarding sectoral patterns of trade, EU exports to China remain concentrated in capitalintensive sectors, with industrial machinery and equipment, telecommunications and audio-visual products, chemicals, road vehicles and other transport equipment constituting 75.6 per cent of total exports to China’s markets in

Figure 5.6 EU trade with China by member state (1987, 1997) Source: Eurostat.

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1997 (see Table A.4). However, dynamic change is evident within the structure of China’s exports to the EU. In 1980, primary products represented 44.5 per cent of China’s total EU exports but by 1997 this had fallen to 6.1 per cent. Emerging sectors over the period included industrial machinery and equipment (11.9 per cent by 1997), telecommunications and audio-visual products (7.1 per cent) and office machines and computers (6.9 per cent). Textiles and clothing have remained the single most important sector with 20.0 per cent of the total, although this share has fallen considerably since 1980 (see Figure 5.4). Moreover, miscellaneous labour-intensive manufactures currently make up the largest concentration of China’s exports to the EU. China’s competitive threat to European manufacturers has been and will continue to be considerable. This primarily refers to those EU industries in structural decline and more specifically producers of textiles, clothing and footwear, metal manufactures and various low-tech manufactures. As Table A.4 indicates, the EU also sustains deficits in higher-tech sectors such as office machines, computers and electrical machinery. While the pressure upon the EU to adopt counteractive measures was strong, its protectionist impulses had to be restrained in the light of other factors. Even though China was not a member of GATT, the EU was morally and otherwise obliged to pursue a more liberal trade policy after the completion of the Uruguay Round of GATT in December 1993. Furthermore, the EU was cautious not to aggravate fears of a ‘Fortress Europe’ emerging after the installation of the SEM a year earlier (Hanson 1998). Nevertheless, a variety of new EU restrictions was placed on Chinese imports. In a regulation passed by the Council of Ministers in March 1994,37 the European Commission imposed EU-wide quantitative restrictions on seven categories of products originating from China, namely footwear, gloves, porcelain kitchenware and tableware, ceramic kitchenware and tableware, glassware, toys and car radios. Certain surveillance measures were also introduced in special circumstances on a number of other products including certain chemicals and bicycles. This new regime replaced the 4,500 or so nationally set quotas that had previously affected China. The rationalisation of the EU’s quota system was further vindicated ‘as part of a global package including acceptance of the Uruguay Round results, reinforcement of the trade policy instruments and completion of the Common Commercial Policy’ (CEC 1995c). In 1996, the EU discontinued four of these quotas, thus leaving only three in operation (toys, ceramic tableware and footwear). Although removal of the old system of national quotas was to China’s advantage, it should be noted that by the mid1990s China was the only EU trading partner that faced such restrictions. Moreover, the surviving quotas still made a notable adverse impact on Chinese producers. According to one estimate for China’s toy manufacturing sector this amounted to a $5bn loss of trade. Changes made by the EU to its GSP scheme from 1995 onwards were also to affect Chinese producers. China had been the biggest singular beneficiary of the EU’s scheme in which trade concessions were offered to developing countries. Between 1988 and 1992 the sum of China’s exports enjoying GSP benefits more

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than tripled from Ecu2.1bn to Ecu6.6bn, while its share in the total scheme benefits rose in value terms from 13.7 per cent to 22.2 per cent, three times greater than the second placed beneficiary. Although China’s low income level meant that it did not completely ‘graduate’ from the EU’s scheme,38 benefits were removed in certain industrial and agricultural sectors, namely: chemicals (excluding fertilisers); leather and furskins; clothing; footwear; glass and ceramics; ECSC (steel) products; base metals (non-ECSC); miscellaneous manufactured products; certain products of animal origin; oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial and medicinal plants; straw and fodder. Despite the downgrading of China’s GSP status, its share of the scheme’s benefits continued to rise, taking 30 per cent of the total in 1997. Chinese exports were also becoming increasingly targeted within the EU’s anti-dumping regime. Over the 1990–7 period, China attracted forty-five ADD investigations from the European Commission and thus an annual average figure of just under six, a marked increase on previous periods studied (see Table A. 7). These were far higher figures than any other EU trading partner, constituting 16.8 per cent of all investigations undertaken by the European Commission for the period and around a third of those among East Asian countries. As Table 5.2 indicates, Chinese products that are particularly affected include low-tech chemicals, metal and miscellaneous manufactures. In many ways, the EU was presented with a situation regarding China that it had faced with Japan two decades earlier, this being what policy should be adopted to an emergent economic superpower against which a divergent trade deficit was developing. There were, of course, important qualitative differences between Japan in the mid-1970s and China in the mid-1990s. The latter was a large but still relatively underdeveloped economy that had not been fully integrated into the international economic system. Moreover, the majority of China’s industry remained state-run and its currency was not yet internationally convertible. However, China’s rapid industrial growth and commercial expansion called for the EU to develop a more coherent policy strategy. New advances in bilateral economic diplomacy Positive developments in EU-China economic diplomacy had already been made in the early 1990s. In April 1993 the first annual Joint Working Group on Economic and Trade Matters meeting had been held between EU and Chinese officials in which their trade balance, intellectual property rights (IPR), financial services and various sectoral issues were discussed.39 These were later supplemented by specific sectoral meetings on financial services, IPR and agriculture, with a view to adding other sectors in the future. A prime motivation for instigating this dialogue was to match the US bilateral deals with China (e.g. on IPR, market access and maritime transport) brokered in previous negotiations. This fits the general pattern of the EU pursuing a reactive policy of following preceding US initiatives on bilateral agreements with many East Asian countries.

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Table 5.2 EU anti-dumping duties on Chinese imports (at November 1998)

Source: DG1C, European Commission.

In June 1994 a new arrangement for political dialogue was created with one of its main aims being to encourage China’s fuller participation in global affairs, entailing regular meetings between the EU Troika40 and Chinese ministers as well as high-level consultations involving the Commission.41 A year later in July 1995, the EU’s new policy strategy towards China was articulated in the European Commission’s communication document A LongTerm Policy for China-Europe Relations (CEC 1995a). This signalled the EU’s intentions to seek a new framework of relations with China, a principal objective being the country’s ‘integration into international structures’. The marketbased principles on which these are founded would, it was hoped, provide the vehicle for dismantling state controls within the Chinese economy which are

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still responsible for impeding market access to foreign products and investment. New initiatives proposed to promote EU-China economic relations included establishing a China Experts Group, an EU Business Council in Beijing, ‘Europa Houses’ in China’s major provincial cities, an Economic and Trade Working Group and measures to improve the EU’s information strategy in China.42 The European Commission also outlined the five target areas of its new co-operation strategy with China, namely economic and social reform, environmental cooperation, human resource development, business and industrial co-operation and rural and urban poverty alleviation. With respect to the first of these, it was envisaged that EU business and public authority representatives would work with their Chinese counterparts to advance China’s reform process. Furthermore, the document carried provisions for the European Investment Bank (EIB) to grant long-term investment loans to China. While the EU’s new policy document represented an important step forward in its economic relations with China, a number of significant problems and obstacles remained. The first of these related to questions of authority and representation in the conduct of economic diplomacy. The Chinese continued to be somewhat bewildered by certain aspects of the EU power structure, especially over matters concerning the subservience of national sovereignty to pursue common policies in foreign affairs (Grant 1995). China’s perception of EU countries as well-established nation-states, with some being moderately powerful in their own right, contributed towards this bewilderment. As we have mentioned earlier, the primacy of the state in China has a long history, particularly with respect to maintaining territorial integrity. Thus, Chinese officials at times had difficulty relating to the EU ‘group’ on a supranational basis.43 The EU also faced its own problems in China relating to authority and representation. The decentralisation of power in China under the Deng era had generated confusion among European business representatives and policymakers over what level of authority was to be approached to clarify regulatory issues and other matters. This situation will persist as long as the provincial governments are able significantly to determine the localised regulatory environments in which foreign firms must operate. On more specific matters of trade and investment, a survey conducted by the Euro-China Business Association on behalf of the European Commission in early 1997 found that the top five concerns of European traders with China were: high tariffs; a lack of transparency in rules and laws; import quotas and licences; restrictions on marketing, distribution and sales; and intellectual property violations. For investors, the main obstacles were seen as a lack of transparency in rules and laws; dual pricing for locals and foreigners; IPR violations; asymmetric rules across different parts of China; and export performance requirements. The above trade-related concerns were echoed at the 1998 annual high level EUChina trade negotiations held at Brussels in June, with all being linked to the central item on the agenda—China’s requirements for accession to the WTO. At the meeting, a Memorandum of Understanding in the field of Financial Services was signed between the two powers. In addition, two environmental programmes

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were initiated in which EU assistance would be granted to China to implement ‘greener’ policy measures and special assistance would be given to the province of Liaoning which faced severe environmental problems.44 Both sides had also earlier granted trade concessions to the other. The EU secured a freight-forwarding agreement with China in October 1997 which was intended to give European firms the same access to this Chinese market as their US rivals who had enjoyed preferential treatment up until then for some months. Of greater significance was the EU’s decision in April 1998 to remove China’s NME status in relation to anti-dumping decisions. Under the old system, the EU had calculated its ADDs on Chinese exports by use of the ‘analogue pricing mechanism’ whereby the problem concerning China’s absence of meaningful market signals was overcome by making price and cost decisions based on a comparable third country producer of the good in question. This method had attracted considerable criticism from Beijing which claimed that the European Commission was selecting criteria third countries to suit the EU’s desired outcomes, these being relatively high ADD margins (Fu 1997). However, in recognition of China’s progress in introducing market reforms to the economy, the European Commission would in future use domestic price information in its anti-dumping investigations if the existence of market economy conditions could be demonstrated. Thus, decisions would be taken on a case-by-case basis which itself provided China with another incentive for further economic reform. Moreover, Chinese producers could not expect to receive less ADD investigations from the EU as a result. The priority of advancing the EU’s relations with China was further demonstrated by the European Commission’s publication of another communication document, in March 1998 Building a Comprehensive Partnership with China (CEC 1998b), which was intended as a follow-up to its 1995 ‘longterm’ policy paper. While this introduced no significant new initiatives, it did observe several important developments since 1995 that would affect the future direction and nature of EU-China relations, thus: • the fifteenth Chinese Communist Party’s Congress of 1997 which ushered in the post-Deng era by endorsing an ambitious economic and social reform agenda for the next five years; • China’s more assertive and responsible foreign policy in both regional and global spheres; • the British handover of Hong Kong to China in July 1997; • the East Asian financial crisis which although it had not seriously affected the Chinese economy, did, according to the European Commission, underline the need for continued reform and liberalisation; • recent developments in the EU such as preparations for economic and monetary union (EMU) and its eastward enlargement, as well as its own more assertive role played in world affairs; • the initiation of the Asia-Europe Meetings (ASEM) process in March 1996 which added an inter-regional dimension to EU-China relations.

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The 1998 document hence called for a general intensification and upgrading of EU-China relations. In economic fields, this especially related to China’s accession to the WTO, strengthening the bilateral trade agenda, further promoting European investment in China, developing bilateral agreements in certain sectors45 and continued support for China’s economic reform process and promoting the euro. The EU and China’s accession to the WTO In recent years, China’s accession to the WTO has been a pivotal issue in the EU’s economic relations with the country. China’s non-compliance with multilateral trade rules and norms was central to most EU disputes with Beijing over commercial matters, most notably IPR issues, public procurement, industrial policy, export subsidies and high tariff rates. Furthermore, the EU’s motivations for advocating China’s membership of the WTO derived from global and bilateral factors. For the emergent economic superpower to be marginalised from the new multilateral order carried the risk of destabilising the international economic system. As a big trader, it was important for China to abide by the same trade rules as its economic partners. In addition, the scope for conducting EU-China economic diplomacy would continue to be restricted to mainly bilateral channels as long as China was left out of the WTO. China was also aware of the associated costs that accompanied the benefits of joining the multilateral trade regime. On the one hand, it would have to engage in reciprocal liberalisation which implied a substantial dismantling of its state trading apparatus. Those sectors of Chinese industry which still operated on outdated technology, equipment and management methods would also be prone to intensified foreign competition. This would particularly affect the country’s SOEs and TVEs and potentially exacerbate the core-periphery divide between the coastal and interior provinces. On the other hand, China’s recourse to multilateral trade norms and rules offered protection from the excesses of bilateral pressure and unilateral threats from its main trading partners (Wong 1996). Given China’s growing economic and political weight on the world stage, it also has the potential to help shape the future multilateral trade agenda, although this exercise of structural power may take time to perfect. After such risk evaluation, Beijing decided some time ago that the benefits of membership far outweighed the costs involved. China formally requested to join the multilateral trade order in July 1986 when it submitted its application for GATT membership at the advent of the Uruguay Round. More specifically, China claimed that it should be allowed to resume its seat in GATT and not technically accede, as the Republic of China (ROC) had become a founding member of the organisation in 1948. According to Beijing, the ROC’s decision to leave GATT in 1950 (by then Taiwan) was not the desire of the vast majority of Chinese people.46 Prior to submitting its application, China had acquired observer status to GATT in 1982 and later secured special observer status in 1984 which enabled it to take part in GATT meetings as a non-voting member.47 After its

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submission for full membership, a GATT working party was set up to study and report on the matter in March 1987. Over a decade later, China was still waiting for its application to be accepted in what had become the longest delay to GATT/WTO membership by far. The reasons for this delay were varied. Not only were large sections of its economy run on non-market principles but a large and rapidly expanding GDP meant that its impact upon the multilateral trading system would be considerable. China’s burgeoning trade surpluses against the EU and USA raised the stakes further for both powers in getting the accession formula right. To join the WTO, China had to comply with its fundamental principles: • non-discrimination, in which trade concessions granted to one WTO member have to be extended to others under MFN rules; • national treatment, whereby foreign products are not disadvantaged by regulations, internal taxation structures or certain policy measures in relation to domestic products; • the prevalence of price-based measures (e.g. tariffs), with the aim of enhancing transparency within trade policy; • the avoidance of unfair trade practices, e.g. export subsidies. Acknowledging that its state trading practices were essentially irreconcilable to the above, China had worked towards establishing a more WTO-compatible trade regime by the mid-1990s as part of the market reform process48 (Wang 1995; Casadio 1996). It also hoped that formally declaring its intentions to reform further would satisfy the demands of EU and US negotiators, who had become central players in the determination of China’s accession. However, both powers wanted concrete results from China and a demonstration of progress in key areas, such as IPR. There was also a common concern over how China would cope with the emerging WTO agenda and the continued multilateralisation of the traditional domestic policy realm, which would entail a subservience of national sovereignty to the international negotiating process to a degree that few thought China was willing to embrace. Problems were also deemed to arise from decentralisation and central government’s inability to identify the WTOinconsistent practices of its provincial authorities. The irregularities and patchiness of the Chinese legal system were another significant worry, although the EU and USA were offering technical assistance on these and other matters that would improve the WTO-compatibility of China’s commercial structures. China’s failure to negotiate the resumption of its status as a GATT contracting party before the WTO’s inauguration in 1995 meant that it was obliged to negotiate its accession to the WTO with existing members on the basis of separate bilateral talks. This consequently gave more leverage to WTO members to acquire market access gains from China, which in turn were multilateralised to all members through the MFN principle. In return, existing members were not compelled to offer market access deals to China above those already conferred upon other members. Moreover, any leniency granted by WTO members regarding China’s

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conformity to WTO rules was accompanied by the demand for reciprocal concessions which could include special safeguard measures to protect against ‘injurious’ competition.49 Both the EU and USA had tabled a broad list of issues in their bilateral negotiations with China. For the EU, these specifically comprised: • improving market access for industrial and agricultural goods through significant cuts in China’s tariff rates, including the removal of tariff ‘peaks’ (i.e. duties of 15 per cent or higher), and by removing all WTO-inconsistent quotas and specific non-tariff barriers; • removing the current monopolies on foreign trade to enable all Chinese or foreign nationals to engage in export and import practices; • a substantial opening of China’s services market in distribution, telecoms, professional services, tourism, travel and medical services; • opening the financial sector (banking, securities and insurance) in a more systematic and comprehensive, if gradual, manner; • improving the conditions for foreign companies establishing in China; • making China’s industrial policies WTO-compatible, including regulations on subsidies, standards and various state-trading practices; • implementing the WTO’s Trade-Related Intellectual Property Rights (TRIPs) Agreement, Information Technology Agreement, Government Procurement Agreement and Civil Aircraft Code. Successive failures to complete an accession agreement led to Beijing accusing both the EU and USA of delaying tactics to serve their respective market access objectives. The dispute over whether China qualified for ‘developing country’ status on entry to the WTO was an additional source of frustration. If achieved, it would allow China to claim certain derogations from WTO rules (e.g. being able to protect infant industries) and provide a transition period to implement pre-condition measures (e.g. on existing tariff levels and licensing requirements). However, the USA had consistently opposed the concession of developing country status to China, preferring instead to classify it as an NME as it had done since the 1974 Trade Act. While the EU had applied the same classification to China within its anti-dumping regime until April 1998, it had made the country a GSP beneficiary in 1980, thus recognising China as a developing country in its wider trade policy framework. This was typical of the EU’s more pragmatic approach towards China which contrasted to the US traditional hard-line policy. Part of the US case rested on the notion that China should be judged on a commercial basis; because its export performance was indicative of a non-developing country this inferred that ‘developing country’ status should be denied. However, the US position was also implicitly based on a continued proclivity for bilateral agreements with China and these were used as a benchmark for China’s commitment to open market reforms.50 This provided greater incentive for the EU to promote China’s accession to the WTO so as to circumvent these agreements which were effectively disadvantaging European firms (Acharya 1995). Although the EU was not willing fully to accept China’s right to developing

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country status within the WTO, it did seek a compromise. In 1994 the EU Trade Commissioner Sir Leon Brittan first proposed the idea of awarding transitional membership status whereby China and WTO members would be released from some WTO obligations, thus enabling China gradually to conform to WTO rules after entry but to scheduled deadlines. This solution was not acceptable to the USA, but in 1996 the EU revised its approach by suggesting that a case-bycase, sectoral approach be adopted in an effort to secure consensus. Here, the EU was acknowledging the dualistic nature of the Chinese economy in that some aspects were reasonably advanced while others remained significantly underdeveloped, and hence gave scope for flexibility. Clearly defined transition periods for the latter were thus proposed by the EU in which China would phase in WTO-compliant measures beyond the date of accession. Once again, the USA was reluctant to concur, although its own position did soften somewhat after President Clinton’s re-election in 1996. Another positive development occurred in October 1997 when the European Commission achieved what is referred to as a ‘conceptual breakthrough’ in its bilateral accession negotiations with China, namely that a series of precise principles were agreed that provided clearer parameters for negotiations over China’s detailed tariff commitments. A provisional deadline of December 1998 was set for China’s WTO accession negotiations to be completed, by which time Taiwan would also hopefully achieve the same (see Chapter 6). While Taiwan’s negotiation process was on track to meet this deadline, significant outstanding problems remained in bilateral talks with Beijing which made a decoupling of the twin accessions probable. As noted earlier in the chapter, the East Asian financial crisis had undermined China’s confidence to open up its markets further to foreign commercial interests. This particularly related to the financial sector where 80 per cent of banks were still state-owned. The Chinese government announced that it wished to resolve issues of domestic reform (e.g. in the financial sector, the SOEs, etc.) before liberalising those parts of the national economy most exposed to the vagaries of global market forces. The EU was critical of this sequential approach, contending that domestic reform and liberalisation should be a simultaneous process. European Commission representatives argued, for example, that foreign banks could play a significant role in maintaining stability within China’s financial sector through the expertise, prudential management controls and other benefits they had to offer. Other outstanding problems concerned China’s tariff rates, which remained comparatively high,51 and China’s apparent reluctance to dismantle its monopoly trade regime. By the autumn of 1998 it therefore seemed unlikely that China would accede to the WTO by the provisional deadline. Establishing the multilateral dimension of EU-China economic diplomacy was hence also delayed. Conclusion By the 1990s China had become one of the EU’s most important economic partners. At the bilateral level, trade and investment flows between the two

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powers had expanded rapidly during the decade, notwithstanding the imbalances that lay therein. The framework of EU-China economic diplomacy had also improved considerably, owing partly to the EU adopting a more strategic, longerterm perspective on developing its relations with China. This was somewhat fortunate given the scope for trade friction between the two powers. China’s burgeoning trade surplus with the EU and the EU’s own trade policy regime towards Chinese imports nevertheless both have the potential to spark a bilateral trade war. However, mutual endeavours to develop the multilateral dimension to their economic diplomacy make this scenario even more unlikely. Let us now, though, evaluate the overall development of EU-China economic relations from different IPE theoretical perspectives. As neo-realists would concur, the salience of the state and state-centric objectives in EU-China economic relations have been highly apparent, especially in the early post-war decades. The state’s power and authority have a long history in China, as has the association between the state and society. At the height of the Cold War’s adversarial geopolitics, China’s economic relations with the EU were only a means to an end, this being to ensure survival of the state in the face of the blockade and isolationary conditions that confronted it. Furthermore, maintaining the territorial integrity of the Chinese state has been a consistently relevant issue. The EU has had to exercise extreme sensitivity over matters pertaining to Taiwan and Hong Kong which, as Chapter 6 explores in considerable detail, largely explains why the EU’s economic relations with these two ‘tiger’ economies are comparatively underdeveloped. We have also seen how Beijing has been reluctant to surrender many of its neo-mercantilist practices as part of the WTO accession process. China’s economic reform process has already entailed a significant degree of relinquished governance by central state authorities, which may explain such reluctance to forsake a further loss of control over the economy. Thus, Beijing’s attempts to preserve China’s state-centricity, despite the devolvement of power to sub-state actors noted in this chapter, may pose certain problems for the EU, particularly over establishing a partnership at the WTO. At various points in the development of the EU-China economic relationship, EU member states have played a pivotal role. France’s early efforts to promote the Europe-China link were part of a strategy to advance its own national interests and those of the EC. Other ‘global’ EU member states were also at the forefront of developing economic relations with China. Britain’s colonial links with Hong Kong provided a special imperative here. In later years, the bilateral economic agreements made by member states with China paved the way for their EU-level equivalents, e.g. the 1985 EC-China Trade and Co-operation Agreement. As China’s economic stature within the international community has grown, though, the need for EU-level negotiations with Beijing has become more important. This relates both to the changing balance of power at the bilateral level—which can be most effectively countered by a unified EU front—and the growing impact made by China on the international trading system, which the European Commission takes much responsibility for managing on the collective behalf of EU member states.

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A trend that has been stressed in this chapter is how the general context of EUChina economic relations has shifted from the Cold War’s geopolitics to multipolar geoeconomics. Neo-realists would nevertheless insist that high politics is still very relevant in the determination of these relations. Examples include issues relating to Taiwan and Hong Kong and Beijing’s reluctance to compromise the state’s control over the economic security of China mentioned earlier. Moreover, matters concerning the ‘balance of power’ between states remain pertinent. The EU was initially slow to recognise the shift in geoeconomic power that China’s rapid economic growth and industrial transformation were exerting within the international economic system. To an important extent, the EU was able to learn from its past failure to react in time to Japan’s own economic ascendancy a few decades earlier (see Chapter 4). The neo-realist concept of ‘hegemonic stability’ can also be applied to the development of EU-China economic relations. Before the Sino-US détente was established, the USA led the market-democracy coalition against communist states such as China under the COCOM arrangement, which Washington looked to the EC to uphold. While EC member states complied, we saw how West Europe nevertheless established itself as one of China’s major economic partners. However, the decline of US hegemony and other changes to the global economic order have created new conditions for superpower relations. It is conceivable that China will join the EU, Japan and the USA in taking responsibility for sustaining post-hegemonic stability in the twenty-first century. China must first, however, fully participate in multilateral economic regimes. The prolonged and at times fractious bilateral negotiations with China over its accession to the WTO are indicative of the inter-state anarchy and conflict that neo-realists believe still characterise the nature of the international economic system. Beijing has also been wary of the EU and US exercise of structural power in shaping the parameters of China’s accession to the WTO. Neo-realists would also emphasise how China has been increasingly subject to systemic conditioning since the introduction of its market reform process from the late 1970s onwards. Not only was this part of a global trend towards more market-friendly policymaking, but it also led to China’s closer integration into the international economic system (Kapur 1990). On entry to the WTO, China’s systemic conditioning will increase further, bringing long-term benefits for the EU owing to China’s new accountability to multilateral norms and rules. However, the EU’s recourse to protectionist measures against China will be circumscribed by the same norms and rules. As a consequence, any outstanding EU quantitative restrictions on Chinese exports are likely to be removed, while China may take the EU to the WTO’s disputes panel over a number of anti-dumping cases. The role played by international organisations in the global political economy is emphasised by neo-liberalism, or more specifically by neo-liberal institutionalists. Negotiations concerning China’s preparation for WTO membership have been central to recent developments in EU-China economic diplomacy. The impact of China’s actual accession to the WTO will be even more profound. On the one hand, Beijing may react negatively to the EU

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pushing the multilateral trade agenda, along with the USA, further into the traditional realm of domestic economic policy. This could be construed as ‘foreign meddling’, with China being pressured into complying to new multilateral norms and rules that are perceived to compromise state sovereignty. On the other hand, the future expansion of the Chinese economy partly relies on Beijing working with the EU and other WTO members to maintain an open international trading system. Moreover, neo-liberals would also stress how non-state and sub-state actors have become more prominent in EU-China economic diplomacy. We have noted how the decentralisation process in China has permitted the provincial authorities some latitude in determining their own foreign economic policies. While the EU must naturally continue to deal with Beijing on key issues, a rationale exists for conducting certain trade and FDI negotiations at the local government level.52 A greater role played by EU and Chinese business representatives has also been evident. It was shown that they were instrumental in initially consolidating the basis of a China-West Europe economic relationship at the Moscow and Geneva conferences of the early 1950s. New EU-China business contact groups have continued this work, assisting the development of transnational linkages through the mutual trade and investment networks they have helped nurture. However, the comparatively low level of European FDI in China has meant that these linkages are not as strong or extensive as those found in other EU economic relationships with East Asian partners. Thus, the application of complex interdependence with regard to EU-China economic exchange has its limitations, although the new salience of sub-state and non-state actors has produced a greater range of permutations within the economic diplomacy equation. Both the EU and China are also affected indirectly through each other’s impact upon the international economic system and by the new interconnections being created within the system, e.g. financial globalisation and the wider impact of the East Asian financial crisis. Complex interdependence is also apparent concerning the more eclectic but related set of issues on the foreign economic policy agenda shared by China and the EU, including the environment, nuclear proliferation, labour standards and trade, and economic migration. Whereas neo-realists suggest that declining hegemonic stability is the main cause of international trade friction, some neo-liberals have alternatively proposed that surplus capacity problems are largely to blame. Chapter 4 discussed how Japan has exposed the EU’s own surplus capacity problems in higher technology industries since the 1980s onwards. Chinese producers, along with their ASEAN counterparts, have had a similar effect in the EU’s lower technology industries. The EU’s significant sectoral trade deficits with China can be strongly associated with the accelerated contraction of many EU industries in structural decline, e.g. textiles. At the partial behest of European industry lobby groups, the Chinese competitive threat has been countered by special protectionist measures, a wideranging GSP sectoral graduation and the broadest application of ADDs by far on any EU trading partner. However, as Eglin (1997) argued, the strain on EU

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industry could be eased by further advances in China’s economic reform and modernisation that will eventually create its own largest market and hence divert exports internally, thus diminishing pressure externally. For Marxists, the main issues in EU-China economic relations concern the lingering neo-imperial legacy, the relevance of dependency theory and ideological compromises that have been made by China in its dealings with market democracy partners such as the EU. In the first of these issues, European and other foreign multinational involvement in China has historic resonance. Marxists would stress that once again foreign capitalist powers are culpable of carving up Chinese markets between them, as well as exploiting its natural and human resources. Leading on from this, China’s participation in the new international division of labour has made it subservient to Western multinational capital interests through the expansion of foreign investment projects. This idea was subscribed to by the opponents to Deng’s Open Door policy, whereby the new SEZs were criticised as being ‘enclaves of imperialism’. The persistence of neo-imperial legacy highlighted by Marxists is closely related to the theme of dependence. This chapter has discussed how the earliest developments of China’s post-war economic relations with EU member states were driven by its dependency on West European technology, capital and markets. Marxists would contend that the fundamental aspects of EU-China economic relationship have not changed, as respective trade shares differences and the mono-directional flow of both FDI and technology transfers reveal. However, in terms of geoeconomic distribution, China’s reliance on European technology is the only aspect of dependence which remains important. Far more capital enters China from Hong Kong, Japanese and US sources, while the Asia-Pacific has become the principal destination for Chinese exports. Marxists would also comment on how the Chinese government’s experiments with capitalism represent an ideological compromise in the pursuit of improving the country’s position within the international economic system. Dependency theorists may also suggest how this constitutes an attempt by China to traverse the core-periphery divide in the world capitalist system, although the cycle of dependence has proved difficult to break. For most of China’s economic partners, the economic reform process has been key to establishing a more cordial basis to economic relations. The EU has generally benefited from China’s shift towards market friendly policies, especially with regard to improvements made in the framework of economic diplomacy. However, developing the multilateral dimension to this diplomacy is contingent on China making further ideological compromises. In addition, the competitive threat to European industry that has been unleashed by China’s market reforms will pose a significant challenge to the EU for many years. Thus, the EU’s policy towards China will continue to be one of simultaneous containment and engagement for the foreseeable future.

6

The EU, Taiwan and Hong Kong

Introduction Taiwan and Hong Kong are among the EU’s most important and dynamic economic partners. In 1997 Taiwan was its seventh largest source of imports while Hong Kong was ranked as its eighth largest export market. The EU’s other commercial ties with the two maturing ‘tiger’ economies have also flourished in recent times. However, the EU’s economic diplomacy frameworks with Taiwan and Hong Kong remain the most underdeveloped among the East Asian group, owing largely to issues of realigned and contested sovereignty. As discussed in Chapter 5, the EU’s economic relations with China, Taiwan and Hong Kong cannot be easily disaggregated. The return of Hong Kong’s political sovereignty to China in July 1997 and Beijing’s sensitivity over the conferring of any international recognition to the ‘province’ of Taiwan have both narrowed the EU’s economic diplomacy options and triangularised the diplomatic equation. Nevertheless, Taiwan’s and Hong Kong’s ascendancy within the international economic system has placed pressure upon the EU to greater prioritise the development of its economic relations with them. This predicament for the EU is considered by this chapter, which itself can be seen as a continuation of Chapter 5. Before moving on to analyse the EU’s economic relations in detail, let us first introduce the economies of Taiwan and Hong Kong as well as the issues of sovereignty to be discussed. Taiwan and Hong Kong: mature ‘tiger’ economies In this section, we shall initially consider the paths to development taken by Taiwan and Hong Kong. Both were first-generation ‘tiger’ economies, although a different developmental paradigm was adopted by their governing authorities. However, both form part of a ‘Greater China’ economy with both now playing instrumental roles in the economic development of mainland China. This too is analysed by this section, as are matters of economic sovereignty.

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Paths to development Taiwan The modern economic history of Taiwan (formally known as Formosa) has been shaped not just by the Chinese but also by various foreign occupying powers. These included Dutch and Spanish trading companies in the midseventeenth century and Japan, which ruled Taiwan from between 1895 to 1945. Over this latter period, Taiwan achieved a reasonable standard of economic development through capitalist industrialisation, infrastructural investment, the raising of education standards and the development of its finance and trade sectors. However, these advantages came at a price, with Taiwan’s economy and workforce made subservient to the demands of the Japanese economy, a fate that also befell Korea over a similar time-span (see Chapter 7). While Taiwan suffered relatively little war damage, the economy fell victim to lawlessness, corruption, hyper-inflationary conditions and general inefficiencies under the management of the local Nationalist Party, or Kuomintang (KMT) administration during the immediate post-war years (Gold 1986, 1988). This changed, though, after the retreat of Chiang Kai-shek, the KMT’s leader, from mainland China to Taiwan in 1949, which made the island haven the last enclave of the incumbent Republic of China (ROC) regime. With the substantial assistance of the USA, which was to halt the advance of Communism in East Asia, the new KMT administration set about the modernisation and reform of Taiwan’s economy. A land reform programme implemented over 1949 to 1953 diversified the island’s industrial base with incentives given to rural landlords to invest in manufacturing enterprises. US financial aid, at an average annual $100m between 1951 to 1964, made a major contribution to upgrading Taiwan’s industrial capital and improving economic efficiency.1 During the 1950s Taiwan recorded an annual average economic growth rate of 8.2 per cent. Industrial production was concentrated on food processing, textiles and construction materials. A relatively early switch to export-oriented industrialisation (EOI) from import-substitution industrialisation occurred towards the close of the decade as domestic markets became saturated and many of Taiwan’s producers were in a position to compete internationally. This helped boost the economy’s growth rate still further to an annual average 9.2 per cent over the 1960s, with new industrial capabilities also being developed in assembly production consumer electronics, electrical and plastic products. In the early 1970s, the government embarked on a heavy and chemical industry drive, promoting the economy’s petrochemical, metallurgic, machine tool and shipbuilding activities. Economic growth rates reached even greater heights with a 9.7 per cent annual average increase for the decade. Although this slowed to 7.1 per cent during the 1980s (see Table A.2), Taiwan continued its advance into higher technology activities, such as industrial machinery and information-based industries. This reflected the economy’s search for new comparative advantages as inflated domestic cost structures (i.e. rising wages and rents) rendered its more labour-intensive producers less competitive.

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By the 1990s consumer and producer services had become the predominant sector in Taiwan’s economy. A common feature of both its service and manufacturing sectors has been the extremely high density of family-based small and mediumsized enterprises (SMEs) that compose them. Extensive network links between Taiwan’s SMEs and the synergetic collaborations these yield have produced flexible production structures within the economy that have enhanced its ability to respond and adapt to changing competitive conditions in international markets (Whitley 1992; Orru et al. 1997). While such low industrial concentration ratios have reduced the scope for internal economies of scale to be generated, the common agglomeration of networked SME clusters has yielded considerable external economies. These networks can be categorised into two types: • horizontal ownership networks of family enterprises: where profits from core business activities are used for conglomerate diversification; • production networks, or satellite assembly systems: whereby export-oriented SMEs are linked up with local or foreign buyers and usually represent the production end of a global commercial network. Furthermore, Taiwan’s large firms and large business groups are usually upstream suppliers of intermediate goods and services to SME manufacturer networks, which in turn rely heavily on the external demand from foreign contractors. As Orru et al. (1997:81) observed, ‘every level of the economy…is segmented and driven by downstream demand’, and hence Taiwan’s economy is essentially ‘buyer-driven’ in contrast to the ‘producer-driven’ economies of Japan and Korea. The role of the ‘developmental state’ in Taiwan’s post-war economic development has also been significant (So and Chui 1995). The KMT, which has continually held power in Taiwan, has pursued proactive economic policies centred on facilitating capitalist activity while simultaneously guiding the strategic decision-making of Taiwanese companies through setting national economic development objectives within ‘plan’ frameworks. The government has, for example, prioritised key sectors for investment, directly promoted the development of new industrial capabilities, selected companies for promotion in international markets and in the past imposed state control over many of the economy’s ‘commanding heights’.2 Yet such dirigisme is tempered by the collaborative nature of state-business relationships in Taiwan, and moreover a less interventionist approach has been evident during the 1990s. As with many other East Asian countries, human capital investments have played a crucial role in Taiwan’s economic development with a strong emphasis placed on mass education and training. Low inflation has also been a prime objective of KMT economic policy that has been achieved through a combination of tight monetary policy and non-inflationary fiscal incentives ( Jeon 1995). However, inflationary pressures have begun to build up within the economy as a consequence of increasing public expenditures on defence, social welfare and infrastructure. For example, in 1991 the government launched its six-year National Development Plan, the centrepiece being a publicly funded $300bn infrastructure

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investment project, although a 1993 review scaled down the sum invested to $229bn. In addition, ten strategic high-tech industries were prioritised for development under the plan.3 By 1994, various key industrial technologies for localised development were also afforded priority,4 with technology transfers from Japanese firms encouraged to assist this development. Furthermore, the government offered tax breaks for investments made in research and development (R&D), automation, pollution control and energy-saving techniques. Since 1990, Taiwan has also promoted itself as an Asia-Pacific Regional Operations Centre (APROC) —a regional hub for finance, communications and commerce, especially in relation to the axis of international trade and investment in China5 (Islam and Chowdury 1997). As a resource-poor economy with relatively small domestic markets, Taiwan’s economic success owes much to its EOI strategies. It maintains a high trade ratio (57.2 per cent in 1996) with imports concentrated in machinery, chemicals, industrial materials and transport equipment. Around half of Taiwan’s exports consist of machinery and electrical equipment products. Textiles and clothing remain the second most important sectoral exports group, although a growing shift towards higher-tech niches has been evident for some time. Consistent and substantial trade surpluses have provided Taiwan with one of the world’s highest accumulation of foreign exchange reserves. Taiwan has also benefited from economy-wide, trade-induced learning effects that, according to Chuang (1996), have yielded significant external economies. These have been estimated to generate over 40 per cent of Taiwan’s manufacturing output growth during 1975–90, which is not explained by total factor inputs. As Table 6.1 shows, Taiwan’s producers have retained a considerable import dependency upon the USA and Japan. Moreover, Taiwan’s SMEs often serve as subcontractors for large US firms and medium-sized Japanese firms. Inward flows of foreign direct investment (FDI) have also played an important role in Taiwan’s economic development. US firms were early investors, riding on the back of the aid programme of the 1950s and early 1960s. Taiwan’s pioneering export processing zones (EPZs), established first at Kaohsiung in 1965 and then at Nantze and Taichung in 1969, also did much to stimulate multinational investment in the economy by offering a mix of attractive location-specific advantages.6 Levels of inward FDI peaked in 1989 when they accounted for around 25 per cent of the economy’s gross capital formation. However, inward FDI is now only a significant determinant of development within a few sectors of the economy, such as electronics. Outward flows of Taiwanese FDI have risen dramatically since the mid-1980s as Taiwan’s firms strived to maintain a competitive cost advantage in more labour-intensive activities by shifting production offshore, principally to mainland China and Southeast Asia. Most overseas investments have been low risk and small scale in nature with original equipment manufacture arrangements remaining an important vehicle of internationalisation. This is the case even for large firms such as ACER and Tatung, owing to their lack of access to overseas distribution outlets (Chen, J. 1997). In Taipei’s endeavours to redirect Taiwanese

Note: 1 Includes the Caribbean states.

Source: IMF Direction of Trade Statistics Yearbook, various editions.

Table 6.1 Geographic breakdown of Taiwan’s international trade (percentage per trade partner, 1960–97)

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FDI away from mainland China to Southeast Asian locations it has promoted a ‘Go South’ policy with this objective in mind. In January 1998, Taiwan dispatched a high-profile, sixty-person trade mission to Indonesia, Malaysia, the Philippines and Thailand to promote closer commercial ties with ASEAN. The 1997–8 financial crisis that affected much of Southeast Asia also provided Taiwan with the opportunity to expand its informal diplomatic role in the region, by offering funds and expertise to the most troubled ASEAN states. Taiwan was relatively unaffected by the crisis with its banks having been comparatively unexposed and the majority of its overseas investments in industrial plants, many of which subsequently benefited from newly devalued currencies. The economy’s sound financial position, with around $80bn of foreign exchange reserves, has also helped to sustain investor confidence through the crisis. Taiwan was nevertheless affected by the crisis in indirect ways; for example, Southeast Asian and Korean currency depreciations undermined the competitiveness of Taiwanese companies in both its domestic and export markets, while a crisis-induced slowdown in the East Asian economy reduced the demand for Taiwanese products. Other factors that could inhibit Taiwan’s future economic development include the uncertainty over a possible political reunification with mainland China, persisting labour shortages, a still narrow technological base and inadequate infrastructural provision. Hong Kong Most analyses of Hong Kong’s economic history commence from the 1840s onwards, marking the advent of British colonial rule in the territory during the First Opium War (1839–42) with China.7 Although Hong Kong is normally associated with being Asia’s principal entrepôt centre, before 1949 it was a relative backwater, mainly facilitating the trade of Guangdong province. Moreover, Shanghai served as the primary distribution hub for China’s international trade. Hong Kong’s comparatively humble position was further compromised by Western attempts to isolate the newly formed People’s Republic of China (PRC) through the use of trade sanctions.8 In response, Hong Kong had to develop various manufacturing capabilities in order to diversify its economy. The arrival of the Shanghaiese capitalist class, seeking refuge from Mao’s regime, brought the technical know-how and capital that proved instrumental in developing many of Hong Kong’s new industries, particularly textiles. Up until the early 1970s, Hong Kong experienced a phase of rapid industrialisation, leading to average annual growth rates of 6.1 per cent during the 1950s, 10.0 per cent in the 1960s and 9.3 per cent over the 1970s (see Table A.2). From the mid-1970s onwards, the Hong Kong economy diversified further by beginning to develop a broader range of service industries, especially within the financial sector (Cheng 1995). By the time Deng Xiaoping’s economic reforms commenced in the late 1970s, Hong Kong was thus poised to exploit the benefits that a new ‘open’ China would confer. The granting of Special Economic Zone (SEZ) status to neighbouring

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Shenzhen in 1979 and the designation of the Pearl Delta region as an ‘open economic development zone’ in 1985 more than restored Hong Kong’s fortunes as an entrepôt centre, acting as the conduit through which much of China’s rising levels of both exports and imports passed (see Chapter 5). Meanwhile, Sino-British negotiations over Hong Kong’s future had begun in 1982 as the UK’s lease on the inland territories was due to expire in 1997.9 The Sino-British Joint Declaration was signed in August 1984, duly ratified by Westminster in May 1985, and carried provisions for Chinese sovereignty to be restored over the territory on 1 July 1997. However, it was agreed that Beijing would apply the so-called ‘one country, two systems’ principle, whereby Hong Kong would become a Special Administrative Region (SAR) able to function in a relatively autonomous manner up to the year 2047. Hence, it is to a large extent a self-governing entity with its own legal code (except on defence and foreign affairs), having separate customs territory status and maintaining its own currency.10 The rationale behind Beijing’s approach is relatively simple: while it wishes to exercise ultimate political sovereignty over the territory, it is not in the PRC’s economic interests to disturb Hong Kong’s pre-existing commercial regimes and networks that lay the proverbial ‘golden eggs’. We can therefore expect many salient features of the Hong Kong economy to remain unchanged. While Hong Kong’s political sovereignty lies cast within a Communist state, it is still often cited as the most laissez-faire economy in the world, with minimalist government intervention being concentrated on providing essential infrastructure, law and order, property rights and a free trade regime. Since its inception, the raison d’être of the Hong Kong state has been primarily defined by capitalist imperatives. Moreover, private capital interests have always exerted a powerful influence over the form and direction of government economic policy. Yet, the Hong Kong government’s ‘positive non-intervention’ approach has not been devoid of attempts to steer the economy’s path of development (Lethbridge 1993). As Castells (1992) notes, it has created agencies to help coordinate network production (especially in textiles), promote trade, enhance productivity, disseminate market information among firms and helped engineer structural adjustment in the economy in accordance with their own devised strategic plan. Like Taiwan, Hong Kong’s industrial structure is dominated by networkbased, small family-run firms that are able quickly to respond to the vicissitudes of international markets. Compared to other newly industrialising countries (NICs), though, the level of sophistication found in Hong Kong’s manufacturing base is relatively low with limited automation, low R&D and most high-grade and key components being imported (Eng 1997). Furthermore, the economy’s value-added per labour cost ratio has been falling since the 1970s. The consequent loss of momentum in Hong Kong’s EOI activities led to the publication in 1979 of a wide-ranging study conducted by the state-appointed committee to investigate those factors contributing to the economy’s flagging competitiveness. However, their findings became obsolete with the advent of the PRC’s economic reform programme in the same year. The opening up of China to inward FDI enabled

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Hong Kong’s manufacturers to restore cost-competitive advantages by relocating production over the border. This was an ideal opportunity given their small size and hence the constraints they faced in managing long-distance offshore production (Ho and So 1997). The relocation of Hong Kong industry to inland China has been extensive. Around three-quarters of Hong Kong firms’ industrial activities now take place in the PRC, employing an estimated three million workers in the Guangdong province. Consequently, the principal function of the Hong Kong economy is as a business services centre, especially for those companies with commercial interests in China. Hong Kong’s manufacturing sector represented only 8.3 per cent of GDP in 1996, down from 24.3 per cent in 1984. Textile and clothing, on which Hong Kong’s industrialisation was originally founded, remains its most important domestic manufacturing sector. Its continued prominence can be partly attributed to the optimal utilisation of China’s Multi-Fibre Agreement (MFA) quotas which has limited the scope for Hong Kong’s textile and clothing production to relocate to lower cost Chinese destinations. Electronics is Hong Kong’s second largest domestic manufacturing sector where semiconductors, audio-visual equipment, computer systems and telecommunications are key product lines. Inward FDI has played an important role in Hong Kong’s manufacturing industries, the electronics sector being the largest recipient with approximately 30 per cent of total inward investment. The significant structural changes in Hong Kong’s industry have had profound effects upon its trade patterns. The most notable trend since the 1980s has been the shift from domestic exports to re-exports, the latter of which now account for around 80 per cent of Hong Kong’s total exports. Entrepôt ports such as Hong Kong and Singapore perform the task of distributing exports on the behalf of other countries, thus counting as re-exports. This exercise usually requires some form of processing (e.g. final packaging, providing cargo insurance), whereas the simple ‘transshipment’ of goods does not. However, China’s improved capabilities in product processing and auxiliary commercial services in more recent times have led to a marked increase in transshipment trade via Hong Kong.11 A number of rules-of-origin disputes have arisen owing to the possibilities that transshipment offers to circumvent the trade restrictions of third parties. We shall later examine a case of this involving the EU’s anti-dumping regime. Although Hong Kong’s commercial ties with China have flourished, it has also diversified its economic links across East Asia (Table 6.2). While not succumbing to a full-blown financial crisis in the late 1990s, the exposure of Hong Kong’s financial sector to the wider regional crisis meant that the adverse indirect effects were considerable. This particularly related to a loss of confidence which produced both a significant decline in asset prices and the collapse of various securities firms.12 However, in acknowledging Hong Kong’s role as a beacon of prudential management in the region, it has received support from the EU and other powers aimed at fortifying market confidence in the territory. China’s relative immunity to the crisis proved a further boost to Hong Kong.

Note: 1 Includes the Caribbean states.

Source: IMF Direction of Trade Statistics Yearbook, various editions.

Table 6.2 Geographic breakdown of Hong Kong’s international trade (percentage per trade partner, 1960–97)

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Towards a Greater China? The discussion concerning the emergence of a ‘Greater China’ came to the fore in the early 1990s, as linkages between Taiwan, Hong Kong and other constituent parts of the Chinese diaspora13 have deepened and broadened. There exists much ambiguity, though, over what the Greater China concept actually refers to, while to some it is a pejorative term denoting the expansionist aspirations of the core nation. However, Harding (1993) contends that the notion of a Greater China subsumes three relatively distinct themes: economic integration, cultural interaction and political reunification. We have already analysed how Taiwan and Hong Kong have been part of a de facto economic integration with China through extensive trade and investment links that have developed within the so-called South China Sea ‘growth triangle’,14 fostering an economic symbiosis between all three economies (see Figure 8.1). Hong Kong was China’s biggest trade partner between 1985 to 1992 and is still its biggest inward investor, with highly diversified activities covering small-scale, labour-intensive manufacturing to large-scale infrastructure projects. These are mainly concentrated in Guangdong province, providing feedback demand for Hong Kong’s business services back home. Investment from PRC enterprises in Hong Kong is similarly diversified and almost matches opposite flows of FDI from Hong Kong. Taiwan still relies on Hong Kong to act as an intermediary through which indirect economic linkages have formed between the island’s producers and the Chinese mainland. It was only in 1991 that the KMT government began to remove significant barriers to trade and investment flows with the PRC, and in 1995 that it decided on principle to permit direct trade with China.15 These and other factors explain why Taiwan’s economic integration with the PRC is less advanced in comparison with Hong Kong’s, although this situation has engendered a closer economic interdependency between the two NICs. However, Taiwan’s investments on mainland China are diversifying and expanding out of small-scale, labour-intensive activities and into more technology-intensive sectors. As with Hong Kong investments in the PRC, those of Taiwan’s firms are concentrated in their neighbouring economic development zones, i.e. the Xiamen SEZ and Fujian province. Economic integration within a Greater China has been contingent upon cultural interactions, and in particular guanxi business relationships that have evolved on a transnational basis. Such links can fall into the extra-firm (involving political agents), inter-firm (business alliances) or intra-firm (trusted family members or close associates) category. Yeung (1997) attaches primacy to guanxi networks in determining trade and investment decisions and argues that they form their own distinct governance structures. Hence, trade and investment flows between Taiwan, Hong Kong and the PRC owe much to the social organisation of transnational activities that continue to bind their economies closer together. Political reunification is the least developed of Greater China’s three aspects, despite Hong Kong’s recent return to China. Taiwan’s political integration into

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the PRC is still one of Beijing’s prime policy objectives.16 Yahuda (1993: 698) noted that ‘as seen by the leaders of the PRC the importance of reunification with Taiwan is a matter of finishing the civil war, completing the nationalist tryst with Chinese history and finally triumphing over the demeaning effects of past humiliations at the hands of western powers’. Consequently, Beijing has proposed a similar ‘one country, two systems’ framework for reestablishing sovereignty in Taiwan to that applied to Hong Kong. The KMT government remain strongly opposed to such a plan, as do the pro-independent Democratic Progressive Party (DPP). Logically, it is in Taiwan’s interest first to observe the demonstrative effects of the ‘one country, two systems’ principle at work in a post-1997 Hong Kong before any decision is made. Besides, Taiwan is unlikely to give up hope that further economic integration across a Greater China may provide the impetus for political change in the PRC itself (Cheung 1995). Maintaining international status As noted earlier, China’s leaders will permit Hong Kong to fulfil its international economic role, although Beijing will oversee most aspects of its foreign affairs (Yahuda 1996b). However, in the previous chapter we observed how the recent decentralisation of power in the PRC had spurred the coastal provinces in particular to develop autonomous foreign trade and investment policies that had subsequently led to their establishing quasi-diplomatic links with other states. Thus, the retention of Hong Kong’s economic sovereignty has been part of a broader process of change within China. Nevertheless, Hong Kong remains a unique economic territory within the PRC. It is an independent signatory to various international economic agreements, a member of key international organisations (e.g. the WTO17 and APEC) and is able to manage a relatively distinct economic diplomacy with other states. Perhaps the most important threat posed to Hong Kong’s international status from a mainland China source is the predicted re-emergence of Shanghai as Asia’s primary entrepôt centre. Taiwan has meanwhile struggled to reassert its international status, at least among diplomatic circles, after US acknowledgement of the PRC’s political legitimacy in 1972. As a consequence, Taiwan was expelled from various international organisations, most importantly the UN, IMF, World Bank and GATT. When Taiwan re-applied to join the GATT in January 1990 under Article 33, the PRC insisted that its own application for membership—which was submitted in 1986—should be accepted either before or at the same time as Taiwan’s.18 In 1992 an understanding was established within the GATT forum for the coupling of the two applications whereby both would simultaneously accede. While Taiwan secured membership of APEC in 199119 and of the South Pacific Forum a year later, it is yet to re-establish or develop formal diplomatic relations with any of its main economic partners.20 Yet Taiwan’s growing impact on the international economy cannot be easily ignored with a rank of the world’s fourteenth largest trader (see Table A.8) and a major overseas investor. Given the political sensitivity of the Beijing-Taipei

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relationship, the EU and other members of the international community have attempted to foster informal diplomatic relations with Taiwan. In 1991 Western trade and economic ministers began to make visits to Taipei, including in 1992 from the UK, USA and Germany. According to Klintworth (1996:392), Taiwan’s position has also been recently strengthened by ‘the end of the Cold War tensions in East Asia, the consequent decline in the strategic importance of China and the contrast between Taiwan’s domestic political reforms and the bloody events in Beijing in June 1989’. Moreover, Klintworth further argued that attempts to apply economic leverage against Taiwan would rebound as it would demonstrate that China was an untrustworthy economic partner at a time when it continued to seek membership of multilateral fora (most notably the WTO) and a more comprehensive integration into the world economy. Taiwan is, though, unlikely to proclaim political independence so long as economic sovereignty remains intact21 (Clough 1993). It also remains the case that the USA plays a key part in guaranteeing Taiwan’s political survival. The EU’s economic relations with Taiwan and Hong Kong To a significant extent, the EU’s economic relations with both Taiwan and Hong Kong can only be understood in the context of EU-China relations. Before July 1997 the EU’s relations with Hong Kong were essentially driven by the UK’s ties with its old colonial possession.22 Indeed, the UK still plays a prominent commercial and diplomatic function in EU negotiations with Hong Kong and Beijing. Owing to the EU’s ‘one China’ policy, its relations with Taiwan are informal and relatively under-developed. Moreover, because Taiwan has not been able to participate at multilateral level negotiations, its relations with the EU have been resigned to the bilateral level only. Thus, issues of sovereignty have largely orientated the EU’s economic relations with Taiwan and Hong Kong. While this has brought difficulties to managing the economic diplomacy process, their growing importance as EU economic partners has equally made it imperative to prioritise the development of relations. EU-Taiwan economic relations Early encounters and the beginnings of economic diplomacy In historical terms, interactions between Europe and Taiwan have been limited. Mercantile contacts were first formed in the early seventeenth century, where for a time Dutch and Spanish trading companies effectively controlled the island of Formosa, as Taiwan was known then, between the years 1624 to 1662 (Klintworth 1996). After a victorious Franco-British war against China, the conditions of the 1858 Treaty of Tientsin gave French and British ships access to two ports on Formosa’s eastern coast. In a later conflict with China, the French navy partially blockaded the island during periods in 1884 and 1885. It was not until the KMT’s retreat to Taiwan in 1949 that more positive diplomatic interactions were established with the European powers.

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However, disputes over Taiwan’s sovereignty continued to make this difficult. It could be said that early developments in Taiwan’s post-war diplomacy with West European countries followed a more or less inverse path to Sino-European relations. As a condition of forming official diplomatic ties with Beijing, countries were obliged to discontinue those with Taipei: only one legitimate China could be recognised. Thus, the decision of the UK, Netherlands and Denmark to curtail diplomatic relations with Taiwan in 1950 was a precursor to commencing those with the PRC (see Chapter 5). France’s diplomatic advances towards China during the early 1960s led the Taipei government voluntarily to break ties with Paris in February 1964. Up until the Sino-American normalisation of 1971, Luxembourg, Spain and Portugal remained the only West European nation-states to keep formal diplomatic channels with Taiwan.23 Moreover, Taiwan’s attempts to formalise links with the EEC during the early 1960s were thwarted by objections raised by the French and Dutch governments.24 However, an agreement on textiles trade was signed between the EC and Taiwan in October 1970, but this simply imposed restrictions on Taiwanese exporters and lasted for only three years. Any chance of other agreements arising or formal channels being created was ended with the opening of official relations between Beijing and the European Commission in 1975.25 Consequently, Taiwan was denied membership to the EC’s Generalised System of Preferences (GSP) scheme and other economic assistance afforded to its rival Asian NICs. Tsai and Ming (1990) have blamed Taiwan’s foreign policy failures of the early post-war period on the inflexible position adopted by the KMT government. They argued that the pursuing of a ‘two Chinas’ or ‘dual representation’ policy after China’s rapprochement with the West would have improved their chance of maintaining official relations with many countries. As it transpired, the number of states recognising Taiwan’s sovereignty fell from sixty-six in 1970 to twentythree by 1983. During this time, Taiwan had also developed a very pronounced economic and military dependency on the USA. A significantly high proportion of its imports also originated from Japan (see Table 6.1). Certain similarities can be made with Korea in this respect. Like Korea, in more recent years Taiwan has also diversified its trade relations towards Europe to such a dependency. This process has also helped broaden indirect support for its sovereignty (Cooper 1996). While the EU’s ‘one China’ policy means that it cannot confer political recognition to the Taiwanese state, it has had to adopt a de facto economic recognition, given Taiwan’s growing commercial status in the international economy. Indeed, Taiwan is currently a more important trading partner to the EU than Canada or Australia (see Table A.3). As a result, the EU has had to afford a relatively high priority towards developing an economic diplomacy with the island territory within the confines of nonpolitical ties. The latter has necessitated a low level of representation and an absent institutionalisation of formal diplomacy either at the member state or supranational level. However, both sides have established non-official institutions that have acted as the conduit through which an informal diplomacy has evolved.

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Where higher level representation has occurred via mutual visits, a certain informality of contact has been clearly demonstrated so as not to offend Beijing. This is referred to as the ‘flexible diplomacy’ approach. The PRC has nevertheless been very sensitive to any high-level interactions between Taiwanese government ministers and foreign officials,26 although it has been tolerant of EU-Taiwan bilateral negotiations on Taiwan’s WTO accession—a process which the PRC must simultaneously undergo. The development of a framework for EU-Taiwan economic diplomacy, albeit informal, began in the early 1980s. Three trends should be noted. First, a growing number of bilateral economic co-operation committees were being set up around this time between EU member states and Taiwan. Belgium set the trend in 1981, followed by Spain (1982), the Netherlands (1983), Sweden (1986), West Germany (1988), the UK (1988), Ireland (1988) and Italy (1989). In each case, companies from each country were directly involved in establishing these links with both sides, conspiring on issues such as regulatory environments and public procurement bidding. Second, and in a similar vein, eleven European countries had by 1988 set up fourteen commercial-based institutions in Taiwan between them, their main function being to promote mutual business and technological co-operation as well as cultural exchanges. These are not official diplomatic representative offices, and hence their level of politicised authority remains limited. However, as Mengin (1997) notes, most have become reasonably close substitutes for embassies by performing many of the tasks usually associated with them,27 e.g. issuing visas. In Europe, Taiwan had also created fourteen commercial representative offices by this time, with one based in Brussels to manage contacts with the European Commission and other EC institutions. Third, delegations from the European Commission and Taiwanese government convened for their first round of informal trade talks in December 1981. In the 1980s there were seven such rounds but these remained shrouded in secrecy.28 Neither their full agenda nor the names of participants were publicly disclosed. It is known that discussions were reduced to minor level, bureaucratic matters (e.g. visa applications for commercial travellers) rather than substantive talks on major geoeconomic issues. This could be partially attributed to Taiwan’s lack of engagement in international economic organisations which somewhat narrowed the scope of discourse.29 However, a wider range of technical discussions on various commercial issues were to follow during the 1990s and these are examined later. Thus, the scope for conducting an informal economic diplomacy between Taiwan and the EC was reasonably developed at the end of the 1980s. The quasidiplomatic functions performed by business representatives from both sides continue to play a relatively prominent role in EU-Taiwan economic relations, filling the vacuum of a non-existent political diplomacy. The European Commission even used Eurochambres (European Chambres of Commerce and Industry) as its agent to conclude two agreements with Taiwan over 1990–91. These were the ‘Protocol on Income Tax Exemption on Shipping Enterprises’ (1 August 1990) and the ‘Agreement on the Organisation of a System of

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International Customs Deposits with China-Taiwan for the Temporary Admission of Goods’ (29 December 1990–20 March 1991).30 The weakness of the European Commission’s commercial policy regime in this respect has prompted the European Parliament (EP) in particular to compete for influence over the evolving EU position towards Taiwan. The EP has often been a strong advocate of promoting the EU’s relations with Taiwan beyond that level conceded by the European Commission and Council of Ministers. As a democratic agency, the EP has felt obliged to safeguard Taipei’s sovereignty against pressure from Beijing to undermine it. To some degree, this has been a question of relativity: the KMT’s presiding ‘one-party’ democracy in Taiwan offers a more palatable alternative to monolithic Chinese Communist Party rule. Furthermore, the EP has been encouraged by KMT’s recent political reforms, its support increasing with the pace of democratisation in Taiwan. A 1985 EP resolution, under the initiation of MEP J.Van Aerrsen, called upon the EC to upgrade its trade relations with Taiwan where latitude permitted. Among the measures suggested were: • informing Taiwan of changes in EC policy towards other East Asian countries; • the EC was to incorporate Taiwan where it could into the international economic system; • the simplification of existing commercial procedures, including visa insurance and certain financial arrangements.31 Despite the fact that the EP’s proposals were dismissed by the European Commission and the Council of Ministers, Taiwan announced that 1986 was the ‘Year of Trade with Europe’ in response to this support from within the EC. A trade promotion group from Taiwan was dispatched to Europe in the spring of that year, visiting the Netherlands, UK, Belgium, Sweden, Ireland, West Germany and Austria. The EP have also been strong supporters of Taiwan’s accession to the WTO. In May 1993, the Hindley and Reding Reports were presented to the EP as the basis for discussions over the reintegration of both Taiwan and the PRC into the GATT and the wider international economic sys tem in general.32 A delegation of MEPs visited Taiwan in November 1995 at the invitation of Taipei. A few months later in March 1996, the EP publicly condemned the PRC for conducting high-level military exercises in the Taiwan Strait on the eve of the island’s first ever direct presidential election. The following July, the EP adopted the so called ‘Role of Taiwan in International Organisations’ resolution in which support was registered for Taiwan’s return to the UN and the wider international community. Most recently, some MEPs have also pushed for the European Commission to establish an EU-level representative office in Taipei.33 The dispersed commercial interests of Taiwanese business across the Chinese diaspora has meant that the EU’s economic relations with China, Hong Kong SAR and the ASEAN states have a significant impact on those with Taiwan. This may relate to the EU’s trade disputes with East Asia’s Chinese-based economies (e.g. anti-dumping duties on goods produced by Taiwanese firms that are based

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there)34 or to the promotional aspects of these relations where Taiwanese firms have benefited as a result.35 In an attempt to promote its APROC initiative, Taiwan has also encouraged European multinationals to link up with Taiwanese companies jointly to develop new business opportunities in China and Southeast Asia.36 This was the main focus of the first EU-Taiwan Industrial Co-operation meeting held in June 1996, in which fourteen European industrial groups and sixteen private and public sector groups from Taiwan convened to discuss the potential for joint ventures in the region.37 Security considerations have played some part in Taiwan’s economic relations with the EU, which in turn have affected EU-China relations. The dispute over Taiwan’s sovereignty has led to Beijing’s frequent resistance to Taipei’s attempts at diversifying its military procurement sources beyond the USA. Given the comparative strengths of European arms producers, this has frequently involved EU member states. In 1981 the Dutch RSV shipyard secured a contract from the Taiwanese government to build two diesel-powered submarines. Beijing consequently downgraded its diplomatic relations with the Netherlands from ambassadorial to chargé d’affaires level.38 Full Sino-Dutch diplomatic relations were restored in 1984 when the Dutch government informed China that it did not intend to bid for any further military contracts from Taiwan.39 In 1990 the French government came under pressure from Beijing not to sell sixteen LaFayette frigates to the Taiwanese Navy but the $4.8bn deal went ahead anyway. Later on in 1992, France also sold sixty Mirage jets to Taiwan worth $3.2bn. It is noted in Chapter 5 how Beijing responded by closing the French consulate office in Guangzhou and barred French companies from bidding for the contract to build the city’s new subway system. Undeterred, France went on to sell a further $2.6bn worth of military hardware to Taiwan in 1994, although this policy was soon reversed after the inauguration of a new French government that year. Meanwhile, by 1991 a Belgian affiliate of a French firm, Thomsen-CSF, had sold rocket propulsion systems to the Taiwanese air force, while Italy had sold torpedoes to the Taiwanese navy and a German shipyard received an order from Taiwan to build four minesweepers. However, in January 1993 the German government refused to accept a DM12bn contract from Taiwan to sell its armed forces ten submarines and ten frigates. A few years later, Taiwan’s Ministry of National Defence had set up an arms procurement office in Europe by the end of 1997. Developments in EU-Taiwan economic exchange Trade and investment flows between the EU and Taiwan during the early years of their economic relationship were minimal. In 1958, the newly formed EEC imported just $6 million worth of products from Taiwan and exported $18 million to the territory. By 1968, these figures had only risen to $70m and $77m. As Table 6.1 indicates, the EU 15 group was a poor third import partner for Taiwan during the 1960s and 1970s, well behind Japan and the USA which between them supplied the Taiwanese with well over half their imported goods. In 1975 Taiwan accounted for a mere 0.3 per cent of extra-EU15 export trade

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and 0.5 per cent of extra-EU15 import trade (see Table A. 3), representing in value terms Ecu389m and Ecu643m, respectively. However, by the early 1980s Taiwan had become one of the EU’s most dynamic trading partners. Its shares of extra-EU 15 imports and exports had both doubled by 1985 to 1.0 per cent and 0.6 per cent, while in value terms they had risen to Ecu4.0bn and Ecu2.3bn. By 1997, these shares had more than doubled to 2.3 per cent and 1.8 per cent, and in the same year the EU imported Ecu5.6bn worth of goods from Taiwan and exported Ecu12.6bn to the island. Figure 6.1 shows that the EU sustained a continuous trade deficit with Taiwan over the 1975–97 period, peaking in 1991 at Ecu6.0bn. By the end of the period, Taiwan had become the EU’s seventh most important import source and the fourth largest outside Europe behind the USA, Japan and China. The EU’s position as one of Taiwan’s import partners had also improved slightly over the same period from a 12.0 per cent share of the total to 15 per cent. Table 6.1 also shows how the EU has remained a relatively important export market for Taiwanese producers. In terms of member state trade, Germany is still Taiwan’s most important EU trading partner followed by the UK, France and the Netherlands (Figure 6.2). The rapid expansion of EU-Taiwan trade over the 1980s and 1990s can be attributed to Taiwan’s techno-industrial advancement. This has required various imported capital-intensive goods from Europe (e.g. industrial machinery, chemicals), but has simultaneously created a demand within the EU for Taiwan’s more technology-intensive, competitively priced products. Recent sectoral patterns in Taiwan’s exports to the EU reveal this structural shift. Figure 6.3 shows that more labour-intensive exports such as textiles,

Figure 6.1 EU-Taiwan merchandise trade (1975–97) Source: Eurostat.

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clothing and footwear have fallen proportionately, while Taiwan’s more technology-intensive exports have increased. For example, office machinery and computers accounted for only 1.4 per cent of Taiwanese exports dispatched to the EU in 1980 but by 1997 they represented 34.4 per cent, making Taiwan the EU’s third largest import source for these products (see Table A. 5). Electrical machinery’s share of the total also rose markedly from 7.1 per cent to 16.0 per cent and that for road vehicles increased from 1.3 per cent in 1987 to 5.7 per cent ten years later. Up to 1979 annual European direct investments in Taiwan numbered less than five with the total amount invested not rising above $30m per annum. However, inflows of European FDI in Taiwan steadily rose during the 1980s and by 1996 the stock of EU direct investment totalled $2.293m, although this only represented 9.3 per cent of Taiwan’s total inward stock of FDI. Figure 6.4 shows that this compared to the USA’s 25.8 per cent, Japan’s 26.6 per cent and Hong Kong’s 10.6 per cent. Dutch and British firms have

Figure 6.2 EU member state trade with Taiwan (1987, 1997) Source: Eurostat.

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Figure 6.3 Taiwan’s exports to the EU by sector (1980, 1987, 1997) Source: Eurostat.

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spearheaded EU direct investment on the island with 39.1 per cent and 34.2 per cent, respectively, of the EU total. The British firm ICI has been particularly prominent, establishing six industrial plants in Taiwan, with Volkwagen, Peugeot and Renault also operating large factories. Many of the current 600 or so European investment projects involve major public works and joint ventures in high-tech industry. Taiwan’s six-year National Development Plan has especially attracted European investment interests. For example, the $14bn high speed train programme has brought many European commercial ministers to Taiwan to promote key contracts for their domestic producers, with the European Commission also playing an active lobbying role. Taiwan’s SME-based economy largely explains the relatively few and smallscale nature of Taiwanese investments in Europe, especially in comparison to Japan and Korea. By 1996 total Taiwanese FDI in the EU amounted to $420.4m representing a mere 1.0 per cent of all Taiwan’s outward FDI (Figure 6.5). However, this figure rises to 3.4 per cent if China is removed as a host destination. The largest Taiwanese direct investment in the EU has been Chung Hwa Picture Tubes’ manufacturing project in Lanarkshire, Scotland, which supplies Digital, IBM and other IT producers in Scotland’s Silicon Glen. There have, though, been other developments which may signal a greater influx of Taiwanese FDI into Europe. In 1995 Lodz in Poland and Plzen in the Czech Republic were specifically targeted as industrial zones for Taiwanese investors. Under this project, Taiwanese firms are to assist the development of the zones to perform as low cost, export production platforms from which EU markets could be served. The anticipated accession into the EU, and hence the Single Market, of the two host countries has also been an instrumental factor. Furthermore, similarities with the EPZs that Taiwan pioneered in the 1960s can be made with these zones.

Figure 6.4 Inward FDI stocks in Taiwan by geographic origin (1987, 1996) Source: UNCTAD database. Note: Approved investment.

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Figure 6.5 Stock of outward FDI from Taiwan by geographic destination (1996) Source: UNCTAD database. Note: Approved investment.

Major issues and disputes in EU-Taiwan economic relations In the past, the lack of formalised economic diplomacy between the EU and Taiwan meant that each was often subjected to the unilateral actions of the other (Shen 1995). Only in recent years has there been a more consultative approach, especially via Taiwan’s WTO accession negotiations. Towards the end of the 1980s, the EC’s outstanding commercial disputes with Taiwan concerned its taxes on maritime and air transport, import tariffs, liquor and tobacco taxes, public procurement, IPR and agricultural import licence regimes. Meanwhile, Taiwan expressed concerns over the EC’s quotas on textile, footwear and various consumer durable products and anti-dumping regime. Most of these disputes persisted up to the mid-1990s and it was only at the beginning of WTO accession negotiations that any effective resolutions to these were found. As with other East Asian NICs, Taiwan’s trade disputes with the EU have centred on its ‘external’ barriers to trade, i.e. more conventional or official trade barriers such as tariffs, duties and quotas. The EU’s anti-dumping regime has particularly been criticised by Taiwan’s government and firms, as have certain trade restrictions placed on EU imports from China. These not only relate to ADDs but also the number of quotas placed on China’s non-textile exports. However, as we shall discuss later, this regime has had a bigger impact on Hong Kong. Table A. 7 shows that Taiwan had attracted sixteen anti-dumping investigations by the EU over the 1985–97 period. This was a relatively high number when compared to most of its East Asian rivals, being over twice as many for either Hong Kong or Singapore, although only half that of Korea’s figure. As Table 6.3 shows, Taiwanese producers of synthetic polyester fibres, microdisks, electrolyte capacitors, glutamic acid, polyester yarns, personal fax machines and stainless steel fasteners all faced definitive ADDs in November 1998.

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Laursen (1995) observed that specific Taiwanese criticism levelled at the EU’s anti-dumping regime concerned its ‘producer-driven’ approach, and hence its apparent failure to consider European importers’ interests. This was manifest when the European Bicycle Importers Association registered its complaint in 1998 over the new ADD which the Commission had imposed on bicycle imports from Taiwan.40 To circumvent this, Wang (1993) observed that many Taiwanese SME firms had adopted a strategy of becoming suppliers to EU producers, thus providing them with a disincentive to lobby for anti-dumping actions on Taiwan imports. Taiwan is joined by some state-trading economies (Vietnam, North Korea and Mongolia) in not participating in the MFA. It has therefore been prone to frequent unilateral actions from the EU in the textile and clothing sector. The 1970–73 EC-Taiwan Textile Trade Agreement did allow Taiwan some latitude for negotiation, but set a import quota of 11,445 tonnes of Taiwanese cotton textile products that could enter EC markets.41 However, textiles and clothing have gradually become a less important export for Taiwan, constituting only 6.6 per cent of its total exports to the EU in 1997, down from 19.2 per cent in 1980 (see Figure 6.3). Both MFA and non-MFA restrictions are nevertheless to be phased out by 1 January 2005. Taiwanese producers have been liable to other nontextile trade restrictions. A series of European VERs operated on Taiwanese footwear products and umbrellas during the 1970s. In 1988 the European Commission imposed quantitative restrictions on Italian and French imports of footwear originating from Taiwan. After a request from the Spanish authorities in August 1994, the European Commission applied safeguard measures on garlic imports originating from Taiwan, with the issue of import certificates being curtailed until the following June. Since then, Taiwan has encountered no further quantitative restrictions on non-textile trade. Moreover, Taiwan’s relative position in the EU’s hierarchy of trade relations Table 6.3 EU anti-dumping duties on imports from Hong Kong and Taiwan (at November 1998)

Source: DG1C, European Commission.

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received a boost when its NIC rivals from East Asia and elsewhere were either partially or completely graduated from the EU’s GSP scheme from 1995 onwards. As previously noted, Taiwan had never been a GSP beneficiary and thus never gained from the tariff and quota-based concessions which the scheme afforded. After these changes to the EU’s GSP, many Taiwanese manufacturers gained because they now competed with their East Asian counterparts on more equal terms. Taipei was quick to seize this opportunity. When it was announced that Taiwan’s closest NIC rivals—Korea, Singapore and Hong Kong—would be fully graduating from the EU’s scheme in May 1998, the Taiwanese Board of Foreign Trade drew up plans to send forty trade promotion teams to EU locations. The EU’s trade disputes with Taiwan represent a departure from its usual preoccupation over ‘internal’ barriers to international trade, i.e. non-officialised barriers such as discriminatory domestic tax structures. Positioned outside the GATT/WTO framework, Taiwan has been able to resist the downward pressure on tariffs and other ‘external’ barriers to trade such as miscellaneous duties, quotas and import licences. Taiwan’s relatively high level of import tariffs on certain products has thus been of significant concern to the EU, especially on cars, agricultural goods and alcoholic beverages. As part of its WTO accession negotiations with the EU and other trading partners, Taiwan has had to make many tariff concessions, as we discuss shortly. Despite bucking the trend, Taiwan’s ‘internal’ barriers to international trade have nevertheless presented various problems to EU exporters, such as its domestic tax regimes on alcoholic beverages and tobacco. In Taiwan, liquor attracts very high rates of so-called ‘monopoly taxes’, which on whisky are NT$440 (around US$15) per litre and on brandy and cognac up to NT$ 1,000 (approximately US$35).42 The EU argued that its liquor producers were being unfairly discriminated against and wanted these reduced to NT$ 198 and NT$490, respectively. European Commission negotiators managed to secure these concessions during the February 1998 WTO accession negotiations, although higher rates on whisky continued in some instances. The EU also expressed concern over some 150 lookalike brands produced indigenously in Taiwan.43 On another matter, Taiwan’s testing procedures for pharmaceutical products intended for a medical use have also elicited complaints from European producers. Furthermore, the EU’s negotiations with Taipei have involved matching the advantages conferred upon the USA by its bilateral deals brokered with Taiwan. A recent example was the preferential access that US shipping firms have enjoyed at Taiwanese ports where European rivals seek the same rights to establish their own terminals. As other chapters testify, this has been a recurrent theme in the EU’s economic relations with its East Asian partners. We shall return to this issue in the chapter’s conclusion. The EU and Taiwan’s accession to the WTO As with China, Taiwan endeavours to accede to the WTO during the 1990s were pivotal in the development of its economic relations with the EU. Taiwan’s entry

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to the organisation would also add a multilateral dimension to EU-Taiwan economic diplomacy. It was noted in Chapter 5 how the WTO accession process entails preliminary bilateral negotiations that each prospective member must conduct with incumbent members who request such talks. This requires a mutual compliance to established multilateral rules and accords with Taiwan consequently making various market opening concessions to the EU. The previous absence of multilateral discipline within Taiwan’s trade regime implies that the EU and others thus had much to gain from its accession to the WTO. As part of this process, Taiwan also signed up for the WTO’s plurilateral accords on public procurement, information technology and financial services. Conversely, WTO membership brings important advantages for Taiwan regarding its economic relations with the EU For example, the EU’s application of unilateral trade policy actions against Taiwan will be circumscribed by WTO rules and procedures. Like many other East Asian states, Taiwan will especially gain if multilateral competition policy rules are incorporated into the WTO framework which can be expected to temper the EU’s anti-dumping regime. By the spring of 1998 the EU, along with Switzerland, was the last of the twenty-six contracting parties of the WTO to conclude pre-entry bilateral talks. However, it was the intention of EU and Taiwan negotiators to complete an agreement much earlier. Prior to the Tenth EU-Taiwan Trade Talks in February 1994, EU officials stated that the possibility existed to secure Taiwan’s membership of the WTO by the end of that year. In a pre-negotiation tactical move, the EU stated, though, that this was contingent upon Taipei undertaking certain reforms to its trade regime. Three years on and numerous rounds of talks later, both parties were again hopeful of concluding their negotiations on Taiwan’s WTO accession by July 1997. However, persisting EU concerns on automobile import quotas and tariff rates,44 high tariff rates on industrial and agricultural products (average rates of 6.9 per cent and 21.0 per cent, respectively), liquor tax rates and the Taiwan’s price review system for medical products impeded this outcome. Taiwanese and EU delegates met again in February 1998 where some notable progress was made towards an accession agreement. A meeting between EU Trade Commissioner Brittan and Taiwan’s trade minister Wang in May 1998 made a further contribution to this end. More positive developments stemmed from subsequent ad hoc negotiations with the result that a final agreement seemed probable by the end of that year. However, this depended on the decoupling of Taiwan’s accession to China’s own, the negotiations of which with the EU and other WTO members had run into difficulties by early 1998 (see Chapter 5). It was noted in a previous section how the two accessions had been linked by an understanding established within the GATT forum in 1992. For both the EU and USA, a decoupling would not pose a contradiction to their respective ‘one China’ policies as statehood is not a necessary prerequisite of WTO membership. Prospective members must, though, operate as a separate customs authority and exercise control over its commercial policies, thus qualifying Taiwan. Moreover, this was a de-politicised issue as far as the EU

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was concerned as the WTO was a trade-based organisation. Nevertheless, Beijing remained sensitive to any recognition of quasi-sovereignty concerning Taiwan. EU-Hong Kong economic relations Owing to its past British crown colony status, Hong Kong’s economic relationship with the EU has been significantly affected by UK interests and policy. This relates to both the conduct of economic diplomacy and patterns of trade, investment and finance where British firms have generally dominated. Such close political links between an EU member state and Hong Kong had largely negated the need for the European Commission to develop a separate EU-level diplomacy with the territory until recently. This is not to suggest that Hong Kong has avoided the machinations of the Common Commercial Policy (CCP): it has a place in the EU’s hierarchy of trade preferences. Moreover, the return of Hong Kong’s political sovereignty to China has arguably created greater scope for a more distinct EU policy towards it to be developed, although the UK can be anticipated to have a strong influence here. As previously established, Hong Kong’s economic sovereignty will remain intact as an independent customs authority with its own currency and a member of the WTO, IMF and other international economic institutions. However, as with Taiwan, the EU’s future economic relations with Hong Kong cannot be disentangled from those with the PRC. The ‘one China, two systems’ framework implies that the EU often has to defer to Beijing’s wishes when conducting its economic diplomacy with Hong Kong, depending on how politicised the issue at hand. Conversely, the EU is able to use its links with Hong Kong to affect change in the PRC. By helping fortify the redoubt of economic liberalisation that Hong Kong has become, the EU is lending de facto support to a possible future political liberalisation being realised within China. Interdependence in EU-Hong Kong-PRC relations is also manifest in economic exchange. Intertwined flows of trade, investment and finance between the two Chinese economies have made it difficult to disaggregate EU trade patterns with Hong Kong. These and other complexities face the EU in managing its economic relations with its ninth largest trading partner. The development of EU-Hong Kong economic diplomacy The UK’s colonial relationship with Hong Kong up to June 1997 meant that an EU-level economic diplomacy with the city state was confined to CCP actions and occasional multilateral contacts within the GATT/WTO framework. In anticipating the reversion to Chinese rule, the European Commission carried out various initiatives that would help delineate a post-1997 EU policy towards Hong Kong. In 1993, the European Commission established an EU representative office in the city state to help manage commercial issues and other matters of concern. Over the following years, EU External Relations

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Commissioner Sir Leon Brittan made several speeches in Hong Kong which outlined how the EU envisaged its economic relations with the territory would develop in the future. The first of these occurred in November 1994 where Brittan took the opportunity to defend the EU’s anti-dumping regime and highlight how the quantitative restrictions on the EU’s non-textile imports from China have been drastically curtailed.45 The favour was returned in April 1995 when Hong Kong’s Chief Secretary, Anson Chan, paid a visit to Brussels to explore how EU-Hong Kong relations would evolve after the handover. At the convention of the Foreign Affairs Council in December 1995, EU foreign ministers agreed to pursue a ‘principle of continuity’ policy towards Hong Kong, which was suitably vague enough not to upset Beijing. In June 1996 the Council of Ministers confirmed EU support for a smooth and successful transition of power in the territory. This laid the ground for talks held the following month between Hong Kong Governor Christopher Patten with European Commission President Jacques Santer over the EU’s place in Hong Kong’s economic and political future.46 In the background of the meeting, negotiations were conducted between the EU and Hong Kong delegates responsible for trade (including customs), industry and intellectual property rights protection. During the short time in which EU-Hong Kong economic diplomacy has formally existed, the tone of relations has been generally positive. Hong Kong’s commercial openness has meant that EU businesses have not encountered the same market access problems experienced in other East Asian economies. Highly developed mutual trade, investment and finance links have bred a significant degree of interdependence between the two powers and hence a broad range of common economic interests at the bilateral and multilateral level. The ‘bridging’ role played by the UK up until mid-1997 also helped to create a firm framework of relations in the initial stages. To provide points of reference for the future development of these relations, the European Commission published a ‘communication’ document which it presented to the Council of Ministers in April 1997 (CEC 1997). This was relatively thin on detail and mostly devoted to analysing how democratisation in Hong Kong could be safeguarded. There was no suggestion of any wide-ranging EU-Hong Kong trade and co-operation agreement being signed to help augment relations, either because Hong Kong’s advanced economic position did not necessitate it or, as is more likely, because this would send the wrong signals to Beijing. Signing such an agreement would have appeared to the PRC leadership as an EU attempt to subvert Chinese reunification. However, the document did recommend publication of annual reports on EU-Hong Kong relations, starting from 1998 onwards, to help monitor and promote developments. The creation of the EU-Hong Kong Business Council in 1997 also represented a new structure for promoting commercial links between the two powers. The EU and Hong Kong have forged ever closer ties at the multilateral level. Both had supported the idea for a broad sweeping ‘Millennium Round’ of WTO trade negotiations.47 They had also been signatories to recent WTO

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plurilateral agreements on financial services, electronic commerce and information technology. On the latter, the EU and Hong Kong formed an alliance to cajole other WTO members into signing the telecommunications agreement as part of the ITA. In addition, China’s accession to the WTO has been an important issue for both partners. However, Hong Kong is unlikely to participate in the ASEM’s inter-regional framework of relations because its political aspect extends ‘beyond the competence of the SAR government’ (CEC 1997:6). Hong Kong must therefore depend on Beijing for its interests to be upheld in the ASEM process. Economic exchange Hong Kong is not only a significant commercial partner for the EU in its own right but also has an important strategic function in China’s dynamic economy. It remains the key entrepôt centre for Europe in its trade with the PRC. Furthermore, Hong Kong acts as the primary hub for business and financial services in the southern China region and currently plays host to over 100 European banking, insurance and securities companies.48 Many EU companies are engaged in securities and commodities trading in Hong Kong. Its highly developed communications infrastructure partly explains why over 250 European companies have also based their regional headquarters there.49 In 1960 Hong Kong accounted for only 0.5 per cent of extra-EU15 import trade and 0.9 per cent of extra-EU15 export trade. By 1997 these shares had both roughly tripled to 1.2 per cent and 2.8 per cent, respectively, with Hong Kong being the EU’s eighth largest export market and fifth largest outside Europe. Over the 1980–97 period the EU’s exports to Hong Kong had risen from Ecu2.0bn to Ecu20.4bn while EU imports from the territory had increased from Ecu3.5bn to Ecu8.2bn. The EU has sustained continuous trade surpluses against Hong Kong since 1988 and Figure 6.6 shows an accelerated growth in these surpluses from 1992 onwards. This trend can be largely attributed to the mass relocation of Hong Kong’s export production to the PRC during the early 1990s in response to the new wave of economic reforms then introduced by the Chinese government (see Chapter 5). Over the 1960–97 period, the EU’s position as a Hong Kong trading partner has declined, with only 11.3 per cent of its imports (down from 20.6 per cent) and 14.7 per cent of its exports (down by 21.6 per cent) by the end of the timespan (see Table 6.2). To some extent the EU, like the USA and other trading partners, has been marginalised by Hong Kong’s closer integration into the Chinese and wider East Asian economy studied earlier. It is perhaps not surprising that the UK still remains Hong Kong’s most important EU member state trading partner, with 26.4 per cent of total EU imports from the territory and 23.6 per cent of total EU exports to it in 1997 (Figure 6.7). Other key member states have been Germany, France, Italy and the Netherlands, who actually accounted for a higher share of EU imports from Hong Kong than the UK in the same year with 28.1 per cent.

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Figure 6.6 EU-Hong Kong merchandise trade (1975–97) Source: Eurostat.

Like Taiwan, there has been a structural shift in the sectoral pattern of Hong Kong’s exports to the EU over the last two decades, although this has been less marked. Figure 6.8 indicates that while there have been increases in the shares of more technology-intensive products (e.g. electrical machinery, office equipment and computers), textiles and clothing exports and products from other labour-intensive sectors remain prominent. With specific regard to textiles and clothing, it was previously mentioned how the relocation of Hong Kong’s export production in these sectors has been constrained by the PRC’s near optimally utilised MFA quotas, which largely explains this relative lack of structural adjustment. As with trade, the UK’s investment and financial ties with Hong Kong are more extensive than any other EU member state’s. Moreover, Hong Kong’s mode of capitalism shares many similarities with the Anglo-Saxon model. The prominence of the UK and Hong Kong financial sectors in their respective economies provides another commonality. The level of British investment in Hong Kong is also the highest among the EU member states with 38.6 per cent of the EU total in 1996, followed by the Netherlands with 26.8 per cent, France 11.6 per cent and Germany 10.4 per cent.50 In the same year the EU’s overall share of inward FDI in Hong Kong was 13.8 per cent, a figure not much altered over the 1987–96 period and still relatively low compared to the USA’s 28.1 per cent and Japan’s 33.4 per cent (Figure 6.9). Trade disputes and economic co-operation As noted earlier, Hong Kong’s highly deregulated and open economy has meant that the EU has had very few market access disputes with the territory.

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Figure 6.7 EU member state trade with Hong Kong (1987, 1997) Source: Eurostat.

Virtually all EU exports enter Hong Kong’s markets under tariff-free conditions. European firms have also had little to complain about regarding ‘national treatment’ issues, export subsidisation or trade-related investment measures. However, as with many other East Asian economies, high excise duties on alcohol, tobacco and some hydrocarbon oils still persist in Hong Kong. The new liquor tax rates introduced during early 1990s by the Hong Kong administration brought French protests over the adverse discriminatory effects which these were deemed to have on its wine and brandy exports.51 During the 1970s in particular, European manufacturers frequently voiced their concern over the flood of cheap imports from their Hong Kong rivals. The EC signed textile trade agreements with Hong Kong in 1976 and 1980 as part of the wider MFA regime which aimed to restrict the flow of Hong Kong’s main export (see Figure 6.8) to European markets (CEC 1976, 1980). However, protectionist anxieties generated by Hong Kong producers began to subside somewhat as they increasingly shifted their production to mainland China,

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Figure 6.8 Hong Kong’s exports to the EU by sector (1980, 1987, 1997) Source: Eurostat.

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Figure 6.9 Inward FDI stocks in Hong Kong by geographic origin (1987, 1996) Source: UNCTAD database. Note: Secondary sector investment only.

and with it the focus of European attentions. Yet the growing economic integration of the PRC and Hong Kong also meant that the latter has often become entangled in Sino-European trade disputes. The EU’s microdisk ADD case and EU quantitative restrictions on Chinese imports are demonstrations of this. Regarding the first of these, the EU began its so-called ‘anti-circumvention’ investigations in early 1995 into the claim that some Hong Kong firms were faking country-of-origin certificates to avoid paying relatively higher ADDs on microdisk exports. This allegedly involved the transshipment of these products from mainland China and Taiwan via Hong Kong. Chinese and Taiwanese firms faced more punitive ADD rates at 39.4 per cent and 32.7 per cent, respectively, in comparison with the 6.7 per cent to 27.4 per cent rates imposed on Hong Kong origin microdisks. In total, twenty-four Hong Kong firms came under the EU’s study. Hong Kong’s Trade Department consequently registered a complaint to the WTO’s anti-dumping committee on the basis that the EU’s ‘anticircumvention’ procedures were not WTO consistent.52 The EU’s investigations were eventually dropped in July 1996 after the European Commission failed to establish whether circumvention by Hong Kong firms was being practised. However, the ADD circumvention issue re-emerged in February 1998 when the European Commission had identified Chinese silicon metal exports that had been relabelled and transshipped through Hong Kong. The fact that there are no silicon producers in Hong Kong naturally aroused suspicions in Brussels. Many Hong Kong producers have been affected by the EU’s widespread application of ADDs on its Chinese imports where their factories produce goods of designated PRC origin. For example, after the EU’s imposition of an ADD in 1997 on leather handbags produced in China, Hong Kong producers established a coalition with their European suppliers to protest against the decision. At this time there were around 1,500 Hong Kong-owned handbag factories in China and 3,400 in both territories. The EU’s justification for imposing the ADD was

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based on estimates that European competition was being undercut by an average margin of 28 per cent. Injurious competition was also cited by claiming that the number of EU handbag manufacturers fell from 76,000 in 1992 to 57,000 by 1996. Other Hong Kong firms were also affected by the EU’s quantitative restrictions placed on certain Chinese non-textile imports, namely toys, footwear, gloves, porcelain kitchen and tableware, ceramic kitchen and tableware, glassware and radios (see Chapter 5). The EU’s tougher MFA restrictions on China had similar effects.53 Hong Kong itself has been subjected to only seven EU anti-dumping investigations over the 1985–97 period and no new direct investigations since 1992 (see Table A.7). Table 6.3 shows that in November 1998 the EU applied just one ADD on Hong Kong producers (of microdisks). Of greater concern for Hong Kong firms were the changes made to the EU’s GSP scheme during the latter 1990s. For some time Hong Kong was a GSP beneficiary of the EU and thus received trade concessions on selected industrial exports. As with other East Asian economies we have studied, Hong Kong experienced sectoral graduation in various industrial product lines, beginning in 1995 and ending in 1998. These sectors included leather and furskins, clothing, jewellery and precious metals, consumer electronics, optical instruments, clocks and musical instruments, and miscellaneous manufactured products. Together with Korea and Singapore, Hong Kong completely graduated from the scheme in May 1998. On the promotive side of EU-Hong Kong economic diplomacy, both partners signed a customs co-operation agreement during Sir Leon Brittan’s visit to Hong Kong in February 1998. This was the first international agreement concluded by the post-1997 regime. Brittan noted the contribution that this would make to uphold the territory’s economic sovereignty and commented that the agreement ‘will be a clear signal to the outside world of Hong Kong’s autonomy and Hong Kong’s confident exercise of its own autonomy’.54 Maintaining the integrity of Hong Kong’s established economic system up until its full integration into the PRC (i.e. in 2047) lies at the centre of any current or future EU strategy towards the territory. This is deemed important not least because of the need to maintain Hong Kong’s stability as a regional financial centre, made more critical by the East Asian financial crisis. Hong Kong is seen by EU member states and firms as a beacon of sound financial management and prudential control to neighbouring East Asian economies, and as such has a key function to play in safeguarding Europe’s wider commercial interests in the region. Given its status as a global financial centre, Hong Kong will take particular interest in the EU’s moves to economic and monetary union and its external impact upon the international trade and finance systems. Conclusion In drawing conclusions, we shall as usual consider IPE’s main theoretical perspectives with regard to our preceding analysis. For neo-realists, the salience of the state and state-centric imperatives in the EU’s economic relations with

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Taiwan and Hong Kong is clear. Taiwan’s promotion of its relations with the EU is a means to promote the political sovereignty of the island territory. However, the EU recognised some time ago the contestable nature of this sovereignty which has narrowed its diplomatic options. Despite such constraints, the EU has possessed both the motivation and latitude to promote Taiwan’s own economic sovereignty. As we have seen, Taiwan has become an increasingly important trade partner for the EU and has therefore necessitated its higher prioritisation within the framework of EU economic diplomacy. By upholding Taiwan’s right to function as a separate custom’s authority, the EU is able to establish more definitive parameters for negotiation with Taipei. At the same time, the EU will be wary not to offend Beijing, especially now that China’s own ascendancy to economic superpower status seems likely and how this affects the future balance of geoeconomic power. Hence, maintaining cordial relations with China has become an even greater priority for this and other reasons discussed by Chapter 5. This does not, though, prevent the EU from adopting the ‘principle of continuity’ in its general relations with Hong Kong. Notwithstanding the PRC’s own policy of establishing discontinuity insofar as repelling European political influence over the territory, Beijing also accepts that safeguarding Hong Kong’s commercial potential relies on the maintenance of harmonious relations with the territory’s major trading partners. This permits scope for the EU to continue to advocate Hong Kong’s own economic sovereignty. Neo-realism’s emphasis on systemic factors and their conditioning of interstate relations is perhaps most relevant to Taiwan’s accession to the WTO. In its endeavours to join the multilateral trade regime, and thus integrate itself more closely into the international economic system, Taiwan has had to temper its neo-mercantilist policies. This has offered specific benefits for the EU and other trading partners, who will also generally gain in the future from an important world trader complying to multilateral trading norms and rules. Neo-realists would also highlight the primacy of politico-security objectives in determining Taiwan’s and Hong Kong’s economic relations with the EU. We have already discussed how Beijing’s desire to maintain the territorial integrity of the Chinese state has been a central factor here. It has also noted how the USA’s security relationship with Taiwan underpins their economic relationship, which has thus made Taipei more inclined to confer preferential market access or key contract deals to US producers, hence disadvantaging European firms. This ‘policy of obligation’ rests on the USA not just being perceived as Taiwan’s bilateral guarantor of political and economic self-determination but also as a guarantor of its global economic interests. As hegemonic stability theory claims, US hegemonic power has upheld the multilateral trading system and thus helped to liberalise the international markets into which Taiwan’s export production has expanded. Although these factors have become less relevant in recent years, the EU can only hope to approximate the US special position within Taiwan’s hierarchy of diplomatic relations. Moreover, the UK can no longer be expected to exercise the same degree of influence over Hong Kong.

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To neo-liberals, the absence of political sovereignty is not as crucial to the conduct of economic relations as neo-realists maintain. Taiwan and Hong Kong can be seen as ‘economic states’ with the technocratic apparatus to manage both domestic and international economic policy agendas. Furthermore, the EU’s economic exchange and linkages with Taiwan and Hong Kong have flourished despite the lack of an advanced or formalised economic diplomacy framework. Neo-liberals attribute this to the role played by non-state actors. It is firms that trade and invest overseas and have hence created new interdependent links between the EU and the two territories. We have shown how business representatives have also performed a quasidiplomatic function in the EU’s economic relations with Taiwan from an early stage, and how Taipei invited European multinationals to participate in its APROC initiative and Southeast Asian joint ventures with Taiwanese firms. Neo-liberal institutionalists would also stress the importance of the WTO as a non-state agent and alternative governance regime. We have argued in this chapter that Taiwan’s WTO membership will mark a watershed in the development of EU-Taiwan economic relations. When realised, both powers will be able to discuss broader issues affecting the international economic system within a multilateral forum for the first time. The multilateral dimension of EU-Hong Kong economic diplomacy has existed for a while, with both sides invariably working to similar objectives, e.g. over promoting the Millennium Round within the WTO. The neo-liberal concept of complex interdependence is also relevant. During the 1990s EU policymakers and businesses have increasingly had to acknowledge the triangularised economic links between Taiwan, Hong Kong and China. The South China Sea’s transnationalised coastal economy has brought complications and opportunities for the EU. Examples of the former have included the transshipment and anti-dumping circumvention issue and determining the location of Hong Kong’s export production. European firms should consider the opportunities of network economy building across Chinese diaspora. At present, the direct transnational links between the EU and its two East Asian economic partners are rather limited, with the level of mutual FDI and number of subcontracted production arrangements being comparatively low. However, this chapter has highlighted instances where the ‘insider’ loyalties of EU multinationals have been evident (e.g. European car manufacturers and Taiwan’s WTO accession tariff deal) or of various coalitions forged between Taiwanese and Hong Kong firms and EU importers. The interdependencies associated with financial globalisation, underlined by the 1997–8 East Asian financial crisis, have also emphasised the need for closer policy co-operation and co-ordination between the EU, Hong Kong, Taiwan and other partners. For Marxists, difficulties experienced in the EU’s economic relations with Hong Kong in particular originate from post-colonial tensions. It was previously mentioned how the EU’s ‘principle of continuity’ policy could be easily interpreted by Beijing as ‘foreign meddling’. Moreover, most British and other European multinationals—the new imperial agents, according to Marxists—

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have remained in post-1997 Hong Kong and thus form part of a post-colonial legacy. Hong Kong is still seen by the PRC’s communist hard-liners as an ‘enclave of imperialism’. Although Taiwan has very distant colonial links with Europe, it is interesting to note that Dutch trade and FDI links with the island territory are notably strong. Marxists would also stress how the primacy of capitalist interests is revealed in issues covered by this chapter. In many respects, the EU has complied with Beijing’s wishes over matters concerning Taiwan and Hong Kong in order to safeguard European commercial interests across ‘Greater China’. Furthermore, Marxists would contend that the capitalist interests of Hong Kong, Taiwan and the EU have become increasingly aligned now that the two ‘tiger’ economies have matured into fellow capital-intensive powers. Notwithstanding the constraints placed on their exercise of sovereignty, it is certainly the case that both Taiwan and Hong Kong have become increasingly important partners for the EU within the global economic system. However, Taiwan and Hong Kong’s part in the equation of EU-China economic relations, in addition to their special economic territory status, will continue to generate particular challenges for the EU’s conduct of economic diplomacy towards them.

7

The EU and Korea

Introduction As East Asia’s third largest national economy, Korea has an important part to play in the EU’s economic relations with East Asia. European attentions to Korea have been heightened by frequently heard prophesies regarding the country’s supposed destiny as ‘the next Japan’. There are certainly many similarities that can be drawn between them, as this chapter alludes. For some time, EU-Korea economic relations were almost exclusively preoccupied with resolving many ongoing trade disputes. However, the surge of Korean direct investment into Europe during the 1990s in particular made the EU more aware of Korea’s potential significance as an economic partner in the twenty-first century. As a consequence of this and other developments, there has been a discernible shift from conflict to co-operation in EU-Korea economic relations. Nevertheless, these relations continue to be hampered by persisting trade friction in key sectors and certain cross-sector issues. Furthermore, Korea’s 1997–8 financial crisis brought a new complexion to the economic relationship, and therein various challenges to EU businesses and policymakers. These are the main themes that are considered by this chapter. Following the pattern of previous chapters, we first analyse different aspects of the Korean economy to provide an important background context to our discussions. Korea: Asia’s next giant? Korea’s post-war industrial transformation has perhaps been the most remarkable of the four principal East Asian ‘tiger’ economies.1 From the agrarian-based economy of the 1950s, it now stands as one of the region’s industrial powerhouses. The first task of this section is to study Korea’s path to modern industrial statehood. This is followed by a closer examination of Korea’s chaebol conglomerates that have spearheaded the country’s exportdriven industrialisation. Finally, a consideration of future challenges facing the Korean economy is made, paying especial attention to the impact of the 1997–8 financial crisis.

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Korea’s path to development Korea’s geographical location, sandwiched between China and Japan, has given it considerable strategic importance in East Asia. While it was able to resist the exertion of European colonial interests, Korea has frequently been subject to interference from its powerful neighbours.2 During the years 1910 to 1945, Japan exercised an aggressive and exploitative colonial rule in Korea: the Korean people were forced to learn Japanese, endure other forms of cultural imperialism and suffer general economic hardship, while the economy became subservient to the material demands of the Japanese economy (Kwak and Lee 1997). At the same time, Korea benefited from investments made in its infrastructure and education systems, a codification of modern civil laws, increased monetarisation of the economy, the introduction of a new financial system and the development of the country’s export sector in this period. Hence, like Taiwan and other parts of East Asia, Korea’s economic development in the early twentieth century was shaped by the forces of Japanese colonialism.3 After 1945 Korea became the centre of a complex geopolitical struggle between the emergent Cold War powers. The Korean Civil War of 1950–3 ended in stalemate, with the consequent divide between the newly formed states of North Korea and South Korea4 being established along the thirty-eighth parallel. North Korea remains the last Cold War bastion of totalitarian Communism and continues to experience significant economic difficulties. South Korea’s (hereafter Korea) embrace of a different economic system has led to a far more successful path of development5 (Soon 1994). However, economic growth was not the immediate priority of President Syngman Rhee’s post-civil war administration but rather the political objective of reunification. Korea nevertheless embarked on a somewhat haphazard, yet effective import substitution industrialisation policy at this time that helped insulate domestic producers from foreign competition while simultaneously promoting indigenous techno-industrial development, particularly in food and textile sectors. The economy also benefited from large inflows of foreign aid, primarily from the USA, that were dedicated to Korea’s reconstruction.6 In April 1960 Rhee’s government collapsed after a period of widespread civil disquiet due to a combination of political corruption, repressive acts and the effects of an economic slowdown. The replacement administration, led by Chang Myon, was not able to deliver quick solutions to problems generated by an ill-managed economy and subsequently fell victim to a successful coup d’état organised by Major-General Park Chung-hee in May 1961. The reforms introduced by the new Park government were to have far-reaching consequences for the Korean economy, shaping many of its current salient features. As part of a high growth strategy, export-oriented industrialisation became the main priority of economic policy from the early 1960s onwards. The government’s maxim of ‘nation building through exports’ galvanised the country into meeting new development objectives, with export targets set for business and sanctions imposed if these were not realised. It also drew upon many aspects of the Japanese development model, which had already proved highly successful

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in the early post-war years. Korea’s conglomerate enterprises— the chaebol—were promoted to acquire the same scale production advantages achieved by Japan’s pre-war zaibatsu and post-war keiretsu company groups (see Chapter 4). The new Five Year Plan (FYP) framework, introduced in 1962, took its inspiration from Japan’s sector-based rationalisation plans of the 1950s, although the former represented a more comprehensive attempt to state-orchestrate the country’s economic development (Bridges 1993). Later on in 1975, a framework was established for the chaebol groups to emulate the Japanese sogo shosha through forming their own general trading companies (GTCs), and hence further promote Korea’s exports. Further comparisons extend to the close state-business relationships that have been nurtured in both Japan and Korea. This particularly relates to the ‘development alliance’ that was established between the Korean government and the chaebol in the formative years of the Park government, itself motivated by the expedient of securing its political legitimacy (Koo and Kim 1992; Lee 1997). Owing to their scale and dominant position in the Korean economy, the chaebol also offered the state the advantage of requiring a narrower span of administrative control (Song 1994). The state-chaebol nexus remains a key determinant of Korea’s economic development and has led to mutual dependencies evolving between both sides. For most of the post-war period, the chaebol have spearheaded Korea’s industrial restructuring and export drives, largely in accordance with the government’s FYP objectives. To realise these, the chaebol were assisted by soft loan policies and other incentive mechanisms. Korea’s brand of ‘guided capitalism’ took its main orientation from the FYP framework. The principal objective of the First FYP (1962–6) was the expansion of the country’s infrastructure, while the Second FYP (1967–71) was primarily focused on developing labour-intensive manufacturing capabilities. In its Third FYP (1972–6), the Korean government initiated Korea’s heavy and chemical industry (HCI) that provided the economy with a broader industrial foundation on which higher value-added sectors could be developed and economies of scope captured. Both export promotion and industrial policy had been broadly sector-neutral until the HCI drive, but thereafter became more sector-specific, as well as firm-specific in character.7 Moreover, the late 1970s were to become the high watermark of Korea’s developmental state with the continued extension of cheap credit, discretionary incentive mechanisms and selected sectoral interventions. The Fourth FYP (1977–81) also heralded a shift in industrial priorities towards the development of more technology-intensive activities, e.g. electronics and automobiles. However, Korea entered a period of crisis around this time with the assassination of President Park in October 1979 and the pressures exerted by the global ‘shocks’ of the early 1980s, i.e. oil price hikes, currency and interest rate fluctuations. In response, the Fifth FYP (1982–6) of the new regime of General Chun Doo-hwan (1980–7) introduced deregulatory measures that aimed to inject more flexibility into the economy, in addition to provisions to help ease the growing labour unrest that arose as a consequent effect of the above pressures. It also signalled

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the start of a less interventionist role by the state, with a new emphasis placed on economic liberalisation. This trend was continued by the Sixth FYP (1987–91), whose inauguration coincided with the receding of military governance under the new presidency of Roh Tae-woo (1988–92). Constitutional and social reforms soon followed, with the effect of releasing pent-up wage demands. The subsequent rise in wage levels during 1988 and 1989 seriously eroded the competitiveness of the Korean economy, converting much prized trade surpluses into deficits. Nevertheless, Korea had achieved the highest average annual growth rate of any East Asian country during the 1980s at 9.7 per cent, a slight improvement on the 9.5 per cent rate for the previous decade (see Table A.2). When President Kim Young-sam took office in 1992, the developmental state continued to make its retreat, albeit at a gradualised pace. Under the auspices of the 7th FYP (1993–7)8 Korea’s finance sector was further liberalised, numerous protected home markets opened, competition policy strengthened, greater transparency introduced to trade policy, domestic regulations made more consistent with international standards and numerous restrictions lifted on foreign investment (both inward and outward) and import licensing. These all became elements of the government’s segyehwa (globalisation) policy. Korea’s commitment to uphold the Uruguay Round and World Trade Organisation (WTO) accords also extended the scope of liberalisation to other areas, such as agriculture, government procurement, retail and financial services. Furthermore, Korea had to liberalise its capital markets in order to meet the membership criteria for joining the Organisation for Economic Co-operation and Development (OECD), which it secured in October 1996. However, it was the country’s 1997–8 financial crisis that led to the most important advances in liberalising the Korean economy. The origins of the crisis lay in the state’s cheap credit policy towards the chaebol which had encouraged them to maintain high debt-equity ratios. By 1997 the fragility of the chaebol’s, financial structures had become increasingly apparent. In January, Hanbo Steel became insolvent while Kia Motors was nationalised in October after banks refused the company further loans. Korea’s liquidity problems were exacerbated by both the widespread practice among its banks of borrowing short-term capital to finance long-term investment and the unravelling of a wider financial crisis across East Asia. By November, the country was on the verge of bankruptcy. The failure of the Kim Young-sam government to provide a convincing policy solution led to the intervention of the International Monetary Fund (IMF) and the election of the new Kim Dae-jung administration in December 1997. In return for $57bn worth of funds to help restore Korea’s financial stability, the new government was obliged to introduce far-reaching economic reforms under the terms of the IMF ‘bailout’ programme, comprising: • the tightening of monetary and fiscal policy aimed at reducing Korea’s trade deficit-induced external debt; • a comprehensive restructuring of the financial system based on a firmer exit policy, increased competition and strong market and supervisory discipline;

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• a timetable to liberalise trade in accordance with commitments set by the WTO, including the removal of trade-related subsidies, restrictive import licensing and the import diversification programme;9 • wider foreign access in Korea’s finance and capital markets (including majority share ownership); • a more flexible labour market, including the lifting of restrictions on lay-offs and strengthening employment insurance. The implementation of these measures would further accelerate the retreat of Korea’s ‘developmental state’. While the legacy of the financial crisis will most likely involve a decade of significant financial and industrial restructuring, the Korean economy’s capacity for growth is anticipated to stay relatively strong. Korea can also be expected to remain an important international trade partner and one of East Asia’s major industrial producers. Thus far it has achieved considerable export success in globally significant industries such as automobiles, consumer electronics, semiconductors, electrical and industrial machinery, steel, ships, chemicals, textiles, clothing and footwear. Table A.9 shows how Korea’s share of world exports has risen from less than 0.1 per cent in 1960 to 2.5 per cent by 1997. Like their Japanese counterparts, Korean companies have made concentrated penetrations into Western markets and continue to endure counter-reactionary protectionist measures. Korea’s chaebol conglomerates: a closer examination Most chaebol companies were created and remain largely controlled by selfmade founding families. Throughout the 1960s and 1970s, the chaebol took advantage of cheap state-provided credit and rapid domestic and export market growth. Moreover, as Chen (1995:162) observed: The rapid industrialisation and fast-changing industrial structure have forced chaebol to continuously look for new opportunities. If they do not constantly form new businesses they will suffer from lower growth rates and lose their relative share of the market. Therefore, chaebol tend to diversify into products and markets that are not related to their current lines of business. Consequently, the corporate interests of many chaebol are dispersed across a wide spectrum of activities. For example, the Samsung group’s industrial portfolio includes ships, semiconductors, PCs, consumer electronics, financial services, chemicals, industrial machinery, telecommunications, real estate and textiles. The chaebol’s broad range of industrial interests has meant that a high proportion of their output is still generated in Korea. However, during the 1990s most chaebol acknowledged the need more actively to internationalise their operations, especially in those sectors where global competitive forces dictate. As with Chinese guanxi links, but in contrast to Japanese keiretsu connections, family ties play an instrumental role in chaebol organisation and ownership. At its extreme this can take the form of a dynastic, usually patrilineal succession

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within the company. This has been perhaps most clearly seen in the LG group, where the male descendants of its founder, In Hoe Goo, have held key executive positions. It is also commonplace for other relatives to be appointed to senior positions, further reinforcing the centralisation of power within the group. This produces a more hierarchical structure which differs to the keiretsu’s more flexible and adaptable network arrangements between group companies (Whitley 1990; Orru et al. 1997). In relative terms, chaebol organisational structures are more akin to inter-market keiretsu as opposed to their vertically integrated equivalents. Simple subcontract networking has evolved within many chaebol’s span of control, in contrast to the elaborate relational subcontracting that prevails among Japan’s major assemblers and their suppliers. The chaebol have also traditionally lacked the financial independence of the keiretsu with no group bank at their core. An important advantage of the chaebol model is that it allows the strategic decisions made by the group’s top executiveship quickly to be converted into palpable actions. This has been particularly demonstrated within the Daewoo group whose large overseas investments in commercially remote locations10 during the 1990s aroused much interest. Due to the Japanese predilection for consensual decision-making, such an approach is much less likely to occur within the keiretsu. According to Hattori (1989), the chaebol can be categorised into one of three types, namely those based on: • direct and sole ownership, in which the family founders own all the chaebol subsidiaries, e.g. the Hanjin group; • a dominate holding company, whereby the founders own the holding company, which in turn owns the subsidiaries, e.g. Daewoo; • inter-locking mutual ownership, whereby the founders own both the holding company and an intermediary foundation, which itself owns the group’s subsidiaries. Links of ownership and co-operative interaction between these subsidiaries are particularly high, e.g. Samsung. In the 1990s a general shift towards the third organisational paradigm was apparent (Chen 1995). This inferred that the chaebol’s ability to capture economies of scale and scope had improved. Furthermore, they had become less organisationally independent through entering into extensive subcontracting links with domestic and foreign SMEs. However, chaebol primacy within the Korean economy has come under threat as a consequence of the 1997–8 financial crisis. Some have become bankrupt (e.g. Kia)11 while others were on the verge of collapse. The rationale of maintaining the state-chaebol nexus was also seriously questioned by the Kim Dae-jung government. Its ambitious plans to promote the SME sector were seen as central to the restructuring of Korean industry, and thus as part of the crisis-management process. The opening up of many chaebol-dominated domestic markets to foreign companies has posed another challenge. In response, most chaebol have undertaken extensive rationalisation exercises in which their range of diversified activities has been reduced and longer-term domestic and overseas investments scaled back.

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Future challenges In the aftermath of the 1997–8 financial crisis, the Korean economy has had to make a number of important structural adjustments. These especially relate to industrial restructuring, financial sector reform, deeper market liberalisation and accommodating wider foreign access to both domestic product and capital markets (Matthews 1998; Mok 1998). In many respects, the crisis had simply raised the importance of fulfilling pre-established economic policy objectives. For example, the Korean government’s segyehwa policy was supposed to liberalise domestic markets and remove constraints upon inward foreign direct investment (FDI) flows. This policy, though, had been criticised by Korea’s trade partners for its lack of scope and slow pace of implementation. However, under the conditions of the IMF bailout programme, the Korean government was compelled to adopt more convincing policy reforms. The future challenge for the government lies in effecting desired structural change in the economy and overcoming sources of resistance that impede this objective (Dent 1998d). In addition, the crisis raised questions concerning Korea’s future role in the international economic community. As an emerging trade power, its compliance to multilateral trade rules and norms will become increasingly critical. Korea’s government and companies will also be expected to behave in a more financially responsible manner given the impact of the crisis on the international financial system. Generally, Korea has become more aware of its position and responsibilities at the regional level (Sakong 1993). Its growing stature and geographical location give it a unique position in the Asia-Pacific, acting as a potential mediator between APEC’s larger members (i.e. the USA, Japan and China) and also a key provider of new capital and technological assistance to less developed neighbours. In axis with Japan, it will prove a strategic partner in the broader economic development of Northeast Asia, as already evinced in the Tumen River Area Development Project (see Figure 8.1, p. 224). Various other challenges facing the Korean economy are apparent. Korea’s education and training systems have helped to produce a numerate, technically adept and diligent workforce with a large proportion educated to a higher level. However, given the country’s relatively high labour costs there remains considerable pressure to raise the level of human capital investment. While the crisis-depressed wage and exchange rates led to an improvement in price competitiveness during the late 1990s, another general predicament for the Korean economy remained. This relates to Korea being caught in a transitional stage of development between that based on low-wage, low-tech activities and those of a high-productivity and knowledge-intensive nature. Hence, Korea needs to develop the capability to compete more on qualitative terms across a range of industries. To achieve this, other persisting structural weaknesses in the Korean economy must be overcome. For example, it maintains a pronounced technological dependency on Japan and the USA,12 even in its core industries such as electronics where original equipment manufacture and licensing agreements with foreign

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firms have accounted for the vast majority of Korea’s exports in this sector (Hobday 1994). Korea also relies heavily upon Japanese and US component suppliers that make up a broader dependence on import trade from Japan and the USA (Table 7.1). Achieving greater technological independence, or at least diversifying this dependency, has become a strategic objective for many chaebol. This is made more imperative from the numerous Japanese firms that have restrained their technology transfers to Korean counterparts since the early 1990s so as to limit feedback competition effects (Ursacki and Vertinsky 1994; Smith 1997). Another structural weakness lies in the high degree of industrial concentration that prevails in most sectors of the Korean economy. Chaebol industrial dominance has ‘crowded out’ the SME sector, subsequently creating a dearth of domestic suppliers and hence an import dependency on foreign supplier firms. Furthermore, the economy lacks innovative SMEs and smaller, more flexible forms of business organisation found in other East Asian NICs such as Taiwan and Hong Kong. Future attempts to unravel the mutual dependencies entwined in the state-chaebol nexus will, however, prove to be a difficult task with potentially undesirable outcomes. Those Korean bureaucrats and chaebol executives with a vested interest in maintaining the status quo will resist such attempts. Moreover, most Korean SMEs are highly dependent upon the chaebol, and thus structural adjustment towards less industrial concentration is likely to be slow. Finally, the ultimate future challenge of the South Korean economy is reunification with its Northern counterpart. This is both Seoul’s ‘holy grail’ and ‘poisoned chalice’. Dismantling the last barrier of the Cold War is likely to improve the unified country’s international standing in the long run. However, the potential economic burdens associated with reunification are proportionately far greater than those carried by Germany. North Korea’s GDP per capita was a mere one-seventh of South Korea’s by the late 1990s, and the former’s widespread social and economic structural imbalances would undoubtedly render integration an extremely costly exercise on many accounts. Yet despite the economic sacrifices involved for South Koreans, reunification will remain the nation’s prime political and societal objective for the foreseeable future. EU-Korea economic relations Korea’s rise to modern industrial statehood has meant that the EU’s economic relations with the country have become an increasing priority. In the analysis that follows, we shall show how the early period of these relations was characterised by infrequent diplomatic contact and prolonged conflicts of interest over a number of trade issues. However, more co-operative acts were to emerge in the 1990s with the formalising of EU-Korea economic diplomacy and growing economic interdependence between the two powers. We shall also discuss how various trade frictions nevertheless persisted into the decade, as well as the intensification of the EU-Korea FDI relationship. The impact of Korea’s financial crisis is also considered.

Note: 1 Includes the Caribbean states.

Source: IMF Direction of Trade Statistics Yearbook, various editions.

Table 7.1 Geographic breakdown of Korea’s international trade (percentage per trade partner, 1960–7)

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First contacts and initial prolonged conflicts For much of post-war period, and like so many other East Asian NICs, Europe has played the ‘Cinderella’ role in assisting Korea’s economic development. In other words, the EU group has remained a somewhat distant third in Korea’s league of international economic partners behind both Japan and the USA, which have proved to be the country’s closest and most constant economic allies. Over the 1960s and 1970s we can observe (Table 7.1) how their relative positions switched as major import source and export market providers, with the USA initially serving as the former and Japan the latter. Korea’s trade dependency on the US and Japanese economies peaked in the early 1970s: at the beginning of the decade these two main partners were responsible for over 70 per cent of its trade. Up until this time, Korea’s dependency on EU 15 import and export markets had dwindled, although Europe began to attract a higher proportion of Korean exports by the end of the 1970s. By 1980, however, the EU 15 supplied a mere 7.8 per cent of Korea’s imports. Foreign investment flows between Korea and Europe over this period remained at an even lower level of significance. By 1977 Europe had only attracted twenty-seven minor investments from Korea’s multinationals totalling $1.82m or 2.7 per cent of total cumulative Korean outward FDI since 1968, the date from which overseas investments were permitted. Almost every one of these projects was concerned with establishing export marketing and distribution facilities. Although the level of Korean net investment in Europe had risen to $23.2m by 1987, new FDI projects maintained the ‘trade facilitating’ trend while the region’s share of the cumulative total dropped slightly to 2.5 per cent. However, from the early 1980s onwards the chaebol, and Samsung and LG Electronics in particular, had begun to establish their first manufacturing plants in Europe (Table 7.2). Meanwhile, European FDI in Korea had been relatively sluggish in comparison with investments originating from US and Japanese firms. The EU’s share of cumulative inward FDI in Korea stood at 6.6 per cent ($123m) of the total invested in 1981 which compared to Japan’s 55.0 per cent and the USA’s 26.3 per cent. As Table A.6 indicates, these relative positions had remained virtually static by 1986 while the amount of EU investment had almost doubled to $241m. The infrequent degree of diplomatic interaction between the EC and Korea regarding commercial affairs up until this time further reflected the relatively underdeveloped nature of their economic relationship. The two sides had, though, signed a textile agreement in 1977 whereby Korea concurred to restrict its exports to the EC in this sector (CEC 1977). Moreover, as the 1980s progressed, the steady growth in EC-Korea trade flows (Figure 7.1) led to a more regular pattern of contact between the European Commission and the Korean government. The agendas of such meetings were primarily dominated by various trade disputes. Cho (1993) observed that the EC’s initial trade-related concerns centred on three areas of Korea’s domestic policy practices: the protection of intellectual property rights (IPR);

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Table 7.2 Major Korean manufacturing FDI projects in Europe

Source: Dent and Randerson (1996); Perrin (1997) and various journalistic articles. Notes: 1 Product group abbreviations: consumer electronics products (CEP); colour televisions (CTV); microwave ovens (MWO); telephone switchboards (TSB); video cassette recorders (VCR). 2 Where information available. Amount shows the total to be invested over a phased period. Hence, amounts shown are not necessarily attributable to the initial year of the project.

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Figure 7.1 EU-Korea merchandise trade (1976–97) Source: Eurostat.

telecommunications procurement; and taxes on alcoholic beverages. While conflicts of interest became apparent during the early years of the 1980s, it was not until the following decade that these disputes were resolved. To begin with, the EC’s conflict with Korea over its I P R and telecommunications procurement regimes existed more at the multilateral rather than bilateral level. Korea’s weak IPR protection and the ring-fenced domestic market for government telecommunications contracts were a general concern for all its major trading partners. However, the rules of the game changed when the USA secured its own bilateral deal with Korea over IPR protection for US producers in 1986. In reaction, the EC, Japan, Sweden and Switzerland called for parallel treatment. It was not until five years later that the EC managed to broker its own IPR agreement with Korea in November 1991.13 Furthermore, US producers had in the meantime benefited from certain first-mover advantages owing to the easier accommodation of their demands, as manifest in the nature of the ‘retrospective’ agreements signed. Under threat of the US ‘301’ provisions,14 which initially had been invoked against Korea in February 1989, the Korean government eventually capitulated and signed two similar bilateral deals on telecommunications procurement in January 1992 and January 1993.15 Frustrated by two years of unresolved bilateral negotiations to match this deal, the European Commission finally took the dispute to the WTO in June 1996 where an agreement was secured the following November. The EC’s trade dispute over Korea’s discriminatory liquor tax and tariff regime also entailed protracted negotiations between the European Commission and the Korean government. In seeking entry to the Korean alcoholic beverages market, European producers faced high domestic tax and import tariff rates,

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which by the end of the 1980s were respectively applied thus: whisky (200 per cent and 40 per cent), brandy (150 per cent and 25 per cent) and beer (150 per cent and 50 per cent). In comparison, the tax incidence on indigenous rival products was considerably lower. For example, Soju not only benefited from a much lower 35 per cent liquor tax rate but also from its exemption from ‘education tax’.16 The EC had made little progress in persuading Korea to comply to the ‘national treatment’ principle on this issue until September 1987, when the European Commission won its GATT panel dispute with Japan over its trade-restrictive liquor tax laws (see Chapter 4). This precedent subsequently emasculated Korea’s own position but it took another five years before the EC was able to obtain an initial agreement from the Korean government. The agreement was signed in July 1992 and eventually formalised by the 1993 Korea-EU Agreement on Tariffs and Taxes.17 During the 1980s Korean exporters were mainly concerned with the various EC member state level restrictions aligned against their products and the EC’s anti-dumping regime. Over the 1981–5 period, a total of sixty-four member state trade restrictions were applied to Korean exports, a figure comparable to China and Taiwan’s (see Table 3.6, p. 56). While these were to subside with the implementation of the Single European Market (SEM) programme which began in the late 1980s, Korean firms found themselves increasingly subject to the European Commission’s anti-dumping investigations. From 1985 to 1990, eighteen anti-dumping investigations were undertaken against the EU’s imports from Korea, and many of these in key product lines such as consumer electronics (see Table A.8). This represented 8.6 per cent of total EC investigations and 22.0 per cent of all such investigations conducted against East Asian countries over the period. Korea was topped only by China and Japan, which were much larger trading partners for the EC, with nineteen each. Although Korea’s aggressive export practices had been severely penalised by the EC, other major trading partners had followed a similar line. In 1990, 29.5 per cent of the total value of Korea’s exports to EC markets were subject to anti-dumping duties (ADDs). For Korean exports to the USA this figure was 19.7 per cent and to Canada 22.3 per cent, while only 8.5 per cent were affected for those destined for Japan. Both the EC and Korea remained convinced of the arguments underpinning their respective positions in this dispute. The Korean state, in its advocacy of neo-mercantilist practices, perceived dumping as a legitimate competitive strategy to which traditional producers in the West had no reply. Thus, in its view, the recourse of Europe’s industrial lobbyists to pressurising the European Commission into applying ADDs was indicative of ‘Eurosclerosis’ and furthermore a reliance on a political rather than an economic response to the challenges posed by NICs in general. Moreover, Korea has long been critical of how this ‘politicised’ process constitutes a reactive rather than a rational approach of applying ADDs. As previously stated in Chapter 3, the European Commission has nevertheless maintained that its ADD procedures are judicial in nature with limited scope for arbitrary decision-making. Towards the end of the 1980s Korea also became preoccupied with another

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EC trade policy. For some time it had been a beneficiary of the EC’s Generalised System of Preferences (GSP) scheme which afforded trade concessions to a large group of developing countries. Owing to the EC’s frustrated trade negotiations with Korea in the policy areas analysed earlier, it suspended the country’s GSP privileges from 1989 to 1992. Consequently, Korea faced a host of new quantitative restrictions on its ‘sensitive’ sector exports destined for the EC.18 The growing significance of EC-Korea trade disputes from the mid-1980s onwards was understandable given the commensurate increase in the magnitude of their mutual trade flows. EC-Korea trade growth was particularly rapid over the 1985–8 period when the EC’s exports to Korea rose by an annual average 21.7 per cent and Korea’s exports to EC markets grew at an even faster annual average of 26.7 per cent19 (see Figure 7.1). Although various factors—e.g. Korean wage rate hikes, the appreciation of the won,20 the EU’s suspension of its GSP benefits for Korea and the onset of a European recession—led to fluctuations in EC-Korea trade during 1989–92, both parties represented dynamic trade partners to each other. Thus, by the early 1990s the confluence of persisting trade disputes, an emergent dynamic trade relationship and democratic reforms in Korea provided the basis for more formalised economic relations to be established. Formalising economic diplomacy It should be noted that, with the exception of Taiwan, the EU’s economic diplomacy with Korea was the last to be formalised among the East Asian group.21 We have seen in previous chapters how the origins of an institutionalised EU-level economic diplomacy with Japan, China and the ASEAN states dates back to the 1960s and 1970s. In EU-Korea economic relations, these could not be identified until the late 1980s. As with other sets of relations we have examined elsewhere, diplomatic links between Korea and EU member states had long predated those created at the supranational level. This latter process began with the setting up of an EU Chamber of Commerce in Seoul in 1986 which was soon followed by an EU delegation office, established in 1989. While these two agencies did much to improve the extent of Korea-EC bureaucrat and business networks, the end of quasi-military rule in Korea proved instrumental in unblocking the impasse to closer diplomatic relations being forged.22 As with many of the EU’s economic partners, the seal of this new relationship was to be marked by a Trade and Co-operation Agreement, as agreed at the first Korea-EU Ministerial Meeting held in November 1993.23 Negotiations towards this end commenced in May 1994 and were concluded two years later in October 1996. The stated objectives of the EU-Korea Trade and Co-operation Agreement (CEC 1996c) were: • the accordance to each other of ‘most favoured nation’ (MFN) status; • new concerted efforts to eliminate non-tariff barriers (NTBs) and introduce more transparency on trade matters;

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• improved mutual market access in both telecommunications and financial service sectors; • the encouragement of greater bilateral flows of FDI between both parties. The first of these points had particular relevance to the US-Korea bilateral deals discussed earlier that had been the bane of EU trade diplomats. With the accordance of MFN status, Korea was thus obliged to extend any market access or other commercial advantages it initially conferred upon the USA to the EU as well. Hence, the inclusion of this clause was central to the EU’s strategy of redressing its relative lack of leverage over Korea’s foreign economic policy-making. While the actual real impact of such accords on the EU’s commercial relationships with third countries has at times been questionable, there were early indications of EU-Korea economic exchange receiving a new impetus as a consequence of the Trade and Co-operation Agreement. For example, a large number of European and Korean firms began to participate in various industrial co-operation schemes which covered SME business networks, business representative exchanges and joint training schemes. At the policy level, preliminary discussions on establishing a Mutual Recognition Agreement on industrial standards were held modelled on an earlier transatlantic agreement.24 The new accord also helped paved the way for an EU-Korea customs co-operation agreement which was signed in April 1997. More generally, it helped formulate clearer points of reference for the future orientation of economic diplomacy. Furthermore, the Korean government’s rhetoric of seeking to move from a position of ‘conflict to co-operation’ with the EU was to become increasingly resonant in EU-Korea economic relations from this time onwards. This was largely due to the opportunities presented by new developments in their mutual trade and investment flows and the broader economic interdependencies these were creating. Towards a broader economic interdependence By the mid-1990s, EU-Korea economic exchange had entered into a more dynamic phase. Let us consider some trends in trade and investment patterns which reflected this. Over 1980 to 1997, Korea’s share of extra-EU imports and exports rose from 0.8 per cent to 2.0 per cent and from 0.6 per cent to 2.0 per cent, respectively (see Table A.3), becoming the EU’s ninth largest import partner (up from twentieth) and twelfth largest export partner (up from thirtyninth) by the end of this period. Meanwhile, the EU’s share of Korea’s import trade had grown from 7.8 per cent to 11.2 per cent during this time, although this higher position remained significantly below the USA’s 19.9 per cent and Japan’s 19.7 per cent for 1997 (see Table 7.1). Furthermore, the EU had become a less important destination for Korean exports since its peak 16.7 per cent share in 1980, falling to 11.3 per cent by 1997. While the decline in the EU’s overall relative significance as an Korean export market appears to undermine

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the case for greater EU-Korea economic interdependence, two things should be remembered. First, Table 7.1 also reveals that the USA and Japan experienced even sharper declines in their own shares. Therefore, the EU’s position relative to the other core Triad powers has improved. Second, EU-Korea trade in value terms increased substantially during the 1990s:117.6 per cent over the 1990–7 period, compared to 35.5 per cent for Japan and 37.7 per cent for the USA. Regarding EU member state trade with Korea, Figure 7.2 shows that Germany has remained Korea’s most important trading partner overall, although in 1997 the UK was the largest importer of Korean goods within the EU. Closer interdependence has also been apparent in sectoral trade flows. The EU-Korea intra-industry trade ratio rose from 36.1 per cent in 1989 to 56.8 per cent by 1996. Early indications of this trend were suggested by research conducted by Kim (1993). His comparative advantage analysis showed that Korean producers were shifting away from lower-tech, more labour-intensive exports to the EU in the face of increasingly acute competition from their

Figure 7.2 EU member state trade with Korea (1987, 1997) Source: Eurostat.

The EU and Korea

Figure 7.3 Korea’s exports to the EU by sector (1980, 1987, 1997) Source: Eurostat.

203

204 The EU and Korea

Chinese and Southeast Asian rivals. Commensurate with this was a move towards higher-tech, more capital-intensive Korean exports to the EU, especially in electronics, machinery, automobiles and other transport equipment. With regard to EU exports to Korea, Kim’s evidence revealed that their position against Japanese and US counterparts was either strengthened or maintained in machinery and transport equipment, chemicals, textiles and miscellaneous manufactures, but had been weakened in metals and electric-electronic products. Figure 7.3 provides further evidence of the shift to intra-industry exchange in EU-Korea trade. Furthermore, Table A. 5 shows that Korea remains an important export market and import source in key sectors. The growth of EU-Korea intra-industry trade has particularly created wider scope for co-operation and competition between European and Korean firms, thus engendering greater economic interdependence. This has also been reinforced by an even greater increase in EU-Korea FDI flows during the 1990s. Promoting mutual direct investment flows was, of course, an objective of the 1996 Trade and Co-operation Agreement but these had already flourished well beforehand.25 The EU’s share of total inward FDI in Korea increased from 6.6 per cent ($241m) in 1986 to 22.8 per cent ($4.021m) by 1996. This was still somewhat below those for both the USA and Japan at 28.8 per cent and 30.5 per cent, respectively (Figure 7.4; see Table A.6). Meanwhile, Europe’s share of Korean overseas direct investment had risen sharply from 2.5 per cent ($23.2m) in 1987 to 15.3 per cent ($2,104m) by 199626 (Figure 7.5). We shall discuss later the causes and wider consequences of rising EUKorea FDI flows. Suffice to state here that this trend, together with new patterns in EU-Korea trade, were creating both new network links between Korean and European firms and new potential complexities to trade relations themselves. The former were evolving through supplier relationships, joint ventures, local sourcing and other collaborative relationships (Dent 1998e). Examples of the latter could arise via emerging trade-FDI links: it was conceivable that the

Figure 7.4 Inward FDI stocks in Korea by geographic origin (1989, 1996) Source: UNCTAD database.

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Figure 7.5 Stock of outward FDI from Korea by geographic destination (1987, 1996) Sources: Bank of Korea; UNCTAD database.

‘insider’ interests of the foreign investing firm would lead it to side with the host trading authorities on certain matters, e.g. a Korean firm ensconced in the EU supporting the European Commission’s decision to apply an ADD on the exports of a rival ‘outsider’ chaebol or other company.27 In more general terms, however, such developments were engendering a greater convergence and alignment of mutual interest between Korean and EU firms. A deeper understanding of each other’s corporate, political and regulatory cultures also formed part of this process. This was important if persisting EU-Korea trade disputes were to be resolved. Old problems and new challenges While developments in EU-Korea economic exchange were flourishing during the mid to late 1990s, both the Korean government and European Commission remained preoccupied with resolving various trade disputes, some of which had been ongoing since the 1980s. As with most of its other economic relations with East Asian countries, the EU’s main concerns continued to relate to Korea’s ‘internal’ barriers to international trade, i.e. non-officialised barriers such as discriminatory domestic tax structures and biased public procurement contracting. Conversely, the chief priorities of Korea’s trade diplomats were to tackle the EU’s ‘external’ barriers to trade, i.e. more conventional or official trade barriers such as tariffs, duties and quotas. Korea’s concerns were heightened by the fact that in 1993 its trade balance with the EU had moved into deficit for the first time in 22 years28 (see Figure 7.1). For the Koreans, the most contentious issue remained the EU’s anti-dumping regime in which ADDs continued to be applied to key Korean exports entering the Single Market (Table 7.3). Although the average annual number of new anti-dumping investigations on these products was gradually falling in absolute terms, they still represented a relatively high figure sharing second place with

206 The EU and Korea Table 7.3 EU anti-dumping duties on Korean imports (at November 1998)

Source: DG1C, European Commission.

Thailand over the 1991–7 period (see Table A.8).29 From a global perspective, the EU was responsible for 28.0 per cent of all ADDs placed on Korean exports compared to the USA’s 24.0 per cent, Australia’s 12.0 per cent and Canada’s 10.7 per cent. Additional frustrations for Korea at this time originated from the introduction of a ‘graduation mechanism’ to the EU’s GSP scheme in 1995. As noted in other chapters, this entailed the phasing out of GSP privileges for certain product lines from particular countries based on criteria indices that related to both their level of economic development and degree of product specialisation. For Korea, the affected sectors were plastics and rubber, leather and furskins, textiles, clothing, footwear, steel, electro-mechanical equipment (including consumer electronics), automobiles and other miscellaneous manufactured products. Given that many of its East Asian rivals suffered a similar fate, Korea’s relative position in the EU’s hierarchy of trade preferences was not altered much by these changes. However, Korea was later to join Hong Kong and Singapore as the only three GSP beneficiaries which were completely to graduate from the scheme in May 1998. Thus by this time a large number of Korean exporters faced higher EU tariff barriers than their Southeast Asian competitors while they also had to compete on more even terms with Taiwanese counterparts, which had never been eligible for GSP privileges (see Chapter 6). As with adjustments made to the GSP schemes of other developed country powers,30 the EU’s ‘graduation mechanism’ was a compensatory device that removed tariff concessions in those sectors where concentrated penetrations of NIC exports in home markets were apparent. Hence, these changes were anticipated by most Korean exporters and factored into their international strategies. Moreover, other EU ‘external’ barriers to trade were being removed. By the mid-1990s, Korea was no longer subject to any European voluntary exports restraints31 while its textile producers gained from the gradual dismantling of the Multi-Fibre Agreement as an outcome of Uruguay Round negotiations. By the time negotiations towards establishing the EU-Korea Trade and Co-

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operation Agreement were underway, the European Commission had outlined in some detail what it believed to be the principal impediments to EU exporters in Korean markets (CEC 1993, 1994b). Many of these related to areas where trade disputes had lingered since the 1980s. Although the same documents acknowledged Korea’s progress in liberalising its markets, they nevertheless took pains to stress the salience of various outstanding problems: • the exclusive concessions granted to US producers in some sectors; • fiscal discrimination in high import ratio sectors, especially luxury products, e.g. automobiles and alcoholic beverages; • various NTBs (e.g. sanitary-phytosanitary regulations, product labelling, technical standards, customs procedures, import financing) affecting the imports of industrial consumer goods and agro-food products; • inadequate actions undertaken by the Korean Fair Trade Commission in enforcing competition rules, particularly with respect to the chaebol conglomerates’ activities; • deficient protection of intellectual, industrial and commercial property rights; • the chaebol’s vertically integrated distribution and supply-chain networks that render entry a costly and difficult task for European firms; • the recurrence of anti-consumption or ‘frugality’ campaigns and their adverse effects upon EU import demand. The above formed the basis of the EU’s trade concerns with Korea throughout the rest of the 1990s. We noted earlier how the EU’s long-standing disputes from the 1980s over Korea’s liquor tax, IPR and telecommunications procurement regimes had persisted well into this decade. The latter issue was not resolved until 1996 while the former was to re-emerge as a WTO-level dispute in 1997.32 One other issue that was previously of minor significance became increasingly prominent in EU-Korea trade relations. For some time, Korea had used anti-consumption or ‘frugality’ campaigns as a means to help curb import demand and hence ease pressure on the country’s structural trade deficit problem. Imports are not the directly stated targets of these campaigns per se but rather luxury products in general. However, in Korean markets these tend to originate from overseas sources. In the summer of 1996 a new frugality campaign was initiated by the Citizen’s Movement Centre for Anti-Consumption, allegedly under no behest from the Korean government although the EU and other trading partners were suspicious of indirect state support for the movement’s activities. After seeing EU automobile exports to Korea fall by approximately 50 per cent and exports of cosmetics and alcoholic spirits by 10 per cent soon after the campaign had begun, the EU threatened to take Korea to the WTO over the matter. The European Commission drew back, though, after receiving firm assurances from the Korean government in May 1997 that the prime aim of this campaign was to encourage ‘rational and reasonable consumption patterns by way of efficient use of economic resources and reduction of environmental waste’.33

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In this statement, it was half conceded that reductions in import demand may occur as a secondary effect as consumers are advised ‘to live within their means by purchasing the highest quality products at the lowest possible prices’. Nevertheless, given that price competitiveness was one of the chaebol’s main strategic advantages against their rivals—especially in products such as automobiles, consumer electronics, computers and semiconductors—we can construe their benefiting from this prescribed advice to Korean consumers. The EU’s continued focus on Korea’s ‘internal’ barriers to trade and the manner in which it has conducted its economic diplomacy with Korea in general bear certain similarities to EU-Japan economic relations. As with Japan, the EU has impelled Korea extensively to liberalise its markets with the aim of removing the economy’s ‘structural impediments’ to import. Again, like Japan, this has frequently followed in the wake of initial advantages first acquired by the USA in bilateral deals, such as those previously discussed. Korea’s frugality campaigns present a further comparison with Japan, whose low marginal import propensities for consumer goods in particular have been carefully scrutinised by EU and US trade authorities alike. Thus, economic liberalisation measures undertaken by the Korean government in the 1990s were unequivocally welcomed by the country’s major trading partners. The complete retreat of the Korean neo-mercantilist state would still, though, cover some considerable distance yet. Deeply entrenched interests within the state-chaebol nexus provide a formidable redoubt against moves that undermine the fundamental balance of industrial and market power in Korea. Thus, EU pressure upon Korea to remove those internal barriers to trade that in some way disturb or threaten this balance may fail, at least in the short term. The EU’s relative lack of leverage when compared to the USA on influencing Korean state decision-making represents an additional handicap. Furthermore, as we have discussed elsewhere, the EU’s focus on East Asia’s internal barriers to trade is generally problematical insofar as its contesting of matters which have traditionally been confined to the realm of domestic policymaking. However, whereas in the past such foreign meddling in the internal affairs of nation-states could not be easily legitimised, developments in the global economy and multilateral trade regime have changed the rules of the game. As noted in Chapter 1, globalisation continues to expose new barriers to trade and investment that are inherently ‘internal’ in nature, which in turn have shaped the emerging WTO agenda. The implications for relatively ‘controlled’ economies such as Korea were initially spelled out by the WTO’s Director-General, Renato Ruggiero, to the Korean Business Association in April 1997: Korea would have to liberalise much further, especially on issues of market access, if it wished to be considered a responsible WTO member.34 It should therefore come as no surprise that part of EU strategy has been to encourage Korea’s more comprehensive engagement in the multilateral process. The structural power wielded by the EU over the multilateral trade order is to its advantage here. Future developments at the plurilateral and inter-regional level will also have significant impact on EU-Korea economic relations, notwithstanding the

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effects of the 1997–8 financial crisis. Korea’s membership of APEC could further divert the attention of its exporters to emerging East Asian markets and hence away from EU markets. On the other hand, its compliance with APEC’s ‘open regionalism’ principle—and the MFN-based liberalisation of the trade and investment regimes associated with it—could prove beneficial to EU producers. However, as Chapter 8 discusses, it remains unclear what impact APEC liberalisation will have on global trade. Both Korea and the EU, though, will be drawn increasingly together to debate commercial policy issues within other fora. Korea and EU member states have already examined the basis for establishing multilateral investment rules at the OECD, although a concluding agreement proved elusive.35 The Asia-Europe Meetings (ASEM) have recently provided another framework where more co-operative EU-Korea economic relations can be nurtured. As Chapter 8 makes clear, the ASEM’s inter-regional ‘dialogue framework’ is intended to complement existing bilateral relations between EU and East Asian partners.36 The 1997–8 financial crisis presents another important new challenge for EU-Korea economic relations. Korea was the most affected by the crisis of the four principal East Asian NIC s and the implementation of the IMF ‘bailout’ programme could have a far-reaching impact on EU-Korea economic exchange.37 Under the programme’s conditions, Korea’s trade regime is affected in two main ways. First, various import restrictions must be removed with the aim of injecting more flexibility and openness into the economy. These relate to WTO commitments to eradicate trade-related subsidies and restrictive import licensing in addition to introducing measures that improve the transparency of import certification procedures. Second, Korea’s trade position is also affected by the external debt-reducing measures of the IMF programme, specifically by the use of tight macro-economic policies that should mitigate the country’s demand for imports. For example, income and expenditure tax rate increases can be anticipated to curb the demand for foreign consumer products and particularly luxury goods which bear a comparatively high tax incidence. Furthermore, the combined effect of lower public expenditures, the rise in corporate tax rates and higher interest rates as part of a stricter monetary policy that Korea is now obliged to pursue should lead to a fall in investment levels and thus a subsequent decrease in demand for capital good imports. As a consequence of these changes to Korea’s trade regime, there are both costs and benefits for the EU. On the one hand, the removal of numerous import restrictions in compliance with the IMF programme offers certain European exporters new opportunities for market access. On the other hand, those measures aimed at reducing Korea’s demand for imports have most adversely affected EU capital and luxury good producers and moreover could prove a further irritant to existing EU-Korea trade disputes. For instance, increases in Korea’s excise duties and luxury goods taxes could bring new aggravations to the frugality campaign issue while also frustrating Europe’s alcoholic beverage exporters. Furthermore, the EU telecommunications producers who were expecting considerable benefits from the newly liberalised

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Korean telecoms market have also suffered from reductions in Korean public expenditure. The extent to which Korea’s IMF débâcle will affect its future trade relations with the EU and its other major trade partners is highly debatable. In some areas we have discussed, such as Korea’s new fiscal commitments, only a shortterm impact on the pattern of EU-Korea trade should be anticipated. An examination of 1997 and early 1998 trade data indicates a crisis-induced pattern change. As Figure 7.1 and Table A.7 show, the growth trend in EU exports to Korea faltered over those years, while the marked increase in the EU’s imports from Korea could be attributed to the more aggressive commercial practices of Korean companies (e.g. competitive price strategies, intensified marketing) brought on by crisis conditions.38 In the medium term, European exporters should also be encouraged by predictions of Korea maintaining a relatively high growth trajectory and the associated market opportunities which this presents. In the longer run, the EU may substantially benefit where Korea must comply to removing many of its ‘internal’ barriers to international trade as part of crisis-related restructuring and liberalisation programmes. With regard to the financial sector, the relatively high exposure of European banks to Korea’s crisis has generated substantial bad debt problems for them (Figure 7.6). However, the gradual liberalisation of Korea’s financial sector should also provide compensating market opportunities in the future. The EU-Korea FDI relationship Korean FDI in Europe We established earlier that the growing significance of EU-Korea economic relations cannot just be attributed to the expansion of trade but also to mutual direct investment flows. The recent escalation of Korean FDI in the EU and Europe in general has become a notable issue for various reasons. Although the cumulative net invested by Korean firms in the region remains far below

Figure 7.6 International lending to Korea (by end of June 1997) Source: Bank for International Settlements.

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their Japanese counterparts,39 it nevertheless represents a potentially significant inward FDI source. Moreover, the inevitability of comparisons with Japan has stirred considerable media attention over this trend, as has the large-scale nature of many senior chaebol investment projects in Europe.40 These included LG Electronics $2.6bn project in Wales (UK) and Hyundai’s $3.7bn project in Scotland (UK), both of which set consecutive records for the largest planned inward direct investments to enter the EU from a third country. Finally, Korea’s stock of ‘greenfield’ FDI in Europe is second only to that of Japan among the East Asian group and the largest for any NIC.41 We previously noted how the EU’s share of total Korean outward FDI had risen to 15.3 per cent by 1996 (see Figure 7.5). On a country basis, the UK has recently overtaken Germany in becoming the prime investment location for Korean firms with 17.7 per cent of Europe’s total in that year (Figure 7.7). Similarities here can be drawn with the established concentration of Japanese FDI in the UK. The consolidation of the UK’s position can be anticipated at least over the medium term, especially if new phases of planned large-scale investments are initiated (see Table 7.2). However, Korea’s recent debt problems did cause these to be postponed or subsequently scaled-down and the UK’s longer-term prospects of hosting similar projects are to some extent contingent upon whether it joins the EU’s single currency area. The agglomeration effects of existing projects in the UK may, though, exert a strong enough pull on subsequent investments, particularly where the chaebol’s key Korean suppliers are enticed to make complementary investments themselves. In sectoral terms, ‘trade-facilitating’ investments made by Korean firms in Europe still represented a relatively high proportion of the total net invested (around a third). Manufacturing accounted for over a half of this total and here a large concentration of FDI is evident in the electronics and autos sector. The preponderance of Korean manufacturing FDI in Europe is in contrast with

Figure 7.7 Stock of Korean FDI in Europe by host country destination (1996) Source: Bank of Korea.

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Japanese FDI in Europe, which is mostly concentrated in the finance and other service sectors. It was noted earlier in the chapter, though, that the dearth of SME supplier networks in the Korean economy remains one of its prevailing structural weaknesses. This and other such weaknesses—technological dependencies, uncompetitive cost structures, a relatively underdeveloped finance sector— have been important determining factors behind the surge of outward Korean FDI during the 1990s (Figure 7.8). Together with recent developments in the Korean government’s FDI policy, these form the ‘domestic-push’ motivations for Korean firms expanding their investments into regions like Europe (Dent and Randerson 1996). Let us now examine each of these factors in the context of Korean FDI in the EU. In contrast to Korea, the EU has a high density of SMEs and this is especially apparent in countries such as Germany, Italy and the Netherlands. By undertaking ‘greenfield’ investments in the EU, the chaebol are able to diversify their supplier networks among indigenous European SMEs, which are also likely to possess markedly superior technological and logistical capabilities to their Korean SME counterparts. Acquisitional investments of and joint ventures with European SMEs have enabled the chaebol to capture even greater benefits either through procuring their key proprietary assets or through more intimate collaborations. The former objective can be broadened to include the specific consideration of proprietary technology assets that EU firms have to offer the

Figure 7.8 Cumulative stocks of Korean outward FDI (1980–96) Source: Bank of Korea: UNCTAD database.

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chaebol. Their pronounced technological dependency on US and Japanese firms has implied that Europe offers opportunities for diversification here.42 By the mid-1990s Korea’s inflating domestic cost structures were alone creating incentives to relocate production in many low-cost EU regions. Seoul’s comparatively higher labour cost rates in relation to the Northeast of England, where Samsung had decided to locate a $700m investment in 1994, were an often quoted illustration of this. Research conducted by Hong (1996) suggested that the regional policies of European governments also played an important role in both highlighting and improving the location-specific cost advantages of Korean investments made in the EU’s less developed areas. Korea’s real estate price inflation and the appreciating won provided further motivation to increase overseas investments in Europe, East Asia and elsewhere. The EU has particularly attracted more capital-intensive FDI projects as part of this process. In general terms, Korean firms embarked on expansive overseas investments as a longterm strategy to help service their high debt ratios. However, this has only made Korea’s macro-level debt problems more acute in the shorter term, contributing to the country’s IMF débâcle of 1997. The Korean government’s segyehwa programme and other recent policy measures represent the final ‘domestic-push’ factor. Its liberalisation of Korea’s inward and outward FDI regimes, and of the economy in general, has provided the chaebol with both ‘carrot and stick’ incentives to globalise their activities. Under pressure in domestic markets from increased foreign competition, Korea’s multinationals have exploited the new deregulated conditions for outward FDI and expanded their production and service facilities into Europe. These factors have also combined with ‘global-pull’ pressures upon Korean firms to invest more in the EU The first of these relates to the highly globalised nature of the capital-intensive industries in which the chaebol have a competitive advantage, most notably consumer electronics, semiconductors and automobiles.43 Given their under-representation in Europe in comparison with other ‘Triad’ regions (i.e. North America and East Asia), establishing a firmer strategic position in the EU fortifies their ‘Triad power’ status (Ohmae 1985) and moreover demonstrates an extension of their global reach. Furthermore, Europe has provided the chaebol with a new competitive canvas onto which intensified oligopolistic rivalry has been projected. This is consistent with Knickerbocker’s (1973) theory on FDI and internationalised oligopolistic behaviour, as well as more recent research conducted by Motta (1994) into ‘follow the leader’ patterns of investment. Second, the chaebol have been able to exploit their ownershipspecific advantages of cost competitiveness in the same sectors to some considerable effect. Their ‘greenfield’ investments in the EU have invariably been located where this advantage can be upheld or aimed at end markets where price-elastic demand is a salient feature. Moreover, the chaebol’s conglomerate interests enabled them to capitalise on various internalisation advantages, made available through synergetically linking together interdependent activities to create both scale and scope economies. This is at least the intention of the Samsung, LG and Hyundai industrial complexes built in the UK.

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It was commonly accepted that initial Korean manufacturing investments in the EU were typically tariff-circumventing in nature (Lee 1991; Min 1991; Young et al. 1991; Han 1992). This could be largely attributed to the proportionately high number of ADDs confronting Korean exporters in EU markets.44 While the pretext for such investments has not diminished significantly, as we have already established, the motivations for Korean FDI in Europe had become far more complex by the mid-1990s. According to Dent and Randerson (1996), more proactive patterns of investment were discernible from around this time, as demonstrated by the chaebol’s strategic (rather than tactical), larger-scale, cross-sector FDI projects.45 The ‘domestic-push’ and ‘global-pull’ factors discussed earlier are also relevant here in that they help explain the increasingly diversified purposes of Korean investment in the EU.46 Moreover, this pattern of FDI also applies to Central and Eastern Europe (CEE), although, as Perrin (1997) contended, the preponderance of Daewoo’s investments in this region make a firm-specific analysis essential47 (see Table 7.2). Part of Daewoo’s bold FDI strategy in the CEE region has been based on anticipating future access to the EU’s Single Market from low-cost production centres. Under the ‘Europe Agreements’, the company already enjoys preferential tariff treatment on exports dispatched from its CEE locations to EU markets. EU direct investment in Korea The degree of EU direct investment in Korea has also become increasingly significant. European firms have been attracted to both the rising levels of prosperity evident in Korea’s markets and new technological developments that are apparent in Korean industry. These have provided EU multinationals with a important export production platform, for medium-tech products in particular, from which other dynamic East Asian markets can be served. This is revealed in a sectoral analysis of EU direct investment in Korea which shows that chemicals, pharmaceuticals, machinery and electronics are among the main industries to attract European firms.48 The influx of European FDI into Korea has also enabled the chaebol to contract EU firms directly into their supplier networks. This has been most visible in Korea’s automobile sector where European auto-component manufacturers have become increasingly participative. Nevertheless the level of EU direct investment in Korea in absolute terms is quite low at only $4.021m in 1996 (22.8 per cent of the total). This can be largely attributed to Korea’s traditionally restrictive inward FDI regime, whose origins could be traced to a lingering mistrust of foreign capital interests and the Korean state’s imperative of maintaining the levers of control over the domestic economy. Thus, in comparison to most of its regional neighbours, inward FDI has played only a minor part in Korea’s economic development. Hence international borrowing has been preferred as a means of capital acquisition and licensing arrangements as an alternative conduit for technology

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infusion. It was not until 1962 that inflows of FDI were first permitted, while outward FDI was allowed from 1968 onwards. At the beginning of the 1990s prospective EU investors faced a range of impediments. These were categorised by Pangratis (1991) with respect to Korea’s legal environment (e.g. property rights and insurance arrangements), administrative environment (e.g. complex customs and financial transaction procedures) and business environment (e.g. difficult access to distribution systems and other supply chain constraints). Later on survey results revealed in a World Economic Forum (1995) report suggested that Korea’s FDI regime remained the most difficult encountered by foreign firms in Asia. While the provisions of the IMF ‘bailout’ programme have helped reinforce previous attempts to remove those impediments falling into the first two categories (e.g. majority share ownership by foreign firms), many ‘structural’ barriers prevalent in the third category are likely to prove more intractable. However, the financial crisis could also produce new acquisitional FDI opportunities for EU investors in Korea as asset deflation reduces the cost of buying Korean companies. Yet as Chapter 2 generally noted, these opportunities are unlikely to be exploited in full until the path of the crisis has become more determinate. Finally, Figure 7.9 shows that up to 1996 Dutch firms had been the most active European investors in Korea with 36.3 per cent of the EU total, followed by Germany with 17.9 per cent, Ireland 16.1 per cent, the UK 13.2 per cent and France 11.1 per cent. Conclusion In examining the development of EU-Korea economic relations we have seen how a shift from conflict to co-operation was apparent by the 1990s. This could be attributed to the closer pattern of intra-industry trade, the emerging FDI relationship, greater interactions within international economic fora and other miscellaneous developments that have been discussed in this chapter. Korea’s financial crisis has the potential either to lend further momentum to this trend

Figure 7.9 EU direct investment in Korea: net stock invested by member state (1996) Source: UNCTAD database.

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or revert it to the past conflictual mode of EU-Korea economic relations where trade friction prevailed. In drawing conclusions on these and other related themes that have been considered here, we shall now analyse them through different IPE theoretical perspectives. Neo-realism’s emphasis on the primacy of the nation-state in international economic relations is highly relevant when examining the conduct of Korea’s foreign economic policy towards the EU and other trading partners. As we discussed in Chapter 4 with Japan, there has been a strong state centricity to Korea’s economic development and engagement in the international economic system. Since the 1960s, Korean governments have adopted fervent neomercantilist policies as a means of national advancement. These were largely effective because of the ‘development alliance’ formed between the state, business and society in which enhancing Korea’s international status was the unifying common objective. For some time, then, the EU has had to conduct its economic diplomacy with ‘Korea Incorporated’ and hence has encountered similar negotiating predicaments that it has experienced with Japan. Moreover, Korea’s unwillingness to concede to past EU demands and general foreign pressure has been excused on the basis that it remains in some respects a developing country. These factors, together with the competitive advantages which Korea has developed, explain why trade conflict persists as a feature of the EU’s economic relations with the country. It also complies to the neo-realist view of perpetual anarchy in international economic relations. Notwithstanding the more cooperative frame of EU-Korea economic relations that evolved during 1990s, the 1997–8 financial crisis could yet undermine the many positive developments of the decade. The crisis has thrown Korea back into a new game of national economic survival. Although the country is obliged to dismantle most aspects of the mercantilist state under the terms of the IMF ‘bailout’ programme, trade friction can be anticipated from the intensification of aggressive commercial practices by Korean firms and the lower propensity of Korean consumers to purchase imports in the wake of the crisis. More subtle ‘internal’ barriers to international trade may also emerge in an attempt to restore equilibrium to Korea’s external financial position. The EU and other trading partners of Korea thus face important challenges ahead. A different challenge that has confronted the EU throughout the period of its relations with Korea is associated with the neo-realist theory of hegemonic stability. A running theme of this text has been how the USA’s more intimate relations with most East Asian states have often disadvantaged the EU’s commercial interests. As with Japan, Taiwan and others, Korea has pursued a ‘policy of obligation’ towards the USA owing to the fact that US hegemony has been perceived as the ultimate guardian of Korea’s economic and political security over the longer post-war period. Not only does the USA continue to provide important military support to Korea, and hence a deterrent to any North Korean assault, but also key export markets, capital and technologies through established economic linkages. Furthermore, US hegemonic power

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has upheld the multilateral trading system and thus helped open up the international markets into which Korea’s export production has expanded. The culture of obligation that has been thus engendered has led to preferential market access and other bilateral deals being conferred upon the USA to the EU’s detriment. However, this has been somewhat redressed by Korea’s greater susceptibility to international systemic conditioning. As the 1990s have progressed, Korea has been compelled to act as a more responsible participant of the international economic system and thus comply with multilateral rules and norms. Hence, as a WTO member it has had to adhere more closely to the MFN principle, a trend which helps the EU circumscribe Korea’s proclivity for striking bilateral deals with the USA. For neo-liberals, the greater interaction between the EU and Korea in international economic fora such as the WTO, OECD, ASEM and IMF is part of a broader and irresistible trend towards an increasingly co-operative bias in their mutual economic relations. This is largely based on the view that globalisation has produced a more complex economic interdependence between both sides, thus providing a rationale for enhanced policy co-operation and co-ordination within these fora and also at the bilateral level. The growth in EU-Korea intra-industry trade, FDI flows and associated company networks has helped develop one of the EU’s most advanced set of transnational linkages with an East Asian economic partner. Although the EU’s direct investment relationship with Korea has not evolved to the same degree as that with Japan, the complexities generated by the realigned territorial loyalties of multinationals and other non-state actors (e.g. host local authorities, domestic supplier firms) have nevertheless been apparent. If this relationship develops, the role played by non-state actors in EU-Korea economic diplomacy can be expected to become more prominent. However, greater economic interdependence has simultaneously broadened the scope for EU-Korea commercial competition, with rivalry extending across a wider range of industrial activities. In the past, Korean firms have played their part in exposing the EU’s surplus capacity problems in low and medium technology sectors, and this itself offers a perspective on the origin of trade friction. Korea’s financial crisis has, though, exposed its own surplus capacity problems and furthermore highlighted the pressures exerted by globalisation to liberalise domestic markets. The EU has thus welcomed Korea’s more comprehensive embrace of globalisation and undoubtedly hopes the same will apply to the WTO’s ‘new’ trade agenda. Compliance with the IMF programme’s economic reforms can be expected to prepare Korea for the further multilateralisation of traditional domestic policy, as led by the WTO’s agenda, although resistance to change may come from Korean government bureaucrats, chaebol executives and others with an interest in maintaining the status quo. Given the EU’s structural power to shape the emerging multilateral trade order and new trade agenda’s focus on removing ‘internal’ barriers to international trade, Korea’s fuller conformity to WTO norms and processes will be to the EU’s considerable benefit. The crisis will also produce a more

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commensurate approach between Korean and most EU policymakers as the former pursue a neo-liberalist policy agenda. This may generate a more conducive environment for EU-Korea policy co-operation. Marxist themes are also germane to developments in EU—Korea economic relations. Like neo-realism, Marxism predicts that conflict is the predominant feature of international economic relations. Trade friction between the EU and Korea is simply a product of adversarial capitalism where each side has attempted to uphold the commercial interests of its own firms. Korea’s own recent ‘crisis of capitalism’ has only served to intensify the competitive struggle, while the imposition of the IMF programme’s market reforms is seen by Marxists as a means of maintaining the stability of the international capitalist system. Furthermore, as one of the system’s core power’s, the EU may use the IMF as a conduit through which influence over the future direction of Korea’s economic policy is exerted. Whether any such conspiracies have been hatched remains conjecture, although the EU’s structural power over the regimes in which itself and Korea participate cannot be denied. While Korea’s entry to the OECD in 1996 did mark a recognition of its advanced industrial statehood, it still remains highly dependent on European, US and Japanese technology and capital. Thus, Marxist dependency theorists would suggest that Korea continues to lie in the periphery of the international capitalist system and hence ultimately subservient to the capitalist interests of core powers. Although this too is highly debatable, the validity of the proposition would have important implications for EU-Korea economic relations as the nurturing of a more co-operative, interdependent relationship is partly based on a growing convergence of techno-industrial capabilities. Recent developments in the FDI relationship suggest that the interests of European and Korean multinationals could increasingly influence the agenda of EU-Korean policy co-operation, as Marxists would predict. The primacy of economic issues in EU-Korea relations is also no surprise to Marxists, although security and nuclear issues relating to North Korea (e.g. the KEDO initiative)49 became important agenda items by the mid-1990s.50 The broader array of issues now discussed between the EU and Korea is indicative of the establishment of a more co-operative approach to their relations. Finally, to conclude, both sides have important geoeconomic reasons for promoting these relations further. For Korea, the EU must be central to any strategy that aims to diversify the country’s economic relations and commercial interests of its firms. For the EU, Korea represents an increasingly important export market, import source and FDI location for its firms. While Korea perhaps lacks the weight to alter the balance of power in East Asia, it could play a key advocacy role for EU interests in the region51 (Dent 1998d). Thus, both sides have yet to fulfil the considerable potential that an enhanced economic partnership offers.

8

Regionalism and inter-regional co-operation

Introduction Thus far we have mainly examined the EU’s economic relations with its separate East Asian partners. In this chapter we shall concentrate on the regional and inter-regional dimensions aspects of the EU-East Asia economic relationship. As we shall discuss, regional dynamics are an important aspect of this relationship, a deeper mutual understanding of which will help close the significant cultural and psychic distance that persists between both regions. Hence, in the analysis that follows, the development of regionalism in East Asia and Europe is considered in some detail with comparisons and contrasts made where appropriate. The third section of the chapter examines the Asia-Europe Meetings (ASEM) and its introduction of an inter-regional ‘dialogue framework’ to EU-East Asian economic relations. It will be argued that the potential geoeconomic significance of the ASEM is considerable, although it may be some time before this is realised. Regionalism in East Asia East Asia has been responsible for some of the most interesting new forms and structures of regional integration to have emerged in recent years. Whereas regional integration arrangements (RIAs) in Europe have tended to evolve through formalised institutional processes, those in East Asia have developed through more informal paths. This has been manifest at a sub-regional, interstate and pan-regional level. East Asia’s own brand of regionalism has been shaped by four inter-related factors: • the dynamics of its own regional economic development (see Chapter 2); • the pressures and forces of globalisation; • the region’s historic commercial networks, especially across the Chinese diaspora; • various socio-cultural determinants. These determinants, and the forms and structures of regional integration which they have created, are examined below. We first consider the evolution of a

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regional economic identity in East Asia that is then followed by an overview of the various sub-regional networks and other arrangements which have appeared. Integration agreements between nation-states such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Co-operation (APEC) forum are also studied in greater detail. We shall conclude by considering the potential conflicts and future agendas that lie ahead regarding regional integration in East Asia. East Asia and the evolution of regional economic identities Most attempts to foster a common regional identity among East Asian countries have been bound to the notion of developing a broader, pan-Pacific community. This is not only revealed in the current APEC initiative but also in its most distant antecedents, and can be mainly attributed to the USA’s long-standing involvement in East Asia. According to Woods (1993), US initiatives to found the Pan-Pacific Union in 1907 and the Institute of Pacific Relations in 1925 (both based at Honolulu) represent the earliest endeavours at forging such a community. However, these were essentially epistemic communities consisting of distinguished public figures and academics who worked to a relatively unambitious, nonspecific agenda based on the general exchange of ideas and opinions. The Institute was eventually disbanded in 1961, thus joining other partly US-inspired, post-war regional movements that eventually failed, namely the Asian and Pacific Council (ASPAC), Southeast Asia Treaty Organisation (SEATO) and Association of Southeast Asia (ASA). Others nevertheless remained, such as the Economic and Social Commission for Asia and the Pacific (ESCAP). As Chapter 3 discusses, the USA was instrumental in establishing ASEAN in 1967 with the objective of creating a bulwark against the communist advance in the region. This reflected the nature of US strategic interests in East Asia during the early post-war decades, which were arguably determined more by political than economic imperatives. The intellectual development of ideas pertaining to Pacific economic regionalism only really began in the 1960s and originated in Japan, or more specially the Japan Economic Research Centre ( JERC). It was at the JERC’s first international conference in November 1965 that the notion of a Pacific free trade area (PAFTA) was conceived in a paper presented by two leading economists, Kiyoshi Kojima and Hiroshi Kurimoto ( JERC 1966). They argued that the five developed Pacific economies ( Japan, USA, Canada, Australia and New Zealand) could form the core basis of this arrangement, eventually leading to a broader membership of states.1 Japan was also the source of two other key regional initiatives during the late 1960s. The first of these was the Pacific Basin Economic Council (PBEC), an extension of an original Australia-Japan private sector forum which came to include the USA, New Zealand and Canada whose aim was to enhance commercial co-operation across the Asia-Pacific. PBEC’s inaugural meeting was convened in 1968, the same year that Japanese agencies organised the first Pacific Trade and Development (PAFTAD) conference which provided a parallel

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forum for academic debate on regional economic co-operation. It was at the PAFTAD conferences that much of the early technical discussions on economic integration in the region took place and also where the debate over a future PAFTA continued, although it transpired with subsequent conferences that there existed little support for the idea. US involvement in these initiatives remained low key until the late 1970s when it began to see closer Pacific regional co-operation as both economically desirable and politically feasible (Morrison 1981). In 1978 the US Senate commissioned a study on creating a Pacific regional trade organisation and helped engage intellectual interest in the related conceptual issues. In the meantime, Japan’s Premier Ohira and Australia’s Prime Minister Frazer announced their support for a Pan-Pacific Association which inter alia would aim to define the parameters for an emergent regional community of nation-states. From its initial exploratory meeting—the Canberra Seminar—stemmed the first of many Pacific Economic Co-operation Conferences (PECC) that were to follow. After a somewhat shaky start,2 these grew in significance as a wider range of both countries and issues were embraced into the framework.3 However, PECC’s ability to convert intentions into concrete actions came under increasing criticism from participating countries. By the late 1980s, as a consequence of these frustrations and other developments, most PECC members conspired to raise the level of political co-operation between them. Taking the lead, Australia’s Prime Minister Bob Hawke in 1989 proposed the notion of installing an intergovernmental forum for Asia-Pacific Economic Co-operation (APEC) that would serve such ends.4 In its original conception, APEC was to resemble an OECD-style organisation for the Pacific economies. However, many East Asian countries resented the principles of ‘Western formalism’ on which the proposed forum would be based, and expressed an alternative preference for a looser, less institutionalised, consensus-building arrangement (Kahler 1995). This latter approach was to become the conceptual model which guided APEC’s evolution through the 1990s, as we shall later examine. The 1980s also witnessed the introduction of other regionalist initiatives in the Asia-Pacific region, in particular new sub-regional trading arrangements (SRTAs). In 1981 the South Pacific Regional Trade and Economic Co-operation Agreement (SPARTECA) was formed, through which its membership— Australia, New Zealand and their neighbouring Pacific Island states—has pursued a series of minor regional co-operation projects. Two years later in 1983, Australia and New Zealand signed the Closer Economic Relations Agreement (ANZCERTA) that committed both parties to establish an Australasian free trade area, reinforced with public procurement, export subsidy and other auxiliary agreements. In 1990, just one year after the first APEC meeting, Malaysia proposed that an East Asia Economic Grouping (EAEG) be created as an exclusive Asian regional initiative, another issue to which we shall return. Suffice to say here that many commentators saw the EAEG as a rival initiative to APEC, and furthermore as an antagonistic gesture that was particularly directed towards the USA.

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Notwithstanding the political tensions of the early 1990s over the issue of regional co-operation in the Asia-Pacific, Elek (1992a) suggests that its economies faced four pragmatic challenges on how to enhance economic co-operation between them: • improving mutual market access in traditionally well protected sectors, e.g. agriculture, textiles; • reducing uncertainty in regional economic relations, e.g. about future market access; • redressing infrastructure bottlenecks; • harmonising domestic legislation and rules on commercial practice. These were to provide the basis of APEC’s focus of activities as the 1990s progressed. Regional economic integration in East Asia during this decade has also been advanced at a sub-regional level. We noted in Chapter 3 how the ASEAN countries have embarked on a programme to establish their own free trade area (AFTA) by 2003. In addition, various sub-regional economic zones (SREZs) have developed further corporate network links between East Asian economies. A number of conclusive observations and related points can be made regarding the evolution of regional economic identities in East Asia. We have seen how Japan was responsible for much of the intellectual work and policy initiatives that provided Asia-Pacific regional co-operation with its initial momentum. Despite East Asia’s most prominent economic power adopting this lead role, there were important geopolitical and historical reasons why the destiny of any significant East Asian regionalist initiatives was tied to a broader Pacific canvas. First, any attempt by Japan singularly to champion such initiatives would carry resonant memories of its own expansionism in the region during the 1930s and 1940s, with particular respect to the infamous Greater East Asian Co-Prosperity Sphere (see Chapter 4). This meant that Japan had to proceed with the assistance of its new Western partners, which were themselves perhaps the only Pacific powers equipped to achieve the goals of effective economic cooperation at the outset. Second, many East Asian countries were too preoccupied with their own nation-building endeavours to be distracted by attempts to develop a stronger regional identity. Moreover, they were also all too aware of the economic, political and cultural differences that separated one regional neighbour from another, and hence prima facie evidence that such a coherent identity was unlikely to emerge. Third, the USA’s economic and political involvement in East Asia was such that it could not easily be disaggregated from any substantial pan-regional co-operation projects. According to Harris (1994) the processes of Asia-Pacific regional co-operation owed much to the initiatives of powerful individuals and intellectual elites, which in turn relied on a convergence of values among these elites whose own cultural backgrounds were highly diverse. This partly explained why many Asia-Pacific regional initiatives have not progressed. Furthermore, Higgott (1995:379) observed that Asia-Pacific regional co-operation has been mainly

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promoted by numerous ‘policy-network-cum-epistemic communities’ founded on neo-liberal principles that do not conform to ‘neat Weberian patterns of decision-making and opinion-forming’. As we shall discuss later, there are important contrasts to be made here with the approach that has been adopted by EU member states. Sub-regional economic integration East Asia has witnessed more varied forms of sub-regional economic integration than any other global region. These have evolved through contiguous transborder corporate linkages, often fortified by joint policy initiatives, that create a subregional economic zone (SREZ), or so-called ‘growth triangle’. The development of SREZs has challenged conventional assumptions regarding economic scope, political sovereignty, spatial boundaries and state-centred regional integration. Their main purpose has been to attract investments that utilise local resources to produce competitive manufactured goods, usually for export. Examples of those that have emerged between East Asian countries are shown in Figure 8.1. Chia and Lee (1993) have identified five factors that can explain the development of SREZs: • Economic complementarity: what each sub-region has to offer the other in terms of resources, capital, technology, labour, etc. • Geographical proximity: an SREZ’s supply chains and other network links (e.g. ethnic ties) require spatial proximity if they are to function effectively. • Conducive policy framework: created by participative governments, usually entailing relaxed rules on commercial practices and factor mobility. • Infrastructure: supportive investments in public goods to help facilitate crossborder exchanges. • Market access: the creation of efficient production and distribution systems in SREZs ultimately depends on acquired access to regional and world markets. We can also categorise SREZs through their chosen path of development. Some have evolved from metropolitan cross-border spillovers into a hinterland, such as Singapore and SIJORI (the Southern Growth Triangle). The central metropolitan area provides the SREZ with its network hub for key financial, production and infrastructural services. Sometimes neighbouring metropolitan areas link up or merge to create transborder ‘development corridors’ (Rimmer 1994). Other SREZs have emerged as joint development of natural resources and infrastructure projects (e.g. the Mekong and Tumen River Regional Triangles),5 while some encompass whole nation-states (e.g. Singapore in SIJORI, and Laos and Vietnam within the Mekong River Triangle). It is often the case that SREZs incorporate, or are founded on Intra-National Free Economic Zones (INFEZs). An INFEZ can be defined as a designated domestic location which has been granted special commercial status by the government. Companies based here typically enjoy a liberal regulatory

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Figure 8.1 Subregional economic zones in East Asia Source: Chen, X. (1995).

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environment and proactive government support, e.g. subsidies, infrastructure investment. Examples include export processing zones (EPZs), which grew to prominence from the mid-1960s onwards as part of the advanced NICs export promotion strategies, and China’s array of Special Economic Zones (SEZs), Economic and Technological Development Zones (ETDZs) and National Industrial Development Zones for New and Advanced Technology (NIDZNATs). It is also common for family-based network links to play both a key role in SREZs, as epitomised through guanxi connections across the Chinese diaspora (see Chapters 5 and 6). The comparative economic advantages of participating sub-regional members offer greater scope for flexibility and specialisation. Furthermore, they enable smaller firms to acquire a formative experience at internationalisation. Less developed partners also often benefit from technology transfers, subsidised infrastructure and capital upgrading. However, problems can arise concerning the balance of relationships both at a provincial and central government level,6 diverted investment away from peripheral sub-regions, infrastructure bottlenecks and negative externalities generated by lax commercial standards (e.g. on environmental management). Many of East Asia’s SREZs have begun to interlock and overlap, hence contributing to a wider regional integration. The Asia-Pacific Economic Co-operation (APEC) forum In general terms, APEC’s role has been to facilitate inter-governmental consultations with the purpose of enhancing economic co-operation, as opposed to specifically building an ‘economic community’ between East Asian and other Pacific economies. From the beginning it was envisaged that this was to be achieved through convergent directions in policymaking within APEC but avoiding EU-style, treaty-driven integration. Although notable variance existed across APEC’s membership concerning what the remit of the new organisation should be, a significant commonality of aims was also apparent. We noted earlier that Japan had long expressed an interest in creating a regional framework for economic co-operation in the AsiaPacific. Similarly, the East Asian NICs hoped that APEC would promote closer regional economic interdependence but mainly through joint projects. Some ASEAN countries were nevertheless concerned over what impact APEC would have upon their own regionalist initiatives, particularly that of AFTA (Crone 1992). Subsequently, they agreed to participate subject to ‘three nos’: that APEC should have no legal binding authority, no negotiating right and pursue no regional agreements beyond those permitted under GATT/WTO rules. However, what linked all East Asian states was the use of APEC to guarantee access to US markets. Meanwhile, the smaller developed Pacific countries of Australia, New Zealand and Canada recognised the advantages of aligning their own economies more closely to East Asia’s dynamic regional economy. Hence, APEC was been perceived by them as a means to this end. The USA originally desired a loosely structured consultative forum to evolve on trade-related issues, but soon adopted

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a more proactive and ambitious position towards APEC.7 All APEC members hoped that it would help strengthen their international bargaining power vis-àvis non-APEC countries. At the time of the Uruguay Round this was especially relevant in their dealings with the EU. The first APEC ministerial meeting, hosted in Canberra in November 1989, was attended by the foreign and economic ministers from twelve countries, namely the five developed Pacific nations, the ASEAN states and South Korea. It was agreed that APEC’s basic objectives should be to promote regional economic growth and development and to uphold the open multilateral trading system. Thus, there was to be no recourse to building a Pacific trade bloc but rather to foster a constructive economic interdependence between members. It was also agreed that APEC’s ministerial meetings be held annually, while regular and intermediate Senior Officials Meetings (SOMs) would be held to oversee and co-ordinate, with ministerial approval, work in progress. At APEC-II, held at Singapore in July 1990, seven working groups were set up whose purpose was to help engender a ‘habit of co-operation’ and demonstrate the economic benefits thereof through: trade promotion; enhancing technology transfer and human resource development; promoting co-operation in energy, telecommunications and marine resources; improving regional data on the flow of goods, services and investment. Three more groups—transportation, tourism and fisheries—were later added to the framework. By APEC-III, which was convened at Seoul in November 1991, China, Hong Kong and Taiwan8 were admitted to membership. The meeting yielded the Seoul Declaration which laid out the scope of activity, mode of operation and the principles of participation in APEC. The scope of activity in APEC comprised: • exchange of information and consultation on policies relevant to common efforts to sustain growth, promote adjustment and reduce economic disparities; • development of strategies to reduce impediments to trade and investment; • promotion of objectives set within APEC’s working groups, e.g. technology transfer. With regards to participation in APEC and its mode of operation, there was a strong emphasis placed on consensus-building and open dialogue. While APEC did not seek to create any supranational institutions, it was agreed at APEC-IV, held at Bangkok in September 1992, that a permanent secretariat be established to enhance its co-ordinative capabilities. This was implemented by January 1993 and is based in Singapore. It was also decided at Bangkok to create an Eminent Persons Group (EPG) that would ‘enunciate a vision for trade within APEC to the year 2000 and identify constraints and issues which APEC should consider in advancing regional trade liberalisation over the next ten years’.9 In addition, there were proposals to help achieve this in the shorter term, such as the improved harmonisation of customs procedures and practices between members.

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A number of important developments came at APEC-V, hosted by the USA at Seattle in November 1993. Mexico and Papua New Guinea were acceded into membership and it was agreed to admit Chile at APEC-VI. Existing members reconfirmed their adherence to the GATT system and the expansion of regional trade and investment. A Committee on Trade and Investment (CTI) was established, upgrading the former Informal Group on Regional Trade Liberalisation. More private sector involvement was to be encouraged through the new Pacific Business Forum (PBF) that brought together corporate executives from member countries to discuss matters relating to the business sector’s role in and contribution to APEC processes. This entailed promoting the development of business networks across the Asia-Pacific. A Budget and Administration Committee was also established to manage APEC’s increasingly complex tasks in these twin areas. Furthermore, the EPG submitted its first report, A Vision for APEC: Towards An Asia-Pacific Economic Community, that recommended a programme of trade and investment liberalisation measures to be adopted within APEC (APEC 1993). This paved the way for the EPG’s key second report which carried a more ambitious and well-defined set of recommendations that was to emerge at APEC-VI. Also at Seattle, or more accurately at the nearby Blake Island, the first APEC Economic Leaders Meeting (AELM) summit was held which proceeded after the usual APEC ministerial meeting. The attendance of practically all member premiers raised the status and profile of APEC to a new level. A key outcome of the summit was the notion of a ‘community’ of Asia-Pacific countries being created through APEC. According to the EPG’s American Chairman, C.Fred Bergsten, ‘the leaders in Seattle began the process of converting APEC from a purely consultative body into a substantive international institution’. However, this was accepted with reservations by many East Asian states who saw this as a departure from APEC’s original aims of promoting informal economic co-operation.10 At the APEC-VI ministerial meeting held in Jakarta in November 1994, two further agencies were added to APEC organisational structure: an Economic Committee whose main function was to improve APEC’s capability for analysis of economic trends and studies of specific economic issues, and a Policy Level Group on Small and Medium Sized Enterprises. Further inland at Bogor, economic leaders at the second AELM summit endorsed the EPG’s proposals for creating a free and open trade and investment zone within APEC by the two-stage deadlines of 2010 and 2020 (APEC 1994). The developed Pacific economies were to realise this objective by the former date, while the developing APEC members were to meet the latter. All members were, though, to commence implementing their trade liberalisation programmes by the year 2000 at the latest. The EPG’s recommendations, derived from its second report, were incorporated into the summit’s Bogor Declaration which laid out the following main future goals for APEC governments: • Trade in goods: zero tariffs and the removal of all quantitative restrictions. • Trade in services: no limits of travel related to the provision of services for short-term visits.

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• Trade policy dispute settlement: immediate adoption of an APEC Code of Practice. • International investment: national treatment of all firms in all sectors, including tax and subsidies; common rights of establishment; compliance to dispute settlement provisions bound within existing international investment conventions. • Competition policy: adoption of an agreed code of minimum standards for competition policy by 2010; no APEC member is to impose anti-dumping measures upon another. • Administrative procedures: full compatibility of customs documentation and clearance procedures. • Transport: harmonisation of certain procedures and lifting of restrictions on landing rights; full compliance to international legal conventions for the carriage of goods. • Telecommunications: mutual recognition of all technical telecommunications standards; no restrictions on trans-border transmissions; national treatment for access to local common carrier networks. • Other commercial legislation or regulation: agreed minimum standards of disclosure and auditing commercial entities above some minimum size; an APEC Code for the taxation of international income. • Standards (other than already noted): by 2005 APEC governments to have completed a programme of mutual recognition or harmonisation on par with that achieved by the EU by end 1992, and by 2020 to have matched the EU’s own level at this time. In keeping with APEC’s stated adherence to the GATT/WTO principle of ‘open regionalism’, the EPG report was not suggesting that a conventional free trade area, or PAFTA, be established but rather an arrangement that promoted ‘free trade in the area’ which was simultaneously WTO-consistent.11 Hence, it was intended that any tariff reductions would also be extended to non-APEC, WTO members on an MFN basis. This approach can be explained by the broad acceptance that APEC’s economic dynamism was largely dependent upon an open and flourishing multilateral trading system. Moreover, Drysdale (1991:1) contended that APEC’s commitment to uphold the multilateral trading system is based on one of necessity: ‘without access to the global market-place, the opportunities for dynamic East Asian trade and investment growth would be severely constrained’. As with its preceding two meetings, the agenda of APEC-VII, held at Osaka in November 1995, was primarily driven by proposals set out in an EPG report (APEC 1995a). In essence, the EPG recommended that APEC leaders commit themselves at Osaka to halving the period for implementing the liberalisation measures agreed at the Uruguay Round trade talks. For instance, this would imply that APEC’s industrialised countries could choose to accelerate the agreed reductions in their agricultural subsidies from six to three years; meanwhile, developing countries could cut by half the period to implement the new obligations which they have already committed to accept regarding intellectual property

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rights (IPR) and Trade-Related Investment Measures (TRIMs). The call to hasten the pace of liberalisation was echoed by the PBF’s own wide-ranging second report, also submitted in advance of Osaka (APEC 1995b). There was a general lukewarm reception to these ideas from those APEC members who had already expressed concern over ambitious objectives set at Bogor. Some, such as Malaysia and Thailand, were apprehensive about the changes these would bring to APEC’s structure and ethos, especially with respect to any aspirations that the USA may have to institutionalising APEC. The EPG third and final report also expressed its concern over the ‘intensification of economic disputes in the region’ and APEC members’ ‘tendency to ignore multilateral norms and mechanisms’ (APEC 1995a:i), stating that, if unresolved, key APEC processes could be derailed. The installation of a mediation service was suggested to help overcome regional trade disputes which would complement WTO procedures. The main outcome to emerge from the summit was the Osaka Action Agenda which further delineated the objectives and implementation procedures for future APEC economic co-operation, as embodied in the Bogor Declaration. To provide advice on the implementation of the Action Agenda, an APEC Business Advisory Council (ABAC) was established in early 1996 to serve in this role.12 In addition, APEC member states were charged with preparing their own individual action plans that would be submitted at the APEC-VIII ministerial meeting in Manila in November 1996. These were to be implemented from January 1997 onwards13 and were, together with a series of collective action plans, to constitute the basis of the Manila Action Plan (MAPA). The MAPA initiative revolved around six themes: • • • • • •

greater market access in goods; enhanced market access in services; an open investment regime; reduced business costs; an open and efficient infrastructure sector; strengthened economic and technical co-operation.

Its main purpose was to maintain APEC member states’ commitment to the Bogor Declaration objectives by providing a new framework in which the progress of national and collective activities could be monitored. At APEC-IX, held at Vancouver in November 1997, the group’s economic leaders and ministers presided over an agenda that added little substance to APEC’s structure or processes. This could be partly attributed to the East Asian financial crisis, the full scale of which was just emerging. However, by the late 1990s there was a growing consensus within APEC to promote the objective of global free trade by 2020. Depending on how serious a goal this becomes, it would have major implications for the multilateral trade order, an issue to which we shall return. However, by APEC-X, held at Kuala Lumpur in November 1998, the fuller impact of the East Asian financial crisis upon the APEC process was more apparent. As Chapter 9 discusses in further detail, tensions between the USA

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and certain East Asian members emerged after US policymakers sought to use the crisis as a means to push home wider commercial and foreign policy objectives. In his speech to the summit audience, US Vice-President Al Gore expressed his support for Malaysia’s nascent democratic reform movement, led by Anwar Ibrahim, as part of a broader post-crisis political and economic programme suggested for the country. In retaliation, the long-standing Malaysian Premier, Mahathir Mohamad, accused the USA of blatant ‘foreign meddling’ in the domestic affairs of another APEC member.14 A few days earlier, US trade diplomats led APEC’s other Anglo-Saxon members (Canada, New Zealand and Australia) in an acrimonious dispute with APEC’s Asian members over the latter’s import restrictions on forestry and fishery products. The unresolved matter was subsequently transferred to the WTO and was reflective of the poor progress that had been made on other trade liberalisation issues at APEC-X. Premier Mahathir’s call for the introduction of greater controls on hedge funds and other large international investors was also squarely rejected by the USA and most other APEC members. The East Asian Economic Caucus (EAEC) Notwithstanding the positive developments in APEC, many East Asian states were experiencing geoeconomic insecurity by the advent of the 1990s. At the time, the Uruguay Round talks had become deadlocked while the perceived threat of protectionist trade blocs loomed ominously in Europe and North America in the form of the Single Market and NAFTA (North American Free Trade Agreement) programmes. As Rudner (1995:431) accurately observed, ‘aware of their vulnerabilities, the ASEAN countries and some of the Asian NICs felt pressed to explore alternative modalities for regional co-operation in defence of their economic and trading interests’. Such initiative was most keenly grasped by Malaysia’s Asia-centric Premier, Mahathir Mohamad, who proposed the idea of creating an East Asian Economic Grouping (EAEG) in December 1990. The original EAEG blueprint contained plans to form a preferential trading arrangement between East Asian countries, thus snubbing the USA and other Western APEC members (i.e. Canada, Australia and New Zealand). It thus came as no surprise when the USA voiced strong opposition to the idea and ardently petitioned both Japan and Korea to reject it. As it transpired, Japan adopted an ambivalent position towards the EAEG proposal. While its leaders were cautious not to undermine its special relationship with the USA, Japan also acknowledged that its strategic interests lay in generally promoting regional links with its immediate neighbours, leading possibly in the longer term to a more prominent leadership role in East Asia (see Chapter 4). Korea was similarly circumspect, principally for the former reason, with China perhaps the most receptive of the three to the proposal. However, it was the less than accommodating response from Malaysia’s ASEAN partners that led to the EAEG’s demise. For their part, both Indonesia and Thailand were adamantly opposed to establishing such an exclusivist and inward-looking trade arrangement,

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especially one that would lock out the USA and send contradictory signals to their new, non-Asian APEC partners. Consequently, Malaysia modified the EAEG proposal to the more innocuous East Asian Economic Caucus (EAEC) which was launched in October 1991. The EAEC, or ‘Caucus without the Caucasians’ as it became known in certain quarters, sought to provide the East Asian countries with an informal consultative mechanism on matters of policy discussions and consensus-building on trade and economic issues. It was intended that the strategic value of such an arrangement would be particularly revealed in multilateral fora, notably at the time of its conception in asserting the region’s collective interests at the Uruguay Round,15 yet it would also function in a manner consistent with the GATT/ WTO, ASEAN and APEC frameworks. In its endeavours to seek an endorsement among its regional partners, Malaysia tabled the new EAEC initiative at the 1992 ASEAN summit in Singapore and at APEC-V in Seattle where it was in principle accepted, albeit with some reservations. Although the position of the USA had become more amenable with the arrival of the Clinton administration, it nevertheless maintained a hostile view towards any attempt to create an exclusivist Asian trade grouping. This response undoubtedly influenced both Japan and Korea’s positions to somewhat distance themselves from the EAEC arrangement. Hence, Malaysia has had to vindicate the EAEC’s worth by demonstrating how it can enhance APEC unity rather than threaten it. The future direction of the EAEC is contingent on a number of interdependent variables. Other ASEAN countries may join Malaysia in promoting the Caucus as a viable alternative to APEC if open regionalism should, in the words of Rudner (1995:433), ‘flounder on the shoals of discriminatory and diversionary trade policies’. Such support may deepen and broaden to embrace other East Asian countries if North America’s strategic priorities alter in favour of a closer economic alignment with fellow continental countries, as provided by both NAFTA and Free Trade Area of the Americas (FTAA) frameworks. Most analysts would agree that this is unlikely, given the commercial opportunities that East Asia can be anticipated to offer the USA and Canada for some time in relation to other US continental economies. However, as Higgott and Stubbs (1995) have argued, East Asia’s ‘networkbased’ economies, which contrast with the ‘firmbased’ economies of North America and Australasia, provide a longer-term economic rationale for the existence of the EAEC (or indeed an EAEG) than APEC. This is further underpinned by cultural commonalities that bind EAEC members together into a relatively tighter knit group. There are, though, considerable political risks involved in raising the EAEC’s ambitions, given US views on the matter. The global impact and future challenges of APEC Notwithstanding the recent pressures imposed by the East Asian financial crisis upon APEC, the organisation’s most significant challenge remains the

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progressive implementation of its 2010/2020 liberalisation programme. In order to provide a guiding theory by which APEC members can realise this objective, some of its most active academic protagonists have peddled the concept of ‘prisoner’s delight’ (Drysdale and Garnaut 1993; Drysdale and Elek 1996). The concept, an inverted version of game theory’s prisoner’s dilemma, is based on the neo-liberal notion that positive-sum games result from market liberalisation and structural change at home, which not only benefit the domestic economy but also others simultaneously undertaking similar actions. It is further argued that if an initial momentum within APEC for significant liberalisation can be achieved, forthcoming apparent benefits should create the justification and motivation for continued liberalisation. This may be particularly important when convincing governments that any short-term costs incurred will be more than compensated by long-term benefits. Nevertheless, such a process ultimately relies on a culture of mutual commitment being engendered with APEC, although the Seoul and Bogor Declarations have attempted to achieve this based on the principle of concerted unilateral decision-making.16 The advocates of the ‘prisoner’s delight’ concept also concede that the voluntary basis on which this progress depends may not be ideal. There are ‘limits to persuasion’ which become most apparent when dealing with highly sensitive industries where the costs incurred by liberalisation may prove prohibitive, and thus where resistance may be anticipated. However, APEC does have the option of reverting to WTO mechanisms to invoke a more binding obligation upon recalcitrant members. Higgott and Stubbs (1995) have criticised the ‘prisoner’s delight’ concept on the basis that it assumes APEC states are ultimately aspiring to secure absolute rather than relative gains within the group. They further argued that it lacked an underpinning political theory which provides a considered view on this aspect of inter-state economic co-operation. Moreover, in earlier work, Higgott (1993:115) contended that ‘at a regional level, there is a tactical consensus rather than a cognitive one on the utility of APEC as a vehicle for greater economic co-operation’. Thus, the rationale behind APEC’s voluntary-based approach has come under much critical scrutiny. Even the Bogor Declaration 2010/2020 targets are simply indicative and non-binding with the liberalisation process to be realised on a ‘best endeavour’ basis. More recently, Higgott (1998b) has argued that the 1997–8 financial crisis has both enhanced the ‘East Asianisation of regional discourse’, as demonstrated by regional discussions on establishing an Asian Monetary Fund (AMF), and furthermore weakened APEC through the effects of these processes on the attitude and behaviour of the USA (see Chapter 9). There has also been the inevitable debate surrounding whether APEC should gravitate away from its informal, consensus-building style of co-operation to a more formal, treaty-based approach. The USA has often been associated with the latter, and moreover with preferring an orchestrated system for reciprocal concession granting.17 However, Nesadurai (1996) argues that the USA’s ability to use APEC as a tool to dominate the Asia-Pacific is not only

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limited by the strength of East Asian countries’ adherence to the organisation’s founding principles, but is also ‘constrained by the imperatives of interdependence’ and APEC’s complex bargaining processes. Hence, US leverage over determining the future path of APEC has become increasingly circumscribed in that it must now confront a collective of East Asian nationstates rather than exert its traditional influence through bilateral links. Furthermore, any US attempt at dominance through socialisation is likely to be thwarted by East Asian perceptions that Western norms are inherently inferior to their own value systems, although the 1997–8 financial crisis has somewhat undermined confidence in the ‘Asian way’. While the above may prevail, the extent to which US bilateral influence over the East Asian states has dissipated remains highly debatable, as preceding chapters have testified. The USA also maintains considerable structural power within APEC owing to the significant authority it carries within the international economic system in general. On another matter, there exists some doubt over US, and more specifically Congress, reaction to removing barriers to imports from East Asia’s developing countries a full ten years before the opening of their own markets to US exports. Such potential resistance would prove a serious test of APEC’s commitment of upholding the principle of open regionalism. Additional tests of this commitment can be anticipated from other sources. The extension and development of SRTAs have already created a series of concentric and overlapping preferential trade arrangements within APEC, e.g. ASEAN, ANZCERTA and NAFTA. However, their adverse distributional effects will be minimised if these also prescribe to an open regionalism approach (Elek 1992b). Soesastro (1995) notes that most ASEAN members have accepted that efforts to meet both AFTA and APEC objectives could be mutually reinforcing. For example, establishing common positions on a range of associated APEC issues will play an enabling role in realising the AFTA project. As we noted earlier, SREZs are generally promoting a wider, networkdriven economic integration in East Asia. The only real threat they pose to open regionalism comes from their potential to create deepening core-periphery divisions within and between national economies, which in turn carry certain pressures on national policy regimes and interstate policy co-operation. Bilateral market access deals between APEC members present a more obvious test to the principle by their sustaining of discriminatory trade relations within the group. Many of these deals, especially those instigated by the USA, have been mainly preoccupied with removing ‘internal’ barriers to international trade. While this may not create tariff discriminations between APEC members, it does nevertheless pose a challenge to open regionalism’s MFN-driven approach. Additional difficulties are presented by the significant variance in tariff levels that still persists in the region, and by the fact that most of the beneficiaries of Japan’s Generalised System of Preferences (GSP) scheme are developing East Asian countries. Hence, MFN reductions would systematically marginalise their privileges.

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A test that confronts all APEC members concerns the free-riding benefits which non-APEC countries can acquire from the ‘inclusive MFN’ liberalisation promoted by open regionalism. Bergsten (1994) argued that pursuing a ‘temporary conditional MFN’ approach, whereby APEC applies leverage to secure reciprocity from non-APEC trading partners, would serve as a solution to this problem. Furthermore, Wonnacott (1995) proposed that to minimise free-riding APEC could simply act as a forum for preliminary discussions on WTO liberalisation, or alternatively concentrate on those sectors where free riding is less likely; for example, where tariff levels are very low or where APEC producers have a proximate global monopoly (e.g. electronics). The present and future relationship between APEC and the WTO has been the subject of much analysis. Bergsten (1994) contended that APEC could help spearhead WTO negotiations on new multilateral issues, not least by setting precedents in such areas to be adopted at a global level. This may involve opening APEC arrangements to non-members whereby they undertook corresponding obligations. The Information Technology Agreement and Basic Telecommunications Agreement, which both began as APEC initiatives but progressed to become plurilateral WTO accords in 1996 and 1997, respectively, were to become notable examples. Notwithstanding these successes, many APEC members are still adjusting to the patterns of negotiation expected within the WTO framework. As Smith (1996:7) notes, ‘the process of reciprocal bargaining and accepting contractual international obligations about the trade and investment regime, was, and is, a novel experience for the East Asian developing economies’. Conversely, this infers that open regionalism may be achieved, at least partly, through encouraging their compliance to WTO codes and accords. Thus, APEC becomes a conduit through which multilateral agreements are implemented. This itself poses the problem of APEC evolving into a competing regime for trade liberalisation. Given the geoeconomic weight of APEC, such a challenge to the WTO would be especially significant if it was to create a formal PAFTA arrangement. Dieter (1997) has further argued that APEC should desist from its current policy of ‘concerted unilateral liberalisation’ as the WTO is the most appropriate forum in which MFN concessions should be negotiated. While this may present a case for APEC’s redundancy, certain points should be remembered. It was mentioned earlier how there exists a growing consensus with APEC to advocate global free trade by 2020, thus reinforcing but not replacing one of the WTO’s ultimate objectives. The multilateral trade agenda has become increasingly less tariff-centric anyway, which thus diminishes the significance of APEC’s challenge to the WTO. Moreover, MFN liberalisation is only part of APEC’s activities. In judging APEC’s contribution to the international economic system, other activities, such as non-discriminatory confidence building measures and policy co-operation initiatives, should also be included in any evaluation. Panagariya (1994) argued that APEC is unlikely to coalesce into a discriminatory trade bloc owing to three essential impediments: long-standing political rivalries that persist in the region; heterogeneous economic development in the Asia-

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Pacific; and the geographical dispersion and actual number of APEC members. Furthermore, Anderson and Snape (1994:474) contended that the ‘high degree of potential complementarity that exists between freely trading resource-rich and resource-poor Pacific rim countries works against the political feasibility of creating a free trade area in the region’. Although the current 2010/2020 liberalisation programme does not aspire to establish PAFTA, its potential for imposing indirect exclusivist effects on nonAPEC economies is nevertheless considerable. This is particularly relevant to the convergent regulatory environments that APEC members are endeavouring to establish between themselves. Recognising this dilemma, the European Commission stated that if the countries of East Asia were, as a result of regulatory co-operation within APEC, to align their regulatory systems practices to those of the United States, this would place the EU at a competitive disadvantage, at least to the extent that a large and dynamic part of the world economy developed as result of a system which diverged significantly from that of the Union. (CEC 1995d:7) For the above and wider geoeconomic reasons, the EU has aspired to establish a constructive dialogue with APEC. In July 1993 it forwarded a proposal to the APEC secretariat and chair that this should be formed at a ministerial level as well as within its working groups. The EU’s request, though, was subsequently rejected by APEC in October 1993 on the basis that it would be ‘premature to enter into an association with the EU given the fragility of the APEC institutional process’18 (CEC 1995e:22). Stricter rules on third party participation that were adopted by APEC in 1994 further limited the EU’s options. However, some progress was achieved when the European Commission received an invitation to attend the APEC Sub-Committee on Standards and Conformance in August 1997, although due to the lateness of the request the Commission could not comply. Informal contacts between EU and APEC representatives were, though, subsequently established in APEC’s Working Group in this field.19 Before we make a more detailed consideration on how inter-regional relations between the EU and East Asia have recently developed, let us first examine the paths to regionalism that have been taken in Europe. The EU and regionalism in Europe In the section that follows we make an examination of the European and specifically EU models of regionalism, drawing certain comparisons and contrasts with their East Asian equivalents that have been studied above. This exercise also serves as a background analysis to our discussions on the EU-East Asia inter-regional relationship, as embodied in the Asia-Europe Meetings (ASEM) which are presented in the next section.

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For some time after its initial conception, the European Community (EC) provided the model of a regional integration arrangement to other regional groups. This model possessed many essential features that were in direct contrast with those associated with East Asian regionalism. The level of regional economic integration that has been achieved by the EU member states is extremely deep. Intra-regional trade and investment within the EU remain the most developed for any global region. However, this owes much to the advanced state of EU political co-operation and successive treaty-based agreements that have accompanied progressive stages of integrational development. These date back to the Treaty of Paris that established the European Coal and Steel Community (ECSC) in 1951, the precursor to the European Economic Community (EEC) which was founded by the Treaty of Rome in 1957. In 1967 the Merger Treaty coagulated the ‘three communities’ (ECSC, EEC and European Atomic Energy Community which was set up in 1958) into the EC, while the Single European Act of 1986 paved the way for the Single European Market (SEM) and important institutional changes. These were also made by the 1991 Treaty on European Union, or Maastricht Treaty as it is more popularly known, especially in the fields of macro-economic co-operation (economic and monetary union, or EMU), social policy (the Social Chapter) and foreign policy (the Common Foreign and Security Policy). Most recently, the 1997 Treaty of Amsterdam ensured that the momentum of the EU’s integration agenda of the 1990s was maintained. The EU has also progressed through more stages of institutionalised regional integration than any other, simultaneously completing an integral free trade area and customs union by July 196820 and a common market, namely the SEM, by the December 1992.21 It already holds the position as the world’s most sophisticated RIA by far and plans to establish EMU, as envisioned in the Maastricht Treaty, between at least a sub-group of EU member states will further consolidate this position. Managing the EU entails the use of advanced and complex forms of decisionmaking processes that have evolved within multi-level governance structures. As Marks et al. (1996:372) comment, ‘policy-making in the EU is characterised by mutual dependence, complementary functions and overlapping competencies’. In Chapter 2, we gained some insight into how this related to the conduct of the EU’s Common Commercial Policy (CCP). Trade is one of very few policy areas within the EU where its main executive supranational agency, the European Commission, has in effect been granted exclusive competence. However, EU policy proposals forwarded by the European Commission first require a mandate from the inter-governmental Council of Ministers. Numerous other EU institutions and actors (e.g. the European Parliament, European Court of Justice, European Council and Council Presidency) also have a stake in or influence over issues arising on the EU agenda. There is much debate concerning where the sources of power actually lie within the EU’s highly institutionalised structures and processes. Nugent (1995) and others22 have argued that the European Commission has developed a more distinct leadership role within the EU as deeper integration has necessitated

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an extension of competence to supranational agencies. This view is contested by Moravcsik (1991, 1993) who asserts that the EU can be best understood as an ‘inter-governmental regime designed to manage economic interdependence through negotiated policy co-ordination’ (1993:474).23 If we prescribe to this latter notion, then certain comparisons can be made with both ASEAN and APEC, although the EU’s inter-governmental processes and structures are considerably more elaborate. We have to some extent assumed that the EU’s institutionalised co-operation has had a considerable impact upon stimulating economic integration between its member states. It is therefore worth contemplating whether a de facto process of economic integration, akin to that experienced by East Asia’s essentially private-sector led integration, would have emerged in the absence of the SEM programme and other initiatives. Unfortunately, this question is not easily answered, although historic data provided by Anderson and Norheim (1993) suggest that Western Europe had the world’s highest levels of intra-regional trade for many decades before the EEC’s inception.24 On the other hand, and in contrast to East Asia’s SREZs, the EU’s major inter-firm production networks and agglomerations tend to be based more within and not across national boundaries, some of which have their origins in Europe’s city-region states that

Figure 8.2 Europe’s major growth axis Source: Dunford and Kafkalas (1992).

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emerged in the eighteenth century.25 Yet there is evidence for the recent growth of new ‘meso-regions’, as Cappelin (1993) refers to them, with the EU’s territory founded on network relationships between various urban areas. Furthermore, a relatively distinct high-tech development corridor or ‘growth axis’ is apparent within the EU economy, as Figure 8.2 indicates. It is within this zone that much of Europe’s most advanced capital and infrastructure development, high-tech industry activities and centres of prosperity are located. Figure 8.2 also suggests where the future paths of this axis will extend. Continuing on a geographic theme, the EU has had to pay more attention to how it is viewed by outsiders. During the earliest (i.e. EEC/EC) period the EU was seen by many as the epitome of ‘closed regionalism’, especially by those who subscribed to Vinerian theories which highlighted the adverse effects of customs unions on the wider international trading system. However, with globalisation and the increasing openness of the world economy, the EU has become more sensitive to external perceptions of itself.26 This has been particularly apparent since the late 1980s onwards when Europe and its trade partners began to ponder what the potential external impacts the SEM would be.27 At first it seemed that the EU’s objective was to use Single Market access as a bargaining device in international negotiations to secure reciprocal access in third country markets.28 Moreover, others anticipated that a high tariff wall would be erected around the SEM to safeguard its benefits for ‘insiders’ —hence the derivation of the ‘Fortress Europe’ concept.29 As its transpired, neither scenario emerged (Hanson 1998). The reciprocity principle was never meaningfully deployed, on either a systematic or ad hoc basis, while the EU also used the latter stages of GATT’s Uruguay Round negotiations to demonstrate its willingness to conduct external liberalisation simultaneously with the SEM programme’s internal liberalisation. Nevertheless, the EU’s gravitation towards a more ‘open regionalist’ position in recent times has been fundamentally constrained by its depth of integration. In other words, it can be contrived as an even greater contradiction in terms for a regional bloc which is embarking on monetary integration, let alone APEC’s free trade and investment zone.30 Ironically, though, it is the EU’s plans for further economic integration that could emphasise the divisions between existing and future member states and subsequently create an APEC-style (i.e. 2010/2020) variable speed integration. By the early twenty-first century it is conceivable that the EU will consist of a three strata membership. This would comprise: those countries who are EMU participative; other EU 15 which are not; the new Central and East European (CEE) member states whose accession to the acquis communautaire—the embodiment of EU policy and law—will entail a lengthy transition process and hence form the third tier. Thus, while there exist considerable differences in the nature and aspired level of future EU and APEC integration agendas, they may both face the challenges inherent to the ‘variable geometry’ approach. Further EU enlargements, which inevitably increase the heterogeneity of membership, make this a more assured outcome. The EU already operates an extended family network of geographically proximate ‘associative’ states, practically all of whom

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wish eventually to become full members themselves. These include the European Free Trade Area (EFTA) countries (Norway, Switzerland, Iceland and Liechtenstein),31 the CEE states and those from the Mediterranean Basin, i.e. North Africa, Mediterranean island and near Middle East groups. Under the provisions of its association agreements or other special arrangements made with these states, the EU usually confers trade and miscellaneous commercial concessions upon them as well as promoting various forms of economic cooperative ventures. Although this network is not on the same scale as APEC’s super-regionalism, it does constitute the basis of a ‘Greater EU’. Furthermore, the EU’s various co-operation agreements signed with non-European countries and even regional country groups (e.g. ASEAN, Mercosur) should be noted. As we shall discuss in the following section, the EU has been a pioneer in the field of inter-regional relationships. Of these, the ASEM has become the most important to the EU. Before we analyse the ASEM in some detail, let us summarise the conclusions that can be drawn from this section. First, the EU model of regional integration and co-operation differs in a number of fundamental ways from those found in East Asia, which are typically informalised, private sector or market-led and underpinned by an inter-governmental consensus-building approach. In contrast, the EU represents a more formal, institutionalised and technocratically driven approach that has evolved within more developed inter-governmental and supranational governance structures. Strong contractual bonds and common legislative commitments have also been forged between EU member states, whose economies are now closely linked through both extensive market integration agreements and macroeconomic policy co-ordination. As we saw with APEC, its own co-operative initiatives are mainly micro-economic in nature. Furthermore, it lacks the collective political will and the institutional and adjudicative capability for comparable unitary action (Higgott 1995). Second, it is very probable that, even without the EU’s institutionalised frameworks for enhancing regional integration, West Europe would have still experienced an increased, private sector-led, de facto economic integration, as witnessed in East Asia. However, at the meso-economic level (i.e. inter-firm, inter-industry networks) the EU has not witnessed the emergence of SREZ arrangements, although its core ‘growth axis’ (as shown in Figure 8.2) has certain features in common with some of East Asia’s development corridors (e.g. Japan’s Tokaido Megalopolis) and its more urbanised growth triangles. Third, similarities can also be made between the EU and APEC with respect to the recent and future challenges they have encountered. The former refers to a mutual need to vindicate their own regional integration initiatives by paying deference to the ‘open regionalism’ principle, although given its degree of integration this has been far more difficult for the EU to pull off. Depending on how the forthcoming EMU process and ‘eastern’ enlargement are handled, both the EU and APEC are likely to face the challenge of managing a future integrational agenda based on a ‘variable geometry’ approach. While it was previously acknowledged that the actual content of each agenda was radically different, there may exist some

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scope for mutual learning that concerns how each regional bloc maintains a balance of member state interests while reaching the group’s common and differentiated objectives. The basis for wider inter-regional co-operation between the EU and East Asia will now be examined. The Asia-Europe Meetings (ASEM) framework The following sections examine various aspects of the ASEM ‘dialogue framework’. We shall begin by considering the geoeconomic context of the ASEM and its wider significance and potential impact upon the international economic system. The ASEM’s origins and development are then examined, leading on to a study of its operational dynamics. Finally, the ASEM’s future prospects are evaluated. ASEM: the geoeconomic context Inaugurated in March 1996, the ASEM constitutes perhaps the most important development in EU-East Asia economic diplomacy thus far. The ASEM is essentially an inter-regional ‘dialogue framework’ between the EU and ten East Asian states, namely the ASEAN7 countries, Japan, China and Korea. The meetings themselves are biennial and summit-based with intermediate work being conducted in between that is aimed at enhancing mutual cooperation and exchange in economic, political and socio-cultural fields.32 It was intended at the ASEM’s outset that this new framework for managing EUEast Asia relations was to complement existing bilateral (e.g. EU-China) links and not supplant them. This new level of partnership that the ASEM establishes between the EU and East Asia can only be fully understood in the context of Triadic geoeconomics and the recent development of inter-regionalism. The ASEM is actually the last inter-regional Triadic link to fall into place, with APEC and the New Transatlantic Agenda (NTA) representing its transpacific and transatlantic equivalents, respectively. Thus, the ASEM is an attempt to ‘complete the triangle’ of Triadic relations and hence fortify the weak link in that triangle (Dent 1996). Plans made by APEC to create its 2010/2020 free trade and investment zone certainly played their part in galvanising the EU into redressing this imbalance. Like other regional groups, the EU has entered into a series of inter-regional agreements, the most established being that with ASEAN itself.33 This trend has become an emerging paradigm of international economic relations owing to the general growth of regionalism and regional groups seeking co-operative ventures with others. Globalisation has also been a motive force here with new economic interdependencies being created on a transnational and transcontinental scale. Where common interests can be identified between two regional powers as a consequence of such processes, potential benefits arise from joint policy initiatives and other collaborative activities that are thought to yield mutual gains between them.

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The ASEM seeks to facilitate a greater economic exchange between the EU and East Asia in a fundamentally different way to both APEC and the NTA. Most importantly, the ASEM does not carry provisions for ‘mutually aligning regulatory environments but rather aims to establish both congruency in selected administrative procedures (e.g. customs, standards and certification) and enhance familiarity amongst companies of the policy regimes they confront in their opposite region’ (Dent 1998b:514). However, like the NTA, but unlike APEC, the ASEM is not a mechanism for trade or investment liberalisation. Origins and development of the ASEM framework The original idea for the ASEM can be attributed to Singapore’s Prime Minister Goh who first raised the issue of establishing an EU-East Asia inter-regional arrangement on an official visit to Paris in October 1994. This typified the geoeconomic aspirations of Singapore, which had also been a fervent advocate of APEC in its earliest stages. As Camroux and Lechervy (1996) note, ASEAN was proving too small an arena for the prosperous micro-state to conduct collaborative international economic relations and sought to establish itself as a pivotal player within grander frameworks. Given the potential for the EU’s marginalisation in a world economy dominated by a transpacific axis, it was somewhat surprising that the ASEM initiative came from an East Asian source. The subsequent cool reception from the EU’s political leaders is perhaps even more surprising, although Europe’s business community offered a warmer welcome. The basis for a more positive response from the EU was, however, being developed elsewhere. In July 1994 the European Commission had promulgated its ‘New Asia Strategy’ which argued that stronger ties between the EU and East Asia needed to be nurtured (CEC 1994a). During the same year there had also been a thorough review of EU-ASEAN relations. The ASEM initiative has been interpreted as an extension of this long-established inter-regional arrangement. Indeed, it was at the ASEAN-EU Foreign Ministers Meeting of November 1994 that the impetus for the first ASEM originated. Most of the ASEAN states lent considerable support to it, with only Malaysia’s Asia-centric Prime Minister Mahathir expressing any significant doubts regarding ASEM’s value. Others were to arise among other members of the East Asia 10. Japan’s circumspection at joining the new framework mainly derived from fear of upsetting the USA, but also because it saw little need to extend its diplomatic contacts with the EU beyond established bilateral, plurilateral (i.e. OECD and G7) and multilateral links. China was also initially reluctant, but because of an aversion to any international forum where it could become the target of Western criticism over such issues as human rights or its state-trading practices. However, Korea saw the ASEM as an opportunity to diversify its foreign economic relations and to assist the global strategies of its chaebol multinationals (Chun 1996). By early 1995 the principle of the ASEM was accepted by both the EU’s leaders as well as by those doubters on the East Asian side.34 The First ASEM

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summit was convened at Bangkok over 1–2 March 1996. Leading up to the meeting, the EU succeeded in securing a high-level and broad consensus among all fifteen member states.35 This was an important achievement, given the close ties and hence specific interests that some EU countries had with some East Asian nations. It could also be contrived as a triumph of neo-liberal over neo-realist logic as EU member states both individually and collectively had much to gain from building a closer economic relationship with East Asia, notwithstanding the salience of certain national interests such as Portugal’s dispute with Indonesia over human rights issues in East Timor (see Chapter 3). The European Commission played a key part in orchestrating this consensus and helped present a common EU agenda on global trade access and other WTO-related issues. Ironically, this consensual approach was not reflected in the behaviour of the ASEAN states which were keen to present their own distinct ideas about ASEM. For example, Singapore proposed that a special think-tank should be formed, the Asia-Europe Foundation, which was subsequently established in Singapore itself. Thailand was also enthusiastic to make its mark by suggesting that an Asia-Europe Business Forum be created. Meanwhile, Malaysia wanted to use the event to help secure a co-ordinating role in a transasian railway network project. These joined a host of other initiatives that emerged from the Bangkok meeting, which on balance was more focused and of greater substance than anyone had anticipated. This was particularly the case for economic-related matters which continue to dominate the ASEM agenda. It is here that the Senior Officials Meeting on Trade and Investment (SOMTI) group plays a central organising role, based on two main objectives. The first is to examine the proposed measures of its working groups to facilitate greater trade and investment between East Asia and the EU, while the second is to discuss WTO issues that have implications for the ASEM process. Economic and Finance Ministers Meetings also provide a higher political level input to these proceedings (Table 8.1). As with APEC, an intended purpose of the ASEM is to pre-discuss WTO ministerial meeting issues so to establish preliminary negotiating positions and possibly resolve anticipated conflicts prior to multilateral talks. This is consistent with aspects of ‘open regionalism’ to which the ASEM has an expressed commitment. The ASEM’s creation of fora within which EU-East Asia dialogue on new multilateral issues can be expanded also concurs with the WTO’s own notion of how regionalist, or inter-regionalist initiatives can be compatible with the multilateral process (WTO 1995). This relates both to how there has been a convergence of interest at the regional and multilateral level in removing similar non-discriminatory trade barriers, and to how RIAs can provide the ‘building blocks’ as opposed to the ‘stumbling blocks’ to establishing global free trade through inter-regional agreements. Moreover, as ASEM does not share APEC’s preoccupation with tariff liberalisation or market access issues, it is unlikely to represent an alternative regime to the WTO. Nevertheless, the commitment of all Triadic inter-regional arrangements to the principle of open

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Table 8.1 The ASEM: main elements

Source: European Commission.

regionalism is yet to be comprehensively tested, thus posing a latent threat to the new multilateral order. However, the main purpose of ASEM is to promote greater economic exchange between both regions. Much of this depends on the success of the Trade Facilitation Action Plan (TFAP), the Investment Promotion Action Plan

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(IPAP) and the Working Groups on Customs Co-operation (see Table 8.1). The prominence of the ASEM’s economic aspect over its political and socio-cultural equivalents can be largely explained by the fact that trade, investment and technological co-operation all constitute broad common denominators of interest, and hence offer the most scope for collaboration between the two regions. Both sides concurred with the principle that trade liberalisation should still be pursued through the WTO and that the ASEM should thus concentrate on promoting economic exchange between them. Business representatives have been conferred a crucial role here, as demonstrated in the TFAP, IPAP and the Asia-Europe Business Forum groups. At ASEM1 in 1996, EU and East Asian leaders were only prepared to make a ‘trial-run’ commitment to the inter-regional framework by planning for just two further summits. These were to take place on a biannual basis, the first in London in April 1998 and the second in Seoul in the year 2000. While no concrete plans were made in London to extend the summit schedule beyond Seoul, the better than anticipated success of ASEM presents a convincing case to do so. Both sides have already invested much political capital in the ASEM process and have much to gain by its perpetuation for reasons we shall later elaborate. It is therefore likely that at ASEM3 in Seoul there will be a consensus to establish an ‘ASEM4 plus’ framework. Two outcomes from ASEM2 provided evidence to support this conclusion. First, the proposal to create an ASEM Vision Group, whose main function was to consider medium to long-term perspectives on how EU-East Asia co-operation could be further promoted, was endorsed at the London summit. Second, a schedule for future core ASEM meetings was also agreed in which the ABEF group would convene at Singapore in 2001. The ASEM’s operational dynamics Events leading up to and during ASEM 1 demonstrated how East Asia’s comparative heterogeneity led to the prominence of state-centred over region-centred objectives, thus lending credence to neo-realist modes of behaviour. We noted earlier that this contrasted with the EU’s approach, but this was to be expected given both its relatively homogeneous collection of member states and degree of supranational cohesion. In a communication document the European Commission acknowledged that, especially with regard to private sector activities, ‘the diverse economic situation in Asia would suggest that a diversified approach could be preferable’ (CEC 1996d:9). This may imply that the division of the East Asia 10 into specific country subsets (e.g. Japan and Korea in the industrialised subset) may prove a more useful structure of relations for the EU within the ASEM. Matters concerning the ASEM’s operational dynamics and any unique or complementary functions it could perform have been discussed by Segal (1997) in the context of subsidiarity, that is at which level of authority is an issue to be managed most effectively. Hence this posed two general questions: what issues can best be left to the ASEM process or what can also be better achieved at the ASEM level? Segal admitted that certain issues were best handled by the subset or ‘variable

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geometry’ approach noted above, based on where obvious commonalities of interest or expertise were apparent between certain EU or East Asian countries. Although he did not suggest what these might be, we could take international finance as an example where Japan, the UK, Germany and France could consider forming a separate focus group within the ASEM framework. However, the interdependencies brought on by globalisation make the disaggregation of national economic interests increasingly difficult and inappropriate. It also may serve to undermine the inter-regional structure of ASEM relations. Such an approach, if adopted, should therefore proceed with caution. We noted earlier that the ASEM could be used by the EU and East Asia to keep the USA committed to multilateralism. It therefore follows that the more adversarial the USA proves in international economic relations, the closer the ASEM alliance may become (Ferguson 1997; Higgott 1998a). The ASEM may also provide a forum in which both sides can explore general lessons from the other. It was suggested by Segal that the EU could look to East Asia for ideas on how to revitalise their economy while the more advanced economies of East Asia may examine how Europe has managed the process of ‘mature growth’. For Camroux and Lechervy (1996), the general interaction between European and East Asian countries is determined to a significant extent by the sociological features of each region. This relates to the much peddled notions regarding the ‘consensual’ Asian way which contrasts with the ‘contractual’ European way and how this influences EU-East Asia diplomatic and business negotiations. The degree to which a common set of sociological values has coagulated within each regional group is highly disputable. Furthermore, within Europe atomistic Anglo-Saxon values are frequently at odds with continental communitarianism, the latter, it has been argued, even sharing similarities with Confucian ethics.36 The ASEM will nevertheless have proved a worthy exercise if it succeeds in closing the considerable cultural and psychic distances that exist between both sides. Although the ASEM has already demonstrated its potential to raise the EUEast Asia partnership to a new level, questions persist over how this new interregional framework is supposed to interface with established bilateral ties. Again the subsidiarity principle is relevant here as many ASEM initiatives have taken their course through bilateral channels. For example, in April 1997 the EU and Korea signed an agreement on customs clearance and mutual assistance as part of the ASEM process. We should remember, though, that the ASEM serves as a dialogue framework and not a forum for resolving specific disputes which remains the competence of bilateral and multilateral channels. However, the ASEM’s relative informality has helped ease the path of bilateral relations in more sensitive areas, such as investment regulations. In addition, the ASEM has provided some new impetus to EU-East Asia bilateral ties, if only by reminding each partner that their relations are now constituent to a broader framework. While the EU may be able to establish the collective authority to conduct ‘one-on-one’ inter-regional relations, the realisation of an East Asian common position on any significant ASEM issue is highly unlikely for reasons stated

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earlier. Moreover, as I have argued elsewhere, a common agenda that stems from the policy goals of East Asia’s more dominant states may be to the detriment of their weaker neighbours (Dent 1998b). This may be because the latter group could lack the technocratic capability or general resources to implement relatively sophisticated and ambitious arrangements to the same effect, or keep to a similar ASEM time-scale as their richer counterparts. Obvious parallels can be drawn here with APEC in its own endeavours to install the 2010/2020 free trade and investment zone. Future prospects for the ASEM: beyond Seoul 2000 The strategic value of the ASEM to the EU in geoeconomic terms should not be understated, given its potential for economic marginalisation in the ‘Pacific Century’. For the East Asian countries too, the ASEM offers considerable strategic benefits, especially with regard to counterbalancing US influence in their region. Although the ASEM does not aspire to match APEC’s current ambitions, it is worth noting that the latter’s earliest beginnings were also relatively humble. Indeed, ASEM’s initial aims and outcomes were arguably more substantial than APEC’s, with it seeking to promote co-operation and exchange in not just economic affairs but in political and socio-cultural affairs as well. However, it is the ASEM’s economic dimension that can be anticipated to make by far the most progress, especially considering East Asian resistance to European calls for greater co-operation on ‘new’ security issues, e.g. the environment and organised crime. The EU, though, is more willing to include some liberalisation measures into the ASEM process, but its Asian partners are not, which would seem to indicate their reluctance to enter into another APEClevel arrangement. Thus far, outcomes from the ASEM have had more significance for EUEast Asia bilateral relations than those conducted at the multilateral level, although it is more difficult to estimate the full impact of SOMTI’s work in preparation for WTO ministerial meetings. The initial sentiments felt among the East Asian 10 over ASEM may still determine the policy stance adopted by each power. For Japan, the well-established and broadly institutionalised nature of its economic relations with the EU have meant that Tokyo continues to attach relatively little value to ASEM. Moreover, the country’s discomfiture at assuming even a de facto leadership role in East Asia, which ASEM has at least some potential to promote, is well documented (see Chapter 4). China remains wary of ASEM’s scope for including human rights and politicised issues on its agenda, although it has arguably helped further legitimise its claim for WTO membership to some degree by engaging in multilateral agenda issues. More interest in the ASEM has been generated in Korea than in either Japan or China owing to the importance it continues to play in ‘globalising’ the country’s international economic relations. Among the ASEAN states, the ASEM is generally perceived as a projection of its pre-existing inter-regional relationship with the EU onto a broader canvas. Hence, by being at the original centre of this arrangement, the group see ASEM as

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presenting new opportunities to imprint more firmly their own interests both in relations with the EU and with their more powerful regional neighbours. The geoeconomic advantages of including East Asia’s three largest economies into an extended inter-regional partnership with the EU were not missed by Singapore’s Prime Minister Goh. Other countries from both regional territories have also expressed their desire to participate in ASEM. However, the East Asian side were not enthusiastic about allowing those of Indian sub-continent and Australasian origin to join, and moreover are not perceived by the EU as integral to the East Asian economic dynamic. Taiwan had expressed interest in being conferred observer status but Beijing’s continued resistance to any initiative that in some way legitimises Taiwan’s sovereignty will remain a significant obstacle. Furthermore, as Hong Kong is only able to exercise economic sovereignty (as a separate customs authority and monetary regime to the PRC) it cannot participate in ASEM owing to its political dimension. Conclusion This chapter has examined the regional and inter-regional aspects of the EU East Asia economic relationship. We shall, as usual, draw conclusions on the preceding analysis from the perspective of different IPE theories. For neorealists, the salience of the nation-state in the regional and inter-regional processes we have studied is still apparent. The agendas of both APEC and the EU are perpetually contested over by their member states, and hence any inter-regional arrangements will reflect this. Portugal’s ongoing dispute with Indonesia over East Timor is a case in point. Depending on the relative strength of the regional hegemon, these agendas could be significantly prejudiced by just one state. As we have seen, most East Asian states have been wary of the hegemonic exertions of the USA within APEC. While Japan and China also have hegemonic potential, they act as a counter-balance to US influence. Within the EU, Germany’s position is more effectively counter-balanced by three proximate powers (France, the UK and Italy) and furthermore by the degree of authority deferred to supranational agencies. East Asia’s proclivity for informal intergovernmentalism partly explains why many of the region’s states did not hesitate to project their own national interests onto ASEM, which contrasted with the EU’s more unified approach. Neo-realists would further contend that inter-regional agreements are similar to RIAs in that they are essentially voluntary exercises in co-operation which ultimately rely on the convergent whims of states that have identified a common interest or interests to collaborate.37 In addition, even a supranational position adopted by an inter-regional partner is still derived from the collective authority of states and their need to defend national sovereignty against external challenges. Thus, inter-regional relations simply reflect a mixture of separate nation-state interests that seek realisation within an anarchic interstate system. This may make the emergence of a consensual position within each participating

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regional group rather elusive, especially if some member states are more willing to score relative gains over others rather than co-operate to generate higher absolute gains enjoyed by all group members. In such an instance, Scharpf (1985) suggested that greater executive power conceded to supranational agencies would help secure the absolute gains of collaboration. However, we noted the EU’s unified position at ASEM1 was due more to a strong consensus of opinion rather than supranational engineering. The neo-realist emphasis on the balance of power between competing states, or even regions, also has relevance. The ASEM could perform an important function for the EU by counteracting the transpacific alliance. In its geoeconomic context, the ASEM is thus the EU’s potential insurance policy against possible economic marginalisation in the twentieth-first century. Although neo-liberals argue that the fixation with such territorial referenced rivalry has become increasingly redundant in the era of globalisation, APEC’s work towards creating the world’s largest free trade regime nevertheless presents a significant challenge to the EU. Yet any geoeconomic threat that APEC poses to the EU may be overstated. Unlike the EU, APEC lacks an unitary actor capability—for example, to negotiate in multilateral trade talks—and hence this limits its power of leverage within the international economic system. Depending on how effective its commitment to open regionalism, APEC may also produce considerable tariffrelated ‘free rider’ benefits for the EU and, moreover, help drive forward the WTO’s new trade agenda which is also to the EU’s general advantage. The East Asian states also value ASEM in ‘balance of power’ terms. The EU’s plans for EMU and enlargement are expected to raise Europe’s geoeconomic weight and hence the need to promote closer ties with the region. In addition, ASEM is seen by many East Asian states as a means to counteract US hegemonic power and generally diversify their economic relations, with the region’s financial crisis lending greater imperative to the latter. It has therefore been important for the EU to be perceived as a dependable economic partner through the crisis period (see Chapter 9). Chapter 2 noted the somewhat modest assistance that EU member states were willing to confer to help resolve East Asia’s financial problems. Depending on how this crisis unravels, a more generous EU disposition towards the region should be advised. To neo-liberal theorists the very fact that ASEM is a co-operative regime is crucial to any debate that concerns it. According to neo-liberal thinking, the emergence of the ASEM and similar arrangements are part of managing the ‘complex interdependence’ that prevails in the international economic system. Growing transnational linkages between the EU and East Asia and other commonalties produced by globalisation have forced representatives from both regions to work more closely together. This not only involves state actors but also non-state actors whose role in the ASEM process and EU-East Asia economic diplomacy in general has become increasingly prominent. Business representatives play a key part in ASEM, as demonstrated in the TFAP, IPAP and AEBF groups, not least because promoting transnational economic linkages has emerged as the regime’s principal function. Networking between

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multinational company executives is thus given tantamount importance to dialogue between public policy officials. Understanding each region’s own transnational economic dynamics (e.g. SREZs), as opposed to just state-defined economies (e.g. France, Malaysia), is also pertinent to developing closer interregional ties. On another matter, the more co-operative diplomatic environment engendered by ASEM can have positive externality effects for other fora, such as the WTO. However, Marxists would adopt a different view by suggesting that the ASEM is merely an exercise to underpin the prevailing structures of the global capitalist system. In a converse interpretation of the neo-liberal ‘co-operative’ perspective, the ASEM could be seen as deflecting the focus away from EUEast Asian commercial conflicts and thus simultaneously safeguarding the transnational business interests of both regions. Marxists would also stress how the ASEM fortifies the dominant Triadic structure of the world economy, hence reinforcing the core-periphery divide between industrialised, or fast industrialising economies and poorer, less dynamic regions, e.g. sub-Sahara Africa, Central Asia and much of Latin America. The extent to which ASEM consolidates the tripolar structure of the world economy remains, at this point in time, pure speculation. Even if ASEM develops a similarly ambitious agenda to APEC’s, both must take their place among the proliferation of regional and inter-regional arrangements that have emerged within the international economic system. By the late 1990s, ASEM’s value remained largely symbolic. This may continue to be the case if the EU and East Asia remain distracted by more pressing extra-regional issues or by their own introspections, e.g. EMU, the financial crisis. However, for the EU in particular the geoeconomic motivation for adding greater substance to ASEM is likely to increase as the twenty-first century proceeds.

9

Future prospects for the EU-East Asia economic relationship

Introduction This text has examined the development and dynamics of the EU-East Asia economic relationship at various levels of analysis. It has studied how the bilateral, inter-regional and multilateral dimensions of EU-East Asia economic diplomacy have evolved to their current state, considering both its promotive and defensive aspects. The growth in economic exchange between the two regions has also been analysed, from which we have seen how the commercial interests and linkages of European and East Asian firms have become increasingly interdependent. It has been shown how developments at the substate, state and regional level have brought their own influence to bear upon EU-East Asia economic relations. Finally, this text has considered different IPE theoretical perspectives on syntheses of the above to enhance an understanding of the substantive issues covered by each chapter. The main aim of this concluding chapter is to reflect on the future prospects of the EUEast Asia economic relationship. This entails a discussion on those factors most likely to determine the path of this relationship as the twenty-first century proceeds. Future determinants In assessing those determining factors most anticipated to shape future EUEast Asia economic relations we shall examine the impact and legacy of the East Asian financial crisis, plans for future EU integration, the Asia-Pacific Economic Co-operation (APEC) forum and the transpacific axis, the US factor in these relations, the World Trade Organisation (WTO) and the new multilateral agenda, the evolution of the Asia-Europe Meetings (ASEM), the future direction of the EU’s New Asia Strategy and the contested relevance of globalisation, geoeconomics and territoriality. The impact and legacy of the East Asian financial crisis East Asia was the world economy’s pole of strength for much of the 1990s. However, the financial crisis that set root in the region in 1997 undermined

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confidence in its continuation of this role into the twenty-first century. If the crisis leads to an eventual atrophication of East Asia’s economic dynamism, and hence a lower order position within the international economic system, then the EU can be expected to afford less priority to the region in its hierarchy of economic relations. If, on the other hand, the crisis has only a short-term effect on East Asia’s future growth trajectory, then the region’s importance to the EU will remain. Most of the fundamentals that produced the initial East Asian economic miracle are still intact, e.g. human resource development, fervent entrepreneurship, business network flexibilities. Furthermore as Drysdale et al. (1998) contends, East Asian growth is still essentially based on industrialisation for the world market. This view, though, presupposes that the global demand for East Asian exports will not be greatly affected by the crisis itself. Haggard and MacIntyre (1998) make the point that any immediate judgement on whether the crisis has invalidated the East Asian model of development should be reserved, and cite Mexico’s shift recovery after its own 1994–5 financial crisis as a caution.1 It has been noted in previous chapters that the bilateral and global impacts of East Asia’s financial problems upon Europe have necessitated the EU’s policymakers helping to find solutions to those problems. This process has produced an expansion of policy networks between representatives from both regions, adding to the work already initiated by ASEM and a general acknowledgement of the ‘complex interdependence’ of interests that links them. As argued in Chapter 8, the crisis also gives the EU an opportunity to demonstrate what a dependable economic partner it can be to East Asia during such a period of difficulty. This has become particularly resonant in the context of what Higgott (1998b) refers to as the ‘politics of resentment’ that has developed in East Asia towards US Schadenfreude over the apparent demise of the region’s ‘developmental state’ model, and moreover regarding subsequent US-led institutional arrangements aimed at crisis resolution, for example, IMF prescriptions which have been under heavy US influence. Key US policymakers have been at the forefront of articulating a post-crisis triumphalism of neo-liberal, ‘free market’ capitalism over its Asian-style counterpart.2 Furthermore, Belo (1998:434) observed that the USA saw the crisis as an opportunity to ‘achieve what it has been trying to push over the last decade, with little success: the free market transformation of economic systems that are best described as state-assisted capitalist formations’.3 Generally speaking, EU policymakers have not adopted the same triumphalist stance with respect to the crisis. Despite the fact that neo-liberalism made significant ideological advances in Western Europe during the 1990s, the prevalence of the European ‘communitarian’ social market model is still apparent in many key EU member states such as Germany and France. This helps explain why many EU politicians subscribe to the view that crisis resolution lies in greater market reregulation as opposed to deregulation, the preferred mantra of US policy elites.

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Thus, the slight unhinging of the transpacific axis as a consequence of the crisis, together with the relative commonality between the European ‘social market’ model and Asian-style capitalist model, presents a case for fortifying the Eurasian axis. As we further note below, in a post-hegemonic scenario, the EU and major East Asian powers must assume greater systemic responsibilities. Crisis conditions may themselves provide an important opportunity here, for example, by both sides co-initiating a global ‘stability pact’ comprising a jointly engineered framework for closer policy co-operation and co-ordination in which the USA and other states participate. However, the ASEM process in which such proposals are most likely to emerge has failed to deliver on this account. Plans for further EU integration Over the next few years, the EU will be preoccupied with its plans for economic and monetary union (EMU) and its enlargement into Central and Eastern Europe (CEE). This could affect its economic relations with East Asia in many ways. Depending on how successful these two projects are, the EU’s geoeconomic weight and leverage within the international economic system should increase significantly. It is already the world’s largest trader and overseas investor. By establishing the euro as a credible global currency, the EU will pose a serious challenge to US financial hegemonic power. Although we discussed in Chapter 1 how such structural shifts in geoeconomic power can take time to effect, East Asian state and non-state actors nevertheless must at least prepare for this possibility, leading to a revitalised interest in EU integration. More generally, EMU’s trade and investment effects should also be closely considered. This primarily relates both to its potential to enhance intra-EU economic exchange— thus diverting extra-EU flows trade and FDI—and also how EMU’s dynamic integration effects could improve the competitive position of EU firms vis-à-vis their East Asian rivals. The extension of the Single European Market into the CEE region also has important ramifications for East Asian producers. Many of the CEE countries are proximate economic rivals to their East Asian counterparts, possessing comparative advantages in similar industrial sectors. It is therefore conceivable that their accession to the EU will have additional trade diversion effects to East Asia’s detriment. As Table A.3 indicates, the CEE countries’ share of extra-EU imports and exports rose sharply over the 1990–7 period from 5.4 per cent to 9.0 per cent and from 6.2 per cent to 12.1 per cent, respectively. However, this more intimate EU-CEE trade relationship owes much to the gradualised free trade arrangements of the ‘Europe Agreements’, and hence cannot be solely attributed to the CEE’s new-found commercial prowess or dynamic economic development. In these respects, East Asian countries and the region as a whole still have the advantage. APEC and the transpacific axis Chapter 8 discussed at length the impact of APEC and the transpacific axis on EU-East Asia economic relations. To summarise, the future development of

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APEC could have a positive, neutral or negative overall effect on the EU’s geoeconomic position. By acting as a force to promote global free trade by 2020, and offering ‘free rider’ tariff-related benefits along the way, APEC should be seen as having a benign influence upon the EU’s commercial interests. Its contribution to pushing forward the WTO agenda into new areas, as shown by the APEC-inspired Information Technology Agreement, has already been demonstrated and subsequently welcomed by the EU. Many APEC members also support the EU’s call for a Millennium Round of global trade negotiations at the WTO. These developments should serve to improve the sense of partnership between the EU and East Asian states, although this relies upon a convergence of interests between EU and APEC agendas. Even if a shared global agenda emerges between these two regional groups, the EU must still take account of APEC’s capability to consolidate further the transpacific axis. As with the EU’s plans for economic integration noted above, APEC retains the potential to marginalise the commercial interests of nonmember states. Notwithstanding the ‘open regionalism’ principle to which its members prescribe, APEC’s focus both on reinforcing microeconomic linkages across the Asia-Pacific and promoting more extensive policy co-operation within its territorial boundaries has generated significant concern for EU policymakers and business (CEC 1995d). Moreover, APEC could take recourse to the preferential free trade area route if its extra-regional trade partners prove unwilling to comply to its ultimate objective of establishing global free trade. It should be remembered, however, that 2020 remains a distant future date and APEC’s destined path is by no means assured. As Chapter 8 observed, the USA’s continued penchant for specific reciprocity in its trade agreements, which runs counter to APEC intended policy of ‘concerted unilateral liberalisation’, as well as the crisis-related tensions that were palpable among APEC’s membership during the 1997 and 1998 summits, provide two important reasons for adhering to this view. The US factor A central focus of this book has been the Triadic context of EU-East Asia economic relations. This has been approached from different perspectives. First, the strength of the US economic relationship with East Asian states and the region generally was a prime motivating force behind the EU’s development of a ‘New Asia Strategy’ and sponsoring of closer commercial ties with East Asia. However, previous chapters have shown how the USA’s intimate security, political and cultural ties retained with many East Asian states underpins its economic relations with them to an extent that continues to disadvantage EU trade and investment interests. The ‘policy of obligation’ still pursued by states such as Japan, Korea and Taiwan towards the USA, as manifest in bilateral market access deals, has often frustrated EU policymakers and companies alike. Notwithstanding the new crisis-related friction in USA-East Asia relations noted above, the EU is unlikely to develop the same breadth of ties and thus

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may be condemned to the secondary tier within most East Asian states’ hierarchy of diplomatic relations. Second, despite the US economic resurgence of the 1990s, we have assumed that a post-hegemonic global economic order has emerged over the longer post-war period. From the East Asian region, Japan and China are the potential candidates to co-manage this new order along with the EU and USA. This, though, assumes that such a communal regime can endure within the international economic system, which neo-realists particularly stress ultimately depends upon the prevalence of hegemonic stability. It is not yet conceivable for any power other than the USA to fill this singular leadership role. Even if the USA continues to play the default world hegemon, the EU and major East Asian states nevertheless must take on greater systemic responsibilities. This itself provides a firmer basis to nurture the EU-East Asia economic partnership. A third perspective has been much less considered by this text, this being the impact of the transatlantic relationship on EU-East Asia economic relations. While East Asia overtook North America in 1992 to become the EU’s most important regional trading partner, Europe’s ties with the USA remain strong for the same sort of reasons that undergird the transpacific relationship.4 The creation of a Transatlantic Free Trade Area (TAFTA) has been supported by a number of policymakers and business representatives from both sides of the ocean. Although TAFTA is an improbability, the US economic renaissance of the 1990s reminded the EU of its importance as a key economic partner.5 East Asia’s financial crisis has served to reinforce this (Lehmann 1998). These developments therefore constitute a further potential distraction to developing the EU-East Asia economic relationship. The WTO and the new multilateral agenda The future multilateral dimension of EU-East Asia economic relations was explored by Chapter 2, but it is worth re-examining the main themes covered. Many East Asia states remain suspicious of the EU’s promotion of ‘new’ trade issues (e.g. trade and competition policy, trade-related investment measures, environmental and labour clauses) within the emerging WTO agenda. This is primarily due to the focus of these issues on removing ‘internal’ barriers to international trade and hence further multilateralising of the traditional domestic policy realm. A particular concern of less developed East Asian countries is that this trend shifts attention away from liberalising labour-intensive industries, e.g. agriculture, towards the priority concerns of advanced capital-intensive countries. More generally the new or future multilateral agenda is to the EU’s advantage because of its preoccupation with removing East Asia’s ‘internal’ barriers to import. The EU’s structural power aspects discussed in Chapter 2 should also be considered. However, future pioneering WTO accords relating to ‘new’ trade issues are not likely to be forced upon unwilling members, but rather first established by

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plurilateral agreements between a core of compliants. Moreover, the domestic structural and policy changes that have been evident in many East Asian economies during the 1990s (e.g. Japan, Korea) have made them more amenable to the new trade agenda. The region’s most advanced and powerful states are also aware of the post-hegemonic responsibilities that they share with the EU and USA in upholding the multilateral trading system—a point previously mentioned. For this and additional reasons discussed in Chapter 5, China’s accession to the WTO will make a significant difference to the EU’s multilateral economic diplomacy with East Asia. As also noted earlier, the EU will be looking to East Asian WTO members to support its idea for a ‘Millennium’ Round of global trade talks, which constitutes an alternative approach to the WTO’s recent emphasis on sectoral liberalisation. The evolution of ASEM We discussed in Chapter 8 how the new ASEM dialogue framework has provided an important inter-regional dimension to EU-East Asia economic relations. However, the ability of ASEM to move beyond its current largely symbolic importance is contingent upon various factors. These include the ASEM process making a significant contribution to these relations that is not already being performed elsewhere at the bilateral, plurilateral (e.g. via the OECD) or multilateral level. It seems improbable that ASEM will emulate APEC’s trade liberalisation agenda, although it could provide a forum in which embryonic WTO accords are hatched. There must also exist the political will and commercial necessity to push forward ASEM’s own agenda into managing more ambitious inter-regional, co-operative or co-ordinative acts. Both sides will be distracted by their own introspections over forthcoming years, as we have already established. While the considerable psychic and cultural distance between the EU and East Asia further impedes the advance of ASEM, the regular contact between regional representatives that the framework breeds will have distance-reducing effects. The EU and East Asia may also prove reluctant to develop ASEM if it is believed to have certain adverse external effects, for example, jeopardising the transpacific and transatlantic axes. As noted earlier, both sides must also contemplate ASEM’s failure thus far to offer imaginative and substantial joint-policy solutions to the East Asian financial crisis. Furthermore, ASEM’s future success is highly dependent upon the participation of EU and East Asian business in its dialogue and networking processes. Broadening this aspect of the inter-regional framework is key to enhancing ASEM’s practical value. The EU’s New Asia Strategy: quo vadis? Launched in 1994, the EU’s New Asia Strategy (NAS) established a more coherent approach to its relations with East Asia. However, a mid-term review is now required to evaluate progress on all fronts. Considerable advances have been made during the 1990s in the EU’s economic diplomacy with the Northeast

256 Future prospects for EU-East Asia economic relationship

Asian states (i.e. Japan, Korea, China), although progress with Southeast Asian states (i.e. ASEAN) has encountered problems. Moreover, the development of the EU’s economic relations with Hong Kong and Taiwan remains hampered by sovereignty-related constraints. An evaluation of the above, as well as the ASEM process and EU-East Asia economic relations in their multilateral context, now deserve considerable priority. The East Asian financial crisis lends additional urgency to conducting this exercise. It is conceivable that a review’s findings would prescribe the renewal of NAS objectives in the light of post-1994 developments, which have been significant and numerous. A more ambitious revised strategy would send a signal to the East Asian states of the importance which the EU continues to attach to the region. For reasons previously discussed, this could pay substantial longerterm geoeconomic dividends for the EU. Any such strategy must also implicitly acknowledge the lessons learned from the comparative development or current state of the EU’s economic relations with separate East Asian partners. For example, the EU’s experience with an emergent Japan during the 1960s and 1970s should continue to be drawn upon when relating to today’s ascendant China. Further, the realignment of the domestic-international bargaining structure in the EU’s economic diplomacy with Japan after the surge of Japanese investment in Europe should to some extent be anticipated in EU-Korea economic relations. The EU will also need to observe closely Hong Kong’s reintegration into China’s political structures as part of any future economic diplomacy strategy towards Taiwan. In addition, a revised East Asia strategy must consider the changing nature of the economic diplomacy itself. This especially relates to the increased salience of new economic security issues (e.g. environment, drug trafficking, economic migration, nuclear proliferation) and the more prominent role played by business, non-governmental organisations and other non-state actors in the diplomacy process. Globalisation, territoriality and geoeconomics The growing economic interdependence between the EU and East Asia can be largely attributed to advancing globalisation within the world economy. In recognising this, those promoters of the EU-East Asia economic relationship will persist in harnessing the forces of globalisation to achieve their objectives, for instance, by further encouraging business networking between the two regions. As this text has revealed, the EU still plays the ‘Cinderella’ role in East Asia in comparison to its core Triadic rivals, though this analogy is not intended to cast any aspersions on US or Japanese behaviour in the region. European companies started from a low position in East Asia at the beginning of 1990s, especially in Northeast Asia, but have made up some important lost ground as trade and investment figures for the decade indicate. Moreover, many EU firms have learnt important lessons from assimilating Japanese and other East Asian management and production methods. A further convergence of

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corporate practices between European and East Asian firms should provide important future opportunities for collaboration between them. Related to the above is the issue of territoriality. In analysing the EU-East Asia economic relationship, this text has assumed that a strong degree of home territorial loyalty and identification prevails in both regions. However, globalisation confuses the picture somewhat, particularly where transnationalised linkages are most visible. This was perhaps most clearly seen in Chapter 4 where those European firms and countries such as the UK that have become logistically and strategically dependent on Japanese inwardinvesting companies were willing to side with them in the EU-Japan bargaining structure. Of course, the loyalty blurring effects of globalisation are easily overstated and a sense of territorial identification remains important for most state and non-state actors. Notwithstanding some serious seismic activity, both Europe and East Asia will also remain distant geographic regions and moreover at a general cultural and socio-political contrast to the other. Thus, while globalisation may continue to shrink or warp territorial space, the EU and East Asian economies will remain two distinct entities with some definable geoeconomic relationship existing between them. The flourishing of this relationship in the early twenty-first century has important implications for less dynamic developing regions. Its further consolidation of Triadic prominence risks exacerbating the core-periphery divide in the world economy between industrial, or fast industrialising countries and less developed countries. However, as argued elsewhere in this text, the EU is faced with a possible economic marginalisation of its own as the two other Triadic regional economies coagulate within APEC’s free trade and investment zone. Thus, the geoeconomic imperative of promoting close ties with East Asia, its primary regional trading partner, will remain stronger than promoting those with ‘peripheral’ regions. Concluding note This final chapter has considered what broad factors will determine the future of the EU-East Asian economic relationship. These are reflective of the multiple levels of analysis that have been adopted by the text. All factors are likely to remain constants in the relationship for the foreseeable future. It is difficult to place these factors in order of significance for two main reasons. First, this is because some are mutually contingent upon others. For example, the EU’s future position vis-à-vis the transpacific axis depends on the interaction between APEC developments, the US position and the unravelling events and developments surrounding the East Asian financial crisis. Likewise, the future path of the ASEM process and the EU’s ‘New Asia Strategy’ are closely connected. Second, these factors affect the EU-East Asia economic relationship in different permutations of levels and types of interaction (e.g. microeconomic, politico-institutional, bilateral/multilateral, geoeconomic) which in themselves cannot be calibrated in terms of importance. Moreover, it has not been the aim

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of this text to adopt a singular line of argument but rather offer a synthesis of perspectives from which many objective conclusions can be drawn. If one particular point has been stressed throughout this text, it is that the EU-East Asia economic relationship has become one of the most important structural features of the world economy. While this relationship remains the weakest Triadic link, this text has argued that the continued expansion of EUEast Asia economic ties is to be anticipated. Powers from both regions should also be expected to undertake more definitive responsibilities in shaping the new economic order of the twenty-first century. Thus, the future evolution of EU-East Asian economic relations has important regional and global significance.

Appendix Table A.1 East Asian countries: comparative economic profile

Source: Economist Intelligence Unit (1998).

Table A.2 Economic growth in East Asia during the 1960s to 1990s (real GDP growth %, average annual for each decade)

Sources: World Bank Development Reports; The Statistical Yearbook of the Republic of China (1993); Asian Development Bank’s Asian Development Outlook (1994); Economist Intelligence Unit (1998).

Source: Eurostat. Notes 1 Taiwan omitted for these figures. 2 Central and East European countries: Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Romania, Bulgaria, Albania, Slovenia, Croatia, Bosnia HerzegovinaYugoslavia and Macedonia. 3 Commonwealth of Independent States: Russia, Ukraine, Belarus, Moldova, Georgia, Armenia, Azerbaijan, Kazakhstan, Turmenistan, Tajikistan and Kyrgyzstan. 4 Organisation of Petroleum Exporting Countries: Algeria, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, Venezuala. 5 Ceuta and Melilla, Gibraltar, Malta, Cyprus, Turkey, Algeria, Libya, Morocco, Tunisia, Egypt, Jordan, Lebanon, Syria, Israel. 6 Africa-Caribbean-Pacific group.

Table A.3 Geographic breakdown of the EU15’s external trade, 1960–97 (percentage per trade partner)

Source: Eurostat. Note 1 Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand.

Table A.4 EU-East Asian trade: sectoral analysis in 1997 (Ecu million)

Source: Eurostat.

Table A.5 EU industrial trade with East Asian countries: top ten positions of East Asian trade partners in selected extra-EU export markets and import sources (1997)

Appendix

263

Table A.6 Cumulative stocks of foreign direct investment in developing East Asia by Triadic source (1980, 1985, 1993, 1996)

Source: UNCTAD, Division on Transnational Corporations and Investment database. Notes 1 Indonesia, Malaysia, Philippines, Singapore and Thailand. 2 1980 and 1985 figures are 1984 and 1987 data respectively. All figures based on approved FDI flows. 3 Secondary sector only and 1985 figures are 1984 data. 4 1980 and 1985 figures are 1981 and 1986 data, respectively.

Source: Eurostat.

Table A.7 Extra-EU trade and the East Asian financial crisis (1997–June 1998)

Source: DG1, European Commission. Note: Most investigations lead to the imposition of an ADD.

Table A.8 EU anti-dumping investigations initiated against trading partners

Sources: IMF, Eurostat. Notes: Intra-EU and extra-EU figures refer to EC12 for the 1960–1990 period; EFTA figures refer to Austria, Finland, Iceland, Liechtenstein, Norway, Sweden, Switzerland for the 1960–90 period; Latin America includes Caribbean countries.

Table A.9 Patterns in international trade (percentage shares of total by trading partner, 1960–97)

Notes

1

The international political economy of EU-East Asia relations: theoretical perspectives

1

Of course, economics had itself evolved out of the study of political economy but by the ‘marginal revolution’ of the late nineteenth century had somewhat divorced itself from political science. For example, the power of EU authorities to shape the regulatory environment of the Single European Market. This was most infamously demonstrated by the US Smoot-Hawley tariff in which import taxes rose by an average of 40 per cent. The collapse of the Bretton Woods exchange rate system noted earlier in which the dollar was the anchor currency was especially portentous. As encapsulated by the 1974 Trade Act which included the notorious Section 301 provisions for discretionary unilateral action against the illicit commercial practices undertaken by US trade partners. Regimes can be defined as ‘sets of implicit or explicit principles, norms, and decisionmaking procedures around which actor’s expectations converge in a given area of international relations’ (Krasner 1982:186). They can also take the form of ëepistemic communities’ whose ideas on how to enhance international economic co-operation are intended to provide guiding principles to the conduct and structure of economic relations. For EU-East Asia economic relations, these have included the Asia-Europe Foundation and the Council for Asia-Europe Co-operation (CAEC) at the ASEM level and the Eminent Person’s Group (EPG) in EU-ASEAN relations. Examples include the ASEAN-EU Business Council and the ASEM’s Trade Facilitation and Investment Promotion Working Groups.

2 3 4 5 6 7

8

2 1 2

EU-East Asia economic relations: an overview of recent developments

In a further distinction, the ‘core’ Triad powers refer to the EU, Japan and the USA. ASEAN was created in 1967 with its original member states comprising Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei joined in 1984, Vietnam in 1995, Myanmar and Laos in 1997. Cambodia is due to join shortly. 3 For example, see Chen (1979), Balassa (1981), Lee (1981), Turner and McMullen (1982), White (1988), Wade (1989), Appelbaum and Henderson (1992), Gereffi and Wyman (1992), Chowdhury and Islam (1993), Henderson (1993), World Bank (1993), Clark and Kim (1995), Das (1996) and Thompson (1998). 4 See Kwon (1994), Lall (1994), Smith (1995) and Weiss (1995). For further debate on the state-business relationship in East Asia’s development see Johnson (1982, 1987, 1995), Amsden (1989) and Wade (1989, 1990, 1993).

268 Notes 5 Chapter 4 discusses this issue in some detail. 6 With American involvement in both the Korean and Vietnamese wars came substantial inflows of capital and high levels of demand for locally sourced products. 7 I provide a summary on the general determinants of East Asia’s dynamic economic development elsewhere (Dent 1997a). 8 For a discussion on the rise of both intra-regional trade and investment in East Asia, see Naya and Ramstetter (1988), Riedel (1991), Borrmann and Jungnickel (1992), Lucas (1993), Urata (1993), Graham and Anzam (1994), Kirkpatrick (1994), Lloyd (1994), Kojima (1995) and Petri (1995). 9 These include Winchester (1991), Gibney (1992), Borthwick (1992), Abegglen (1994), Fallows (1994), Fingleton (1995) and Mahbubani (1995). 10 Examples here include Coker (1988), Abramowitz (1993), Cumings (1994), Kim and Lau (1994), Krugman (1994a), Manning and Stern (1994), Young (1994), Lingle (1998) and Zuckerman (1998). 11 For a full list of East Asian financial crisis references and compiled reports, see http:// www.stern.nyu.edu/~nroubini 12 See Montes (1998) for an early evaluation on the origins of the crisis. 13 In August 1997, the Indonesian rupiah was also allowed to float and suffered a similar fate. 14 The Malaysian government also took the decision to impose foreign exchange controls. 15 With Japanese capital included, these amounted to $100bn (The Economist, 7 November 1998). 16 Nihon Keizai Shimbun (12 January 1998). 17 Financial Times, 29 January 1998. 18 For studies on the wider Pacific economy (i.e. including North America and Australasia) see Nemetz (1990), Ariff (1991), Higgott et al. (1993), Bergsten and Noland (1993) and Garnaut and Drysdale (1994). 19 Textbook studies that specifically analyse the EU-East Asia economic relationship have been sparse. Maull et al. (1998) consider the broader relationship in which historical, political, security and economic aspects are analysed, while Slater and Strange (1997) have compiled a number of disparate analyses on the business relationships between European and East Asian countries. In another edited work, Drysdale and Vines (1998) examines the EU-East Asia economic relationship in a regional and global context. Regarding other studies, Johansson and Spich (1981) and Langhammer (1986) made respective early attempts at comparing trade patterns and EC trade policies towards East Asia. In addition, Borthwick (1992) has made a deeper historical examination of the economic relationship between the European powers and East Asia during the colonial period. My own work has explored different aspects of the EU-East Asia economic relationship in more recent years (see references). 20 It should also be noted that transpacific trade had overtaken transatlantic trade in 1982. 21 See Von Kirchbach (1992) for an analysis of this historic event. 22 This compared to Japan’s Ecu23.2bn surplus with the EU in the same year. 23 As Chapter 6 discusses, most of the exporting activity of Hong Kong’s firms is now located within China, which largely explains this trend. 24 This particularly relates to Hong Kong and Taiwan FDI across the Chinese diaspora. 25 See Randerson and Dent (1996) for a comparative analysis on Japanese and Korean FDI in Europe. 26 At $2.6bn and $3.7bn, respectively. However, Korean debt problems of 1997–8 caused many chaebol FDI projects to be subsequently downsized or postponed. 27 Singapore had invested $3,057m in the EU by 1995 (more than Korea). However, most investments were acquisitional and not of the ‘greenfield’ type. Moreover, unlike the Korean chaebol, Singaporean firms have not initiated multi-billion dollar FDI projects in Europe. 28 However, this would offset by an expansion of non-tradable activities (equivalent to 1%

Notes

29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

46 47

48 49

50 51 52

269

of gross national product) caused by improved terms of trade, increased capital inflows and subsequent lower interest rates (Financial Times, 24 September 1998). According to the Bank of International Settlements, by June 1997 European banks held $365bn in loans outstanding to Asian banks and companies, compared to $275bn for American banks and $45bn for Japanese banks. For example, Deutsche Bank, which was estimated to have around $16bn loans outstanding across eight Asia-Pacific countries in January 1998, suffered a 57% fall in net profits during 1997 (South China Morning Post, 19 February 1998). The EPC was the precursor to the present Common Foreign and Security Policy (CFSP). See Smith (1994) and Tooze (1994) for a discussion of this issue in the wider context of the EU’s foreign economic policy. However, this is not transcribed into a formal document. Moreover, national parliaments do not scrutinise such decisions closely and the European Parliament still enjoys only limited influence over how the CCP is conducted. Financial Times (28 July 1998). Other EU trading partners are also subsumed into DG1A (e.g. North America) and DG1B (e.g. Latin America). They all graduated from the US own scheme in 1989 (Kirkman 1989). The dispute over Taiwan’s sovereignty has denied its qualification for any formalised scheme of trade concessions. Over the 1991–7 period this share was even higher at 53.8%. The EU’s anti-dumping policy has been generally criticised by third countries for being more politicised than judicial. For a debate on this, see Holmes and Kempton (1996). See Hanson (1998). The 1970 EC-Japan trade agreement was the first significant EC-level trade agreement signed with a third country. For example, see Smith (1974), Ullman (1976) and Sklar (1982). This relates to powerful trade policy instruments used by the USA where a trading partner is deemed guilty of illicit commercial practices. owever, in the spring of 1997 the USA actually followed the EU’s own initiative on pressuring Japan to liberalise its discriminatory liquor tax regime. See Strange (1995) for a further debate on this general issue. The original G7 group comprised the USA, UK, Canada, Japan, Germany, France and Italy. It is conceivable that this could become a G4 gathering if the EU were to become a singular representative. This is more likely if economic and monetary union is successively achieved in the EU. USA-EC in 1990, EC-Japan in 1991, US-Japan curiously last in 1992. Many of those aspects of the Japanese economy that have experienced deregulation concern so-called ‘structural impediments’ to trade. These included Japan’s distribution systems, keiretsu business networks, discriminatory tax regimes and other structural features of the economy that were thought to explain its low import propensity. Over the 1985–97 period, Chinese imports attracted more ADD investigations from the EU than any other country, taking 13.8% of the total. Especially between Portugal and Indonesia over human rights issues in East Timor, the former Portuguese colony annexed by Indonesian armed forces in 1975. Most recently, EU-ASEAN economic diplomacy was suspended after a dispute in November 1997 at the Joint Co-operation Committee over Myanmar’s contested observer status in such meetings. Hong Kong SAR will continue to be a self-governing entity with its own legal code (except on defence and foreign affairs), separate customs territory status and currency. Although at time of writing Taiwan was expected to gain accession to the WTO by the end of 1998. Over the 1985–97 period, Korea attracted 32 ADD investigations from the EU, second only to China for any EU trading partner.

270 Notes 53 This was apparent in both ASEM’s work on customs procedures and APEC preliminary discussions on the Information Technology Agreement (ITA) prior to the WTO’s Singapore Ministerial Meeting in December 1996. 54 DG1 is responsible for the EU’s external relations. 55 At time of writing this latter group consisted of Cambodia, China, Laos, Taiwan and Vietnam. 56 This was clearly demonstrated at the first WTO Ministerial Meeting at Singapore where 335 representatives from 131 non-governmental organisations (NGOs) were in attendance. In June 1998, the WTO announced plans for enhanced co-operation with NGOs. 57 The EU has preferred to use a more positive incentive approach than the USA, as shown by recent changes made to its GSP scheme that reward environmental and labour standard good practice. However, at the Second WTO Ministerial Conference held in May 1998, European Commission President Jacques Santer confirmed the EU’s commitment to promoting environmental and labour standards as future WTO issues. 58 The plurilateral Government Procurement Agreement (GPA) of the Uruguay Round, to which the EU, USA and Japan were all signatories, was a major step forward in this area. 59 These included the EU, USA, Canada, Japan, Korea, Taiwan, Singapore, Hong Kong and Indonesia. 60 In its report on regionalism and the world trading system, the WTO concluded that in many areas covering rules and procedures for trade-related policies both regional and multilateral agendas shared complementary objectives. This especially applied where removing non-discriminatory trade barriers (as typified by the new trade issues in general) were concerned. See debate on ‘internal’ barriers to international trade that follows. 61 The origins of certain issues go back some way. For example, the connection between trade and competition policy was considered in the stillborn Havana Charter for an International Trade Organisation. 62 In the summer of 1997, the WTO launched its Working Groups on Trade and Investment, Trade and Competition Policy and Government Procurement. 63 For example, the International Labour Organisation (ILO) on labour standards and the World Intellectual Property Organisation (WIPO) on IPR issues. We should also note how the WTO is working in closer co-ordination with other powerful international institutions such as the IMF, with which it signed an agreement for future co-operation and collaboration on matters of trade and finance at the Singapore Ministerial. 64 At the WTO Singapore Ministerial, Malaysia’s Minister of International Trade and Industry, Dato’ Seri Rafidah Aziz, stated that the WTO cannot be ‘a multi-purpose organisation that can be called upon to debate and address…social issues…and the various social ills of the world’. 65 For some Japanese, this would specifically relate to Western attempts to multilateralise gaiatsu (foreign pressure) with the objective of removing Japan’s structural impediments to import. 66 The process of enforcement may be either vertical (i.e. organisation to member country) or horizontal (i.e. between members and within the member country). Qureshi (1996:138) argues that for the WTO the latter is more relevant and states that: ‘The WTO enforcement mechanisms are principally dependent for their efficacy on the initiative, disposition and characteristics of individual members—given that the framework of enforcement is horizontally orientated. The system is reliant on individual members’ policing their rights, rather than any external enforcement institution.’ 67 The most important example of this was the Japanese-sponsored Regional Seminar on the WTO and the Multilateral Trading System for Asian developing countries held at Jakarta in March 1997. 68 The Financial Times (10 September 1997:30).

Notes

271

69 In the first 100 disputes brought before the WTO, which covered the period July 1995 to August 1997, twenty were made by the EU but only fourteen were made by the East Asian group. Moreover, the latter were targeted in twenty-five cases ( Japan and Korea nineteen between them) while the former was the subject of complaint in only thirteen cases. However, the USA was even more active, being a complainant or co-complainant in thirty-four cases and targeted in nineteen, thus making it involved in over a half of the total in contrast to one-third for the EU. From the group, only Thailand has requested dispute consultations with the EU (import duties on rice), whereas the EU has been a complainant or co-complainant in disputes concerning East Asian countries in 9 cases, these being: Japan’s liquor tax regime, telecoms and navigational satellite procurement, sound recordings rules and pork import regulations; Korea’s liquor tax regime, telecoms sector and safeguard measures deployed on imports of certain EU dairy products; Indonesia’s automobile industry trade. 70 This derived from the fact that the campaign was attempting to persuade Korean consumers to curtail expenditure on luxury (and hence imported) items. 71 This touches on the notion that a ‘capability-expectations gap’ exists concerning the EU’s role in international affairs (Hill 1993). 3

The EU and ASEAN

1 Only Thailand resisted colonialism through a combination of territorial concessions and diplomatic skill. Colonial rule for the remainder lasted between 50 and 350 years. 2 Malaysia manufacturing sector represents a relatively high 40 per cent of GDP. Manufactures also account for around 80 per cent of the country’s exports, despite it being an oil and gas producer. 3 The Philippines is the only original ASEAN state whose manufacturing sector has actually contracted in relative GDP percentage terms, falling from 26.0 per cent in 1975 to 23.0 per cent by 1996. The economy also has the lowest growth record of any East Asian NIC (see Table A.1). 4 Long-standing political leaderships include Lee Kuan Yew in Singapore (1959–90), Mohammed Mahathir in Malaysia (1981-present) and President Suharto in Indonesia (1965–98). Godement (1997) notes that the strong authoritarian nature of such regimes have been justified on account of the need to resist the communist advance in the region. 5 For example, Indonesia’s REPELITA framework, Thailand’s National Plans, Singapore’s Economic Development Board and Malaysia’s New Development Policy which is also the basis for the longer-term ‘2020 Vision’ programme. 6 The USA’s involvement in the Korean and Vietnam wars brought an initial surge of investment in the region. 7 See Chapters 5 and 6 for detail on guanxi networks. 8 Singapore can be considered as one large EPZ. Malaysia installed its first EPZ in 1972 at Penang, the Philippines at Bataan in the same year, Indonesia at Jakarta in 1973 and Thailand at Lard Kranang in 1980. 9 Cambodia’s intended accession to ASEAN in 1997 was postponed after the Hun Sen coup. 10 With at least 40 per cent ASEAN-wide content. 11 These included unprocessed agricultural goods and other ‘sensitive’ products. 12 Major sectors that will have minimal tariff rates include machinery and electrical appliances, chemicals, base metals and metal articles. 13 In 1996, their respective unweighted average tariff rates were 17.0 per cent, 13.1 per cent, 15.6 per cent, 9.0 per cent, 2.0 per cent and 0.0 per cent. 14 In 1971, ASEAN’s intra-regional trade ratio was 21.4 per cent but by 1988 it had actually fallen to 18.0 per cent. However, by 1997 it had risen to 23.1 per cent (see Table 3.1).

272 Notes 15 Although the EC had established frameworks of relations with ‘looser’ country groups that pre-dated the 1980 Agreement: with Africa-Caribbean-Pacific (ACP) group through the Yaoundé and Lomé Conventions since 1963, and by a 1975 Memorandum signed with the Arab League. See Lukas (1989) for further analysis of this issue. 16 As part of the accession process, the three new entrants to the EC—the UK, Denmark and Ireland—were obliged to align their trade policies with the CCP in 1972, a year before entry. See Langhammer (1982a:137–40) for a discussion of this issue. 17 A trade preferences system that had been reserved for the ACP group, mainly consisting of past French colonies (see note no. 15). 18 See Tulloch (1973) for a discussion of ASEAN’s exclusion from the Lomé Convention. 19 The concept of the GSP originated from the United Nations as part of its ‘New International Economic Order’ initiative that aimed to redress imbalances between rich and poor countries. 20 ACP group members received preferential access to the EC market over GSP members. 21 Although according to the European Commission, this was because ASEAN lacked the ‘requisite institutional structures’ to manage such an agreement (CEC 1996b). 22 Notwithstanding these factors, Japan-ASEAN informal relations were established in 1973 and formalised in March 1977 by the ASEAN-Japan Forum which meets on a 18 to 24-month basis. 23 The Committee of Permanent Representatives (COREPER) of the EC Council of Ministers. 24 The third AEMM was held in London in 1981, the fourth in Bangkok (1983), the fifth in Dublin (1984). Furthermore, the European Parliament and ASEAN InterParliamentary Organisation (AIPO) had been created in 1979 (see Table 3.2). 25 Two years beforehand, the ASEAN-EC Business Council had also been inaugurated (see Table 3.3). 26 See Lorenz (1986) for an analysis of the changing shape of economic exchange between ASEAN and the EC at this time. 27 The Andean Pact and Central American Common Market groups. 28 In addition, since 1995 inputs supplied by EU countries may be treated as if they originated in the GSP beneficiary country who first demanded them. 29 Both the USA and Japan’s own GSP schemes omitted textiles, clothing, footwear, leather goods and timber whereas they were included in the EC’s own. Laos, Myanmar and Cambodia—future ASEAN members—were to qualify as least developed country (LLDC) status within the EC’s GSP scheme from 1977 onwards and hence acquired the highest level of benefits the scheme offered. However, the EU withdrew Myanmar from the scheme in 1997 over its human rights record. 30 In 1986, the ASEAN5 accounted for around 40 per cent of all GSP imports entering the EC. In the same year, 32.4 per cent of ASEAN exports to the EC entered duty free under MFN treatment, 13.8 per cent entered duty free under the GSP scheme, 8.7 per cent received preferential access under the GSP and 45.1 per cent were subject to MFN tariffs. 31 Langhammer’s analysis covered the period 1968–75. 32 By 1984, the shares of GSP-receiving imports in GSP-covered imports for the ASEAN5 were as follows: Indonesia (50 per cent), Malaysia (42 per cent), Philippines (48 per cent), Singapore (33 per cent), Thailand (51 per cent). However, all these rates constituted an increase on their 1978 positions. 33 The MFA effectively replaced the Long-Term Agreement on Cotton Textiles (LTA) which expired in 1973. It is due to be phased out by 2005 as part of the Uruguay Round agreement. 34 The EC deployed two types of MFA quota. The first consisted of EC-wide quotas that applied to signatories of bilateral agreements and which were further split amongst member states on a ‘burden-sharing formula’ basis. The second type were national or regional quotas.

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35 Over 1973–81, ASEAN textile export growth to the EC grew by 1,780 per cent. During the same period, EC consumption of textiles increased by an annual average of only 1 per cent, and EC textile import growth grew at between 21 per cent to 44 per cent. Meanwhile the number of EC textile firms fell from 31,000 to 26,000. 36 However, this was compensated somewhat by provisions carried within the 1980 ASEAN-EC Agreement that allowed ASEAN textile exporters to exchange export quotients between themselves to optimise the allocation of benefits within the quota system. 37 Despite this, ASEAN producers were still able to expand exports in ACP competing agri-product lines, such as vegetable oils (Langhammer 1982b). 38 See Chapter 2 for discussion on the ‘internal’ barriers to international trade issue. 39 See Akrasanee (1982), Harris and Bridges (1983) and Reichel (1985) for further discussion. 40 Meanwhile, ASEAN imports of manufactures from the EC had remained almost static at 87.6 per cent of total ASEAN imports from the Community. In 1980, this figure was 84.4 per cent. 41 In the meantime, a European Parliament report on EU-ASEAN economic relations argued that the 1980 Agreement was ìno longer a sufficient basis for a satisfactory development of future relations’ (1992:6). 42 APEC’s EPG was set up in 1992 with a remit to enunciate a vision for free trade in the Asia-Pacific region to the year 2000 and identify constraints and issues which should be considered by APEC. 43 A Strategy for a New Partnership, Brussels. 44 When Vietnam joined ASEAN in 1995, it was granted immediate observer status to EU-ASEAN meetings prior to signing a protocol at the twelfth AEMM in February 1997 whereby it legally acceded to the 1980 EU-ASEAN Co-operation Agreement. Prior to this, Vietnam had signed a separate EU framework agreement on co-operation in 1995, covering development, trade and economic co-operation. Cambodia signed a similar agreement with the EU in 1996. 45 The EU’s 1988 Regulation (2423/88) on anti-dumping. 46 Provisional duties are only paid retrospectively if the decision to proceed with a definitive duty is made. 47 By the end of 1996, the EU had 143 ADDs in force against third country imports. This compared to the USA’s 298, Japan’s 3, Canada’s 93, Australia’s 47 and New Zealand’s 27. 48 It should be also noted that in 1997 Malaysia applied two ADDs on EU exports (self-copy paper, corrugated medium paper) and the Philippines one (refractory bricks from Germany). 49 Official Journal of the European Communities (L348, 31 December 1994). 50 Moreover, the ASEAN states were among the scheme’s top singular beneficiaries: Indonesia (3rd), Thailand (4th), Singapore (5th), Malaysia (7th) and the Philippines (11th). 51 The two exceptions to the sectoral graduation mechanism are: (1) A country which accounts for more than 25 per cent of GSP imports of a given product sector will lose GSP benefits for that sector; (2) A country which should be graduated, but whose share does not exceed 2 per cent. 52 Official Journal of the European Communities (L160, 29 June 1996). 53 Laos and Cambodia also continued to qualify for ‘least developed country’ status within the scheme beyond 1998. 54 Official Journal of the European Communities (L160, 4 June 1998). 55 By this time, Korean firms had actually invested less in Europe than Singaporean firms, although the realisation of the former’s multi-billion dollar projects will change this. 56 In economic theory, trade diversion and trade creation are essentially part of a ‘static’ analysis on the impact of RIAs on third countries. The ‘dynamic’ effects of an

274 Notes RIA consider the longer-term impact it makes on firm behaviour, e.g. exploiting new opportunities for economies of scale. 57 Interview with Singapore government representative, September 1997. 4 1 2 3 4 5 6 7 8 9 10 11

12 13

14

15 16 17

18 19

The EU and Japan Which can be interpreted as ‘linkage’, ‘lineage’ or ‘system’ in Japanese. At their peak, the top four zaibatsu accounted for 25 per cent of all Japanese business. Sometimes referred to as kigyo shudan. Most notably the Yellow Sea and Tumen River development schemes. Japan possesses one of the highest dependency ratios in the world, with an estimated 40.3 per cent of Japan’s population being 65 or over by 2025 (OECD 1994b). Problematic loans were estimated to total Y76.7 trillion ($577bn) by the end of 1997, or around 12 per cent of the country’s outstanding bank loans. As Shibusawa et al. (1992:138) comment, ‘Japan has long been conditioned to challenge, rather than facilitate, the existing state of affairs.’ Ikeda was counting on the UK’s imminent accession to the Community, which it was believed would subsequently enhance the EEC’s international status considerably. When the Ministry of Foreign Affairs (MFA) published its EEC policy proposals in July 1962, which offered a conciliatory approach to the Community, it was effectively overruled by the more powerful MITI and MOF. It was on Prime Minister Ikeda’s visit to France that President de Gaulle infamously dismissed him as a ‘travelling transistor salesman’. In evaluating the ineffectual safeguard clause policy of West European countries, Rothacher (1983:201) states that ‘without it, the Italians could “protect” their domestic market quite effectively, Britain…never used it, and France and the Benelux employed theirs only once each during a decade and on marginal products (umbrellas and zip fasteners)’. The Commission’s proposals included various safeguard clauses and a common quota on around 200 Japanese imports. However, Table 4.1 shows that if the EU15 member states are considered, then these shares rise quite significantly. For example, in 1965 the EU15 accounted for 7.9 per cent of Japan’s imports and 10.7 per cent of its exports. Table 4.1 also illustrates, though, that North America and East Asia were far more important trade partners for Japan at this time, with even the Middle East being a more crucial import partner. The EEC also ran up trade deficits against Japan in most years during the 1958–67 period. The growing trade imbalance was most clearly demonstrated in the automotive sector. In 1958, Japan’s commercial vehicle production stood at 138,000 units compared to the Community’s 384,000 units. By 1968, Japanese producers were turning out an annual two million vehicles, over three times the Community’s 634,000 figure. However, EC member states were allowed to maintain their own trade agreements with third countries up until 1 January 1970. The Japanese delegation had underestimated the degree of hostility that often accompanied these demands, hence explaining why the term ‘Doko shock’ has been used in association with this visit. During the latter 1980s, other ADDs were applied on Japanese electronic weighing scales, photocopy machines, outboard motors, couplers for forgeable pig-iron pipes, semiconductors (both EPROMs and DRAMs), computer printers, cellular phones, microwave ovens, CD players, and halogen lamps. The addendum was written by Sir Roy Denman, supposedly to motivate other Commission officials to thoroughly scour the 17-page memo for agenda point 11 in particular, in preparation for forthcoming trade negotiations with Japan. Consequently, a mere 8,000 imports were processed per month instead of the projected 75,000 to 100,000 as estimated by importers, most of which were Japanese. This high-

Notes

20 21 22 23 24 25 26 27

28

29 30 31 32

33 34 35 36 37 38

39 40

275

handed action drew criticism from both inside and outside the Community, forcing France to withdraw this system after a few months of it being operational. These applied to certain audio-visual products. The Commission’s earlier attempts from 1973 onwards to deploy EC-wide VERs had up to now failed. An EC Delegation had been established in Tokyo in 1974 which helped raise awareness of the EC and the Commission among the Japanese. Japan’s current account surplus peaked at 4.2 per cent of GDP in 1986. Over 1981 to 1985, the Japanese government introduced seven packages of market opening measures which subsequently made Japan one of the world’s most open markets on a tariff basis. For instance, in July 1985 the Japanese government’s ‘Action Programme for Improved Market Access’ was launched with this specific objective. However, this continued to represent the majority share of all such EU restrictions, which totalled 131 in the same year. By January 1993, Japan faced only around twenty such restrictions and these were all removed soon after the installation of the Single European Market (SEM) with the exception of the VER on cars. In the agreement, these imports were limited to 11 per cent of the EC market in 1993 with annual negotiations on further volumes set to take place up to 31 December 1999 when all restrictions on them will be removed. See Mattoo and Mavroidis (1995) for further analysis. On electronic weighing scales, hydraulic earth-moving shovels, dot-matrix printers, video tape recorders and photocopy machines. On the latter case, the Commission even imposed a 20 per cent ADD on Ricoh photocopiers assembled in the USA on account of their low local content which thus categorised them as Japanese products. Additional arguments put forward regarding the difficulties that Japanese producers had faced in acquiring intermediate products locally and of a suitable quality were proposed by both the Japanese government and the Keidanren. The Second Banking Co-ordination Directive (SBCD) was the first practical manifestation of the reciprocity principle. In June 1990, the European Commission hosted its first conference for European subcontractors to Japanese manufacturing firms based in the EC. Other developments in the mid to late 1980s had also led to a noticeable improvement in Anglo-Japanese economic relations, namely the resolution of the EC’s liquor tax dispute with Japan (which was especially welcomed by British whisky producers), the British VER agreed with Japan on cars and the seats given to UK firms on the Tokyo Stock Exchange. See Ostergaard (1993) for a discussion on this situation during the early 1990s and also for a wider analysis on Japan and European integration. See Mendl (1984) and Nuttall (1996) for discussions on this issue. Somewhat against the usual form of Triadic relations, the US-Japan ‘Tokyo’ Declaration of 1992 was the last to be signed of the three. In 1990 this stood at Ecu14.5bn but increased to Ecu33.0bn in 1991 (see Figure 4.3) Japan’s deregulation proposal list submitted to the EU has covered only minor issues such as driving licences and regulations on cherry and bonsai tree imports. Such as the UK’s ‘Priority Japan’ and France’s ‘Le Japon: C’est Possible’ campaigns. The European Commission piloted its own ‘Gateway to Japan’ export promotion campaign over 1993–6 leading on to a more ambitious exercise launched in March 1997. The scheme has subsequently become part of the wider Japan EXPROM programme. The European Commission had won a similar dispute against Japan at a GATT panel in September 1987. According to a European Commission official, this was particularly apparent in the EU’s disputes with Japan’s fish quota and liquor tax regimes.

276 Notes 41 In December 1997, the WTO panel ruled against Kodak, stating that it had failed adequately to prove its case. 42 Krugman (1994b) has nevertheless argued that the fixation with competitiveness poses a number of dangers. These include bad public policy choices and the descent into protectionism and trade wars. 43 For a wider discussion on the gaiatsu issue, see Schoppa (1993). 44 Since the mid-1990s, these have centred on the US ‘Framework Agreements’ with Japan. 45 A pattern that could also be applied to the EU’s economic relations with other East Asian countries as chapters that follow will discuss. 46 As a 1995 European Commission document commented: ‘Japan is becoming more resistant to entering into agreements with the US which are now seen to be discriminatory…Such US demands are increasingly being seen as perpetuating an unequal, one way relationship’ (CEC 1995b). Moreover, as Mikanagi (1996) argued, Japan’s greater recourse to multilateral channels has arisen not only because it has been a significant beneficiary of post-war trade liberalisation but also its recognition of economic interdependence and the feedback effects of recalcitrant actions. 47 A policy that has been strongly advocated by Strange (1995). 48 See Bridges (1992a, 1992b) for further discussion. 49 This compared to $241m and 25.4 per cent for North America; $281m and 29.6 per cent for Latin America; $196m and 20.7 per cent for the Middle East; $188m and 19.8 per cent for Asia; $11m and 1.2 per cent for Africa; $7m and 7.4 per cent for Oceania. 50 During the expansion of labour-intensive manufacturing period of the 1950s to mid1960s (Phase 1), Europe was little affected as East Asia hosted much of the associated offshore investment as was mentioned earlier. 51 As Roy (1998) has argued, the preponderance of service-based Japanese FDI in the EU deserves far more empirical and conceptual attention, as much academic research has been biased towards manufacturing investments. 52 Where competition in each country is essentially independent of competition elsewhere, and thus the international complexion of the industry marked by series of domestic industries (Porter 1986). 53 Holland’s (1993:77) proposals in a report to the European Commission on EU-Japan relations summarised this stating: ‘Where possible, the Community should seek cooperative outcomes with Japan…rather than penalise Japanese firms for their own success. On the other hand, this cannot reasonably mean liberalisation under conditions of long-term asymmetric trade, nor ceding the innovation frontier in Europe to nonEuropean firms.’ 54 Inferred from an interview with a Japanese government official. 5

The EU and China

1 Such as those stemming from the Great Leap Forward and the Cultural Revolution. 2 To what became known by November 1993 as a ‘socialist market economy’. 3 See Chapter 6 for a discussion on guanxi links between China, Taiwan and Hong Kong. 4 These were Tianjin, Shanghai, Dalian, Qinhuangdao, Yantai, Qingdao, Lianyungang, Nantogn, Ningbo, Wenzhou, Fuzhou, Guangzhou, Shanjian and Beihai. 5 With the exception of Beihai and Wenzhou. 6 See Chapter 8 for a more detailed analysis. 7 Also in the same year, the Beijing Experimental Zone for Development of New Technology Industries was established as China’s own Silicon Valley. 8 Preliminary concessions had already been granted in 1985. 9 MOFERT was to later evolve into the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

Notes

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10 Most commentators seem to agree that this zone will become the most prominent in China over forthcoming years. 11 Although Deng officially remained China’s leader, his incapacity to administrate the post due to ill-health became apparent during the early 1990s. 12 The Sino-Japanese relationship is treated in some detail by Taylor (1996), while Jain (1977) provides an earlier post-war account. 13 This figure is the actual realised amount which contrasts with the approved project figures shown in Table A.6. 14 Guangdong has invested in Yunan’s electricity generation and transmission systems on which it relies. 15 For example, France under de Gaulle, Albania and some Scandinavian countries. 16 The Coordinating Committee for Mutual Export Controls. 17 China made trade deals with the UK and France in 1953, and with West Germany and Denmark in 1957. 18 Diplomatic relations were established between China and West European countries in the following sequence: Denmark (1950); the UK (1954); the Netherlands (1954); France (1964); Italy (1970); Austria and Belgium (1971); Greece, West Germany and Luxembourg (1972); Spain (1973); Portugal and Ireland (1979). 19 While Japan’s rising share of China’s trade can also be attributed to these circumstances, Beijing was reluctant to develop too much of a dependency due to historical reasons (Cabestan 1990). 20 Hongqi (1958), 14:26. 21 See note 18. 22 As Shambaugh (1996:18) argued, ‘Europeans do not exhibit the same missionary complex about remoulding China that many Americans do.’ 23 On his visit to France in 1975, Deng Xiaoping stated: ‘The European people may believe that they can always obtain the support of the Chinese people in their cause of safeguarding independence and strengthening unity European countries unite—this is a demand of history. Unity is strength, and division is vulnerable to bullying.’ 24 The EC’s Head of Delegation, Sir Christopher Soames, had been prompted by China publicly to declare that Taiwan was an illegitimate state. While refusing to do this, he was prepared to announce that the EC had no formal relations or agreements with Taiwan that would constitute recognition of Taiwanese independence. The EC had previously concluded a textile trade agreement with Taiwan in October 1970 which had expired in October 1973. See Chapter 6 for further comment. 25 Sometimes referred to as a state-trading economy. 26 Initially, various exclusions across a range of ‘sensitive’ industry products were made, including agriculture. In 1981, a Commission proposal to include agri-products was rejected by the Council of Ministers, although in later years more products were added to China’s list. 27 China became an MFA member in January 1984. 28 In addition, an EC-China biotechnology centre was established at Beijing in 1988 with the EC agreeing to provide aid totalling Ecu80m over a five year period. 29 Over the 1980–7 period, Belgium provided interest-free loans totalling Bfr2.6bn (approximately $100m) that were used by China to import a range of Belgian capital imports. 30 A cumulative $16m by 1983. 31 These covered conventional areas such as industry and mining, agriculture, science and technology, energy, transport and communication, environmental protection and cooperation in third countries, as well as measures to promote FDI. 32 France was the first EC member state to sign its own economic co-operation agreement with China (December 1978) and was subsequently followed by the UK (March 1979), Italy (April 1979), Belgium-Luxembourg ( June 1979), Denmark (September 1979), West Germany (October 1979), the Netherlands (October 1980).

278 Notes 33 The first EC member state to sign a BIT with China was West Germany (October 1983) which was then followed by France (May 1984), Belgium and Luxembourg ( June 1984), Italy (December 1984), Denmark (April 1985), the Netherlands (June 1985) and the UK (May 1986). 34 The Euro-China Business Association was formed in 1992 as an umbrella organisation for these national agencies. 35 EC Bulletins 4–1981, 12–1985 and 3–1987. 36 This was further consolidated by a Sino-French arms deal. 37 Regulation no. 519/94, 7 March 1994. This came into force on 15 March 1994. 38 A fate that awaited Hong Kong, Korea and Singapore in May 1998. 39 This was also soon joined by a Joint Committee on Industrial Cooperation whose remit covered policy and technical matters. 40 Consisting of past, current and next EU presidents. 41 These are now supplemented by ad hoc foreign minister’s meetings, and twice yearly meetings, both between the Chinese Foreign Minister and EU ambassadors in Beijing, and between the EU Presidency’s Foreign Minister and the Chinese Ambassador in the EU presidency capital. 42 Earlier in November 1994, the China-Europe International Business School was opened in Shanghai. 43 As a partial solution to this problem, Neves (1995) argued for a functional division of responsibilities among EU member states in alignment with particular national interests and experience. Hence, those powers with strong economic but weak political interests— such as Germany, France and Italy—should be given responsibilities for trade and investment. 44 The first programme’s funding amounted to Ecu13m over four years while the second offered Ecu48.5m worth of funds over five years. 45 These included maritime and air transport, nuclear trade and safety, customs and science and technology. 46 Furthermore, China insisted that it should acquire WTO membership either before or at the same time as Taiwan, which itself submitted its application in January 1990 under Article 33. A coupling of China and Taiwan’s accessions was established within the GATT forum in 1992, although as we discuss towards the end of the chapter a decoupling seemed probable by 1998 (see also Chapter 6). 47 This was carried forward within the WTO framework in July 1995 with strong EU backing. 48 This involved ending certain high tariff rates, import licensing controls and fiscal discrimination on imports, as well as introducing greater transparency in certain aspects of its trade policymaking processes. 49 However, under WTO rules safeguard measures cannot be applied to developing countries unless its exports of a product to a developed country member are in excess of 3 per cent of the latter’s total imports of that product, provided that the combined imports of that product from all developing country members with less than a 3 per cent share do not exceed 9 per cent. 50 The collapse of accession negotiations in December 1992 and December 1994 were linked to the US’s disputes with China over IPR issues. 51 Although at the April 1998 WTO Working Party meeting, China did offer to cut tariffs on industrial goods by an average of 10 per cent by the year 2005. 52 For example, on establishing a more predictable FDI regime where rules in certain localities can change on a frequent and unannounced basis. The transnational network links of China’s coastal economy must also be considered by EU policymakers. 6

The EU, Taiwan and Hong Kong

1 Cooper (1996) estimates that this constituted approximately 40 per cent of the economy’s gross capital formation from the early 1950s to 1960.

Notes

279

2 Amsden (1985) has argued that Taiwan’s state-owned companies played a key part in the economy’s early post-war development, although Fukuyama (1995) believes that these always formed the least dynamic part of Taiwan’s industry. By the mid1980s, around 90 per cent of industrial production was located in the private sector. 3 These comprised aerospace, speciality chemicals and pharmaceuticals, information technologies, consumer electronics, pollution control technology and equipment, semiconductors, communications, precision instruments and automatic machinery, new materials and medical equipment. 4 Auto components, LCD devices, integrated circuits, high resolution colour TV tubes and the chemical p-xylene. 5 However, since 1997 the APROC initiative has been downscaled somewhat. 6 Chen, X. (1995) has argued that the role of Taiwan’s original EPZs in attracting FDI has now waned. 7 British rule was effectively established in 1841 on Hong Kong Island and formally accepted by the Chinese in the 1842 Treaty of Nanking. By the end of the Second Opium War (1856–60), British rule was extended to Kowloon (the mainland peninsula pointing towards Hong Kong Island) and Stonecutters Island. In 1898, China was forced to cede the New Territories and 235 islands to Britain on a 99-year lease, expiring July 1997. 8 A United Nations embargo on PRC trade was enforced in 1951. 9 The UK was not technically obliged to return Hong Kong island under the terms and conditions of the 1842 Treaty of Nangking. However, China made it clear that it wanted to reclaim the whole Hong Kong state. It would have also had been near logistically impossible for Hong Kong island to function as a separate economic entity given its infrastructural dependency on the mainland territories. 10 According to Sung (1995), more institutionalised integration exists between Greece and Ireland under EU supranationalism than between Hong Kong and China in the post-1997 arrangement. 11 In 1996, transshipments were estimated to be worth about 70 per cent of Hong Kong’s re-exports. 12 The most profiled of these being CA Pacific and Peregrine Investment Holdings. 13 This refers to the 60 million or so overseas Chinese dispersed mainly across East Asia but also in other continents. 14 Also referred to as the ‘Chinese Economic Triangle’. 15 Beijing had actively encouraged the purchase of Taiwanese imports for a while during the early 1980s. In 1987, travel restrictions between Taiwan and the mainland were lifted. The Taiwan government established an organisation in 1990 that could negotiate the modalities of its relations with China that eventually led to more direct links being created. 16 As we noted in Chapter 5, nationalism is increasingly becoming a substitute for ideology as the principal unifying force in Chinese society. 17 Hong Kong submitted its application for GATT membership in 1986 and was acceded in the same year. 18 The ROC originally joined the GATT in 1947 but left in 1950 after the installation of the Maoist regime on the mainland, and remained uninterested in GATT for many years. Later on, Taiwan sought and gained observer status in 1965 but then lost in 1971 after the normalisation of Sino-American relations. 19 Although under the name Chinese Taipei. 20 Taiwan maintains formal diplomatic relations with thirty or so countries, but these are all small, poor nations in Africa and Latin America that receive high levels of Taiwanese aid. 21 However, a DPP victory in central government elections may change this. 22 Hong Kong’s economic diplomacy was closely aligned to UK interests and policy. For example, it severed economic links with Argentina over the 1982 Falklands crisis and imposed import restrictions on South African goods in 1986.

280 Notes 23 Taiwan’s diplomatic links with the Vatican have remained intact throughout. 24 When Taiwan was voted out of the UN in 1971, most West European nations voted no or abstained, with the exception of Luxembourg, Portugal and Greece. 25 Acting on behalf of the EC, European Commission Vice-President Christopher Soames stated that: ‘The Community…does not entertain any official relations to enter any agreements with Taiwan. I explained that matters such as recognition of states did not enter into the responsibility of the Community. But…all member states of the Community recognised the Government of the People’s Republic of China as the sole government of China and have taken position with regard to the Taiwan question acceptable to the People’s Republic’ (EC Bulletin 5–1975, 1201–1205). 26 For example, when Taiwan’s Vice-President and Prime Minister, Lien Chen, visited Ireland in January 1997. 27 By 1997, the list of unofficial representative offices in Taipei of EU countries included the Anglo-Taiwan Trade Committee, Austrian Trade Delegation, Belgian Trade Association, Danish Trade Organisation, Office of Finnish Industry and Transport, French Institute, German Trade Office, Office of Representative Hellenic Organisation for the Promotion of Exports, Institute of Trade and Investment of Ireland, Italian Trade Promotion Office, Netherlands Trade and Investment Office, Spanish Chamber of Commerce and the Swedish Trade Council. There also exists a European Council of Commerce and Trade in Taipei. 28 Over the course of the 1980s, the EC and Taiwan held the following informal trade talks: December 1981 (London), First Customs Duty Talks between the EC and Taiwan; March 1982 (Singapore), Second Customs Duty Talks; October 1982-January 1983, Textile trade talks; October 1984 (London) Third EC-Taiwan Trade Talks; July 1986 (Brussels), Fourth EC-Taiwan Trade Talks; March 1987 (Singapore), Fifth ECTaiwan Trade Talks; May 1988 (London) Sixth EC-Taiwan Trade Talks; July 1989, (Bangkok), Seventh EC-Taiwan Trade Talks. 29 It is also worth noting that these discussions were deemed so politically sensitive that Taipei did not host the talks until their ninth round in October 1992. 30 The former was negotiated with the Taipei Cultural and Economic Office in Brussels and the latter with the Secretary General of China External Trade Development Council. 31 Official Journal C229, 9 September 1985. 32 EP Report (Hindley) No. A3–0092/93, Doc. PE203.426/fin, 19 March 1993; EP Report (Reding) No. A3–0139/93, Doc. PE202.417/fin, 29 April 1993. 33 In response to such questions, Sir Leon Brittan has stated that this is likely to be considered after Taiwan’s WTO accession. 34 For example, the anti-dumping duty (ADD) placed on bicycles manufactured by the Taiwanese firm Giant in the PRC. 35 See Huang (1995) for a debate on EU-ASEAN relations and their impact on Taiwan. 36 This idea was first raised by Taipei in the Tenth EU-Taiwan Trade Talks held in February 1994 in Brussels. 37 The most prominent sectors discussed were aerospace, computers, telecoms, shipbuilding and environmental technology. Later on in 1997, the French aircraft manufacturer Latecomer became the first European firm to enter into a aerospace joint venture with a Taiwanese counterpart, this being the state-run Aerospace Industry Development Corporation. The venture’s objective was to make components for Airbus Industrie. 38 In addition, Beijing ordered the Anglo-Dutch oil company, Shell, to curtail its prospecting activities in Shanxi province, commanded Chinese naval vessels to boycott Rotterdam port and refused to grant visas to Dutch nationals. 39 See Chui (1991) for further details. 40 Over half of the EU’s total bicycle imports originate from Taiwan. 41 Official Journal L43, 22 February 1971.

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42 A 12.5 per cent tariff and 5 per cent business tax were additionally applied. 43 Whisky is the UK’s second largest export to Taiwan. 44 The EU wanted tariffs on automobiles and auto parts entering Taiwan lowered to 15 per cent after ten years of WTO membership—a demand particularly pushed by France and Italy at a 113 Committee meeting—but Taipei insisted that these would remain at a minimum 20 per cent as it had just previously negotiated a 20 per cent rate deal with the USA and Japan. European Commission negotiators were reasonably content to accept this deal, especially because Peugeot, Renault and Volkswagen had established major assembly plants in Taiwan. In addition, the EU pushed for ban on diesel car imports to be lifted. 45 In May 1996, Brittan delivered a speech entitled ‘Europe and Hong Kong: Prospects for Co-operation’, while in November that year he spoke again in Hong Kong which was hosting the World Economic Forum, making references to promoting EU-Hong Kong relations. 46 It made for an interesting event in that Governor Patten was technically a government representative of an EU member state. 47 This would entail a global rather than a sectoral approach to WTO-led liberalisation. 48 EU banks are ranked third in Hong Kong in terms of assets and lending, behind local and Japanese firms. In the insurance sector, EU firms are Hong Kong’s major foreign provider. 49 Moreover, if regional offices are included then EU-based companies have the highest representation among foreign firms with 597 (29 per cent of the total of foreign firms) compared to 501 Japanese companies and 344 US companies. 50 Inward FDI data for Hong Kong is only available for the secondary sector and hence excludes tertiary (services) sector investments (see Table A.6). 51 The French authorities also expressed their concern over the 90 per cent plus tariffs imposed on these goods. 52 Hong Kong had also seen its market share of EU microdisk imports fall from 19 per cent in 1993 to 8 per cent by 1995. 53 The press reported the case of the decision made by Milo’s Knitwear, a Hong Kong manufacturer with substantial production interests in China, to shift production from the PRC to Thailand after the imposition of an EU quota of certain textile product lines in 1995. 54 Reuters, 20 February 1998. 7

The EU and Korea

1 The others being Hong Kong, Singapore and Taiwan. 2 For example, while unsuccessful attempts were made by France and the USA to open up Korea to international trade during the 1860s, both Japan and China forced Korea to accept their own one-sided commercial treaties in the latter quarter of the nineteenth century. China urged other countries to do the same in an endeavour to counter Japanese influence. However, China’s defeat in the Sino-Japanese war of 1894–5 meant that Japan could more effectively assert its position in Northeast Asia. 3 Korea signed its Normalisation Treaty with Japan in 1965, whose provisions included Japanese reparations and capital inflows to Korea. 4 Officially known as the Democratic People’s Republic of Korea and the Republic of Korea, respectively. 5 This was despite the fact that in 1953 the North had a headstart on the South in terms of capital formation, technological development, income levels and most other economic indicators. 6 Around half of Korea’s industrial base was destroyed in the civil war.

282 Notes 7 For example, in the 1970s Hyundai was virtually compelled to venture into the production of large-scale shipbuilding by the Park government from a practically non-existent skill base. 8 This had been originally scheduled over the 1992–6 period but was later reconceived as the 1993–7 ‘Five Year Plan for a New Economy’. 9 Introduced in 1978 to relieve Korea’s chronic trade imbalance with Japan. 10 These included Uzbekistan, Kazakhstan and Peru. 11 Subsequently bought out by Hyundai in a government-arranged deal. 12 For example, between Hitachi and LG Electronics in the field of microelectronics; General Motors and Daewoo, Nissan and Samsung both in the field of automobiles. However, some chaebol—particularly Hyundai—have attempted to pursue a more self-reliant approach. 13 The US government also negotiated a bilateral deal with Korea on transport services in which the EU gained equivalent treatment to US carriers some time after in November 1992. 14 These are used against the illicit commercial practices of the USA’s trade partners. 15 This latter agreement was specifically on network equipment. 16 This was levied at 30 per cent of the liquor tax rate. 17 Revisions had been made to Korea’s liquor tax regime in July 1991 that eased the tariff and tax burden on foreign imports to a degree. For example, the domestic tax rate on whisky was reduced from 200 per cent to 150 per cent, thus bringing it into line with brandy and beer whose rates were unchanged. Tariff reductions were, though, made on all three imported products: whisky down from 40 per cent to 30 per cent, brandy from 25 per cent to 15 per cent and beer from 50 per cent to 40 per cent. However, the rate of education tax remained the same at 30 per cent of the liquor tax rate. 18 These were applied on VCRs, microwave ovens, small screen televisions, videotapes, polyester film and yarns, oxalic and glutamic acids. Later the EU suspended Korea’s GSP privileges on woollen textile products in mid-1994. 19 This compared to 18.3 per cent and 20.1 per cent for the USA, and 21.1 per cent and 29.0 per cent for Japan, respectively. 20 Up 17 per cent over 1988–9. 21 The EU’s links with Hong Kong were largely managed through the UK up until the July 1997 handover of sovereignty to China. Moreover, the Beijing-Taipei sovereignty dispute meant that the EU could not formalise general diplomatic relations with Taiwan (see Chapter 6). 22 For its part, the European Commission also commented that a series of parallel events and developments helped augment this, namely Korea’s strengthening of relations with the USA and Japan after respective summit-level meetings in 1992, the breakdown of NorthSouth Korea dialogue in the same year and Korea’s normalisation of relations with former Communist countries, including Russia and China. 23 On the EU side, this was first officially suggested in a ‘communications’ document published in June that year (CEC 1993). 24 These were still ongoing at time of writing. 25 By July 1996 Korea had signed bilateral investment treaties with every EU member country with the exception of Ireland (UNCTAD 1997). 26 These figures include Central and East European countries which in 1996 accounted for around a third of the region’s stock of Korean FDI. 27 It should also be noted that the general expansion of global FDI has brought other complexities to the Korea-EU trade relationship. For example, in the most recent WTO (1996) trade policy review on Korea, an EU panel representative welcomed Korea’s intention eventually to eliminate its protectionist regime against Japanese exports (embodied in its Import Diversification Programme) owing to its deleterious effects upon Japanese companies exporting from the EU. 28 In 1997 Korea’s deficit with the EU amounted to Ecu1.4bn, while that with the USA was Ecu5.2bn and with Japan Ecu10.5bn.

Notes

283

29 It should also be noted that Korea was among the dozen or so countries that applied ADDs on EU exports in 1997, these being electric shavers from Germany and the Netherlands, carbonless copy paper from the UK and Germany, cellulose products from Germany and electric smoothing irons from France. Korea also applied safeguard trade restrictions on its EU imports of certain dairy products. 30 In 1989, Korea had graduated from the US GSP scheme and in 1992 from Australia’s scheme. By 1996 Korea still remained a GSP beneficiary in the schemes of thirty-one countries, including Japan, Switzerland and New Zealand. However, in the same year, Canada and Russia also partially phased Korea out of their own schemes. 31 These existed on footwear, microwave ovens, VCRs and TV tubes at an EU level and on frozen squid (Italy), footwear (Ireland) and metal flatware (Benelux) at a member state level until the early 1990s (Tan and Pelkmans 1991). 32 At time of writing, Korea still imposed relatively high tariff and liquor tax rates on imported alcoholic beverages: whisky (20 per cent and 100 per cent), brandy (10 per cent and 100 per cent) and other spirits (20 per cent and 50–80 per cent). The education tax also persists in discriminating against imported liquors. High tax rates also apply on other luxury products such as white goods and jewellery. Consequently, the European Commission re-initiated its trade dispute with Korea on the alcoholic beverages issue, requesting the WTO for a ruling on Korea’s liquor tax regime in September 1997 that was resolved in the EU’s favour by October 1998. 33 Quoted from ‘The Korean Government Statement on the Frugality Campaign’, 9 May 1998. 34 In his speech, Ruggiero stated that: ‘Your Government’s continuing contribution to the liberalisation of telecom services will benefit business and all other consumers…Not only does the agreement accelerate liberalisation in a key economic sector…it also creates a global regulatory framework for the telecommunications industry, broadening rule-making horizons into areas like competition policy, investment, and standards and regulations.’ Later on, his comment that ‘it is worth underlining that consumer goods account for only some 11 per cent of Korea’s imports, and that Korean exports in this sector are three times as large’ could be interpreted as a criticism of Korea’s ‘frugality campaign’. 35 As Chapter 2 notes, this task may well be passed on to the WTO. 36 For example, Korea and the EU signed an agreement on customs clearance and mutual assistance as part of the ASEM process in April 1997. 37 The general impact of the East Asian financial crisis on EU business is considered in Chapter 2. 38 Over the 1996–7 period Korea lost its top ten position in the following EU export markets: power generating machinery and equipment, metal ores and scrap, specialised industrial machinery, clothing, beverages, electrical machinery, and iron and steel. Table A.5 shows that such a position was only retained in organic chemicals. 39 The ratio of Korean to Japanese FDI stocks in Europe was approximately 1:60 in 1996. 40 See Randerson and Dent (1996) for a comparative analysis on Korean and Japanese FDI in Europe. 41 However, the level of Singaporean FDI in the EU was higher than Korea’s by the mid1990s, although as stated elsewhere in this text the former was largely acquisitional in nature. Moreover, Singaporean firms are not expected to embark on the same ambitious multi-billion dollar FDI projects as Korean firms in the future, Korea’s recent financial troubles notwithstanding. 42 This was demonstrated by Samsung’s interests in acquiring Fokker (the Dutch aerospace group) and Rollei (the German camera maker), together with Daewoo’s own interest in Lotus (the UK sports vehicle manufacturer) and their 65 per cent stake in Steyr-DaimlerPuch (advanced engine producers). 43 This represents somewhat of a departure from the 1980s’ literature on ‘Third World multinationals’ which suggested that the ownership-specific advantages of Korean

284 Notes

44 45 46 47 48 49

50 51

8

MNEs and others lay in their possession of their labour-intensive technologies and small-scale modes of production (Wells 1983; Lall 1984). In 1989, 21.3 per cent and 20.3 per cent ADDs had been imposed on Haitai’s and Inkel’s respective compact disc products. Both firms subsequently embarked on FDI projects in the EU McDermott (1995) argued that this was more apparent, or could be anticipated in the automobile sector rather than the electronics sector. In some contrast with Dent and Randerson (1996), Nam (1997) contended that Korean FDI in the EU remained essentially ‘reactionary’ to newly erected trade barriers, although their survey research was conducted in the early 1990s. Primarily as a result of Daewoo’s large-scale investment in Central and Eastern Europe, the region’s share of Korean FDI in Europe rose from 13.5 per cent in 1993 to 30.4 per cent by 1995. Together, these sectors account for around a third of all EU direct investment in Korea, while about two-fifths of EU investment is located in the service sector, leaving the vast majority of the remainder in other manufacturing activities. The Korean Peninsula Energy Development Organisation (KEDO) was established in March 1995 with the aim of improving nuclear safety and reducing the threat of nuclear proliferation in North Korea. Non-Korean members include the EU, Japan and the USA. The EU contributed Ecu75m over five years towards resourcing KEDO’s work. Both the EU and Korea are also members of the ASEAN Regional Forum in which Southeast Asian security matters are discussed (see Chapter 3). This has already been demonstrated with respect to the EU’s attempts to establish a dialogue with APEC (see Chapter 8). Regionalism and inter-regional co-operation

1 See Korhonen (1994) on the evolution of the PAFTA concept. 2 Caused by the reservations of some ASEAN countries, notably Indonesia and Malaysia. 3 By the late 1980s PECC members had come to comprise the current APEC membership, plus the Pacific islands, Peru and Russia. 4 APEC did not actually supersede PECC. As Soesastro (1994) noted, a positive and interdependent relationship evolved between APEC and PECC, with the latter generating issues based on practical problems encountered by the private sector in the region on which APEC-convened ministers could provide policy solutions to them. PECC continues to provide an umbrella organisation for APEC, PAFTAD and PBEC representatives. 5 See Marton et al. (1995) and Tan et al. (1995). 6 For example, Singapore’s government has been criticised for the dominant role it has assumed in SIJORI. 7 Especially after the inauguration of the Clinton administration. 8 At China’s insistence to be referred to as ‘Chinese Taipei’. 9 The EPG ran for four years (1992–5) and produced three key reports. 10 It was for this reason, among others, that Malaysia’s Prime Minister Mahathir decided not to attend the summit. 11 Wonnacott (1995:33) describes ‘open regionalism’ as where ‘economic relations may be strengthened among member nations, while at the same time the region also becomes more open to trade and investment with other parts of the world’. 12 The ABAC’s six main areas of concern are infrastructure, finance and investment, SMEs, human resource development, the facilitation of cross-border flows and fostering a deeper sense of community in the APEC region. 13 Three years earlier than first agreed. 14 After the event, an unrepentant Al Gore stated: ‘Democracy and freedom are essential prerequisites. That is the US message, and I am proud to deliver it anywhere I go.’ The Financial Times, 18 November 1998.

Notes

285

15 This partly reflected the frustration of Malaysia and other ASEAN countries over the lack of attention being afforded to their concerns at the GATT talks. 16 This is applied through three stages: 1 APEC members agree on follow general guidelines for implementing particular reforms but these are voluntary and non-binding. 2 An agreed approach to realising each target set out by APEC declarations (e.g. zero tariff rates). 3 Establishing confidence in the effectiveness of this approach through regular and objective monitoring and review. 17 In 1994 Noordin Sopiee defined this Western approach to regional co-operation as a ‘Cartesian emphasis on legalism, form and contractual obligation’ (Japan Times, 24 November 1994). Moreover, President Clinton stated around the same time that ‘any market opening granted by one country would have to be met with equivalent concessions in other APEC countries’ (Bangkok Post, 14 November 1994), somewhat challenging the ‘prisoner’s delight’ principle. 18 EU Trade Commissioner, Sir Leon Brittan, had received support from Korea’s President and Foreign Minister in backing the EU’s request. 19 For example, preliminary meetings between APEC and EU officials were held in February 1998 at Penang, Malaysia concerning the promotion of mutual awareness of industrial standards in the two regions. However, this contact was established through informal ties rather than through an institutionalised process. 20 A free trade area commits participating countries to remove all tariff barriers on each others’ imports but each country maintains control over their own external tariff rates and procedures on third country imports. A customs union goes one step further by establishing a common external tariff that is adopted by all participating countries on third country imports. Thus, the EC effectively skipped the free trade area stage by completing the customs union arrangement at the same time. 21 Although minor elements of the SEM programme were not in place until the end of the 1990s. 22 See Sandholtz and Zysman (1989), Cameron (1992) and Ross (1993). 23 See Taylor (1991), Milward (1992) and Streeck (1996) for additional elaborations on this view. For a very recent evaluation of differing perspectives, see Caporaso (1998). 24 According to these data, Western Europe’s intra-regional trade ratio stood at 53 per cent in 1958. By 1990, this had risen to 72 per cent. 25 See Porter’s (1990) discussion on ‘industry clusters’ with respect to Italy and other West European countries. 26 Munch (1996) makes a broad discussion of this issue, covering economic, social and cultural aspects. 27 Bollard and Mayes (1992) suggest that the SEM initiative had an important galvanising effect on the formation of APEC. 28 The Second Banking Co-ordination Directive of 1989 was a high profile example of this. See also speeches made by the EU’s External Affairs Commissioner, Willy de Clerq, at around the time for an indication that such an approach would be adopted. 29 US President Bush, in his own speech delivered in May 1989 at Boston, stated that: ‘We must work hard to ensure that the Europe of 1992 will adopt the lower barriers of the modern economy, not the high walls and the moats of medieval commerce.’ See Dent (1997a) for a fuller consideration of the EU’s position and impact within the global economy. 30 See Besson and Jayasuriya (1998) for a discussion on the contrasting political rationalities of European and Asia-Pacific regionalism. 31 With the exception of Switzerland, the EFTA countries participate in the European Economic Area, a virtual extention of the SEM. These are the remaining EFTA members that have decided not to join the EU over time.

286 Notes 32 See Council for Asia-Europe Co-operation (1997) for an introductory discussion on the ASEM’s non-economic aspects. 33 Other significant examples include those made with the Andean Pact (1987), Central American States (1987), the Gulf Co-operation Council (1990), Mercosur (1992), South African Development Community (1994) and neighbouring Mediterranean countries within the Euro-Med Partnership (1995). 34 The European Council formally granted the EU’s endorsement of the ASEM in June 1995. 35 Only two EU political leaders did not attend the First ASEM: Spain’s Felipe Gonzales, who faced an imminent general election at home, and Sweden’s Prime Minister Carlsson, much to the alleged annoyance of the country’s business community. All ten premiers of East Asia were in attendance. 36 See Thurow (1992) and Fukuyama (1995) for comments on this comparison. 37 See Puchala (1972) for more discussion on this issue. 9

Future prospects for the EU-East Asia economic relationship

1 Moreover, Haggard and MacIntyre (1998) remind us that, notwithstanding the World Bank’s (1993) efforts, the search for a single East Asian model has been elusive and the distribution of the crisis effects upon the region has been patchy. 2 These included Charlene Barchevsky (US Trade Representative), Jeffrey Garten (Under-Secretary of State for Commerce), Robert Rubin (Treasury Secretary) and Larry Summers (Under-Secretary). 3 Belo further defines developmental statist practices as ‘the complex of protectionism, mercantalism, industrial policy and activist state intervention in the economy’ (1998: 434). 4 As Table A.3 also shows, the US position as an EU export market had almost converged with East Asia’s own position over the mid-1990s. 5 Zuckerman (1998) has gone so far as to prophesy that a second ‘American Century’ is imminent.

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Index

ACP (Africa-Caribbean-Pacific) group 260 acquis communautaire 238 aerospace industry 84 Afghanistan 48 Africa 39, 89, 130, 156, 160, 195, 238, 248 AFTA (ASEAN Free Trade Area) 41–4, 51, 58, 69–71, 72, 74, 222, 225, 233 agriculture industry 27, 29, 53, 55, 61, 65, 74, 75, 121, 123, 126, 140, 146, 174, 175, 190, 222, 228, 254 aid 57–8, 66, 69, 81, 135, 153, 155, 188 Airbus 7 anti-dumping duties (ADDs) 11, 27, 28, 29, 62–3, 69, 91, 93–4, 101, 108, 134, 136, 140, 141, 143, 146, 149, 151, 159, 167, 172, 173, 175, 177, 182–3, 185, 199, 204–6, 214 ASEAN regional forum (ARF) 41, 47, 73 Asia-Europe Foundation 242, 243 Asia-Europe Meetings (ASEM): APEC 31, 240, 242, 245–6, 247–9, 255; ASEAN 30, 59, 61, 71–2, 75, 240–1, 246; AsiaEurope Business Forum (AEBF) 242, 243–4, 248; Bangkok summit (1996) 30, 241; China 30, 31, 71, 144, 241, 246; enlargement 246; financial crisis (East Asian) 21, 31–2, 249, 251; future prospects 245–6, 255–6; Investment Promotion Action Plan (IPAP) 242–3, 248; Japan 30, 31, 59, 71, 106, 116, 241, 244, 246; Korea 30, 241, 244, 245, 246; London summit (1998) 243–4; Malaysia 241–2, 248; operational dynamics 244–5; origins and development 240–4; Senior Officials Meetings (SOM) 243; Senior Officials Meeting on Trade and Investment (SOMTI) 242, 243, 246; Seoul summit (2000) 243–4; Singapore 240–2;

subsidiarity aspects 244–5; Taiwan 246; Trade Facilitation ActionPlan (TFAP) 242–3, 248; Triad context 240, 248; Vision Group 243–4; USA 240, 244, 245–6; WTO 31, 241–2, 246, 248, 255 Asian and Pacific Council (ASPAC) 220 Asia-Pacific Economic Co-operation forum (APEC): AFTA 44, 225, 233; APEC Business Advisory Council (ABAC) 229; ASEAN 44, 58, 225, 226, 233; ASEM 31, 240, 242, 245–6, 247–9, 255; Australia 225, 230–1; Bogor Declaration (1994) 227–9, 232; Canada 225, 230–1; China 124–5, 226; Committee on Trade and Investment (CTI) 227; EAEC/G 220, 231; Eminent Persons Group (EPG) 226–9; EU 235, 236, 238–9, 252–3, 257; financial crisis (East Asian) 229–30, 231–3; free trade and investment zone 227–8, 231–5, 238, 240, 245, 253, 257; general 16, 22, 225–35; Hong Kong 162, 226; Indonesia 230; Japan 81, 225, 230; Korea 226, 230; Malaysia 229, 230–1; Manila Action Plan (MAPA) 229; New Zealand 225, 230–1; Osaka Action Agenda 229; Pacific Business Forum (PBF) 227, 228–9; origins and evolution 221–2, 225–30; Senior Officials Meetings (SOMs) 226; Taiwan 162, 226; Thailand 229, 230; USA 4, 226, 229–30, 232–3, 257; working groups 226, 235; WTO (and GATT) 225, 227–30, 232, 233–4, 253 Asian Monetary Fund (AMF) proposal 21, 82, 232 Association of South-East Asian Nations (ASEAN): anti-dumping duty regime of EU 62–3, 69; APEC 44, 58, 225, 226,

310 Index 233; ASEAN Free Trade Area (AFTA) 41–4, 51, 58, 69–71, 72, 74, 222, 225, 233; ASEAN Investment Area (AIA) 42, 71; ASEAN regional forum (ARF) 41, 47, 73; ASEM 30, 59, 61, 71–2, 75, 240–1, 246; Central and Eastern Europe 42, 43, 48, 58, 69; Common Effective Preferential Tariff (CEPT) scheme 42–3, 71; China (and Chinese diaspora) 38, 40, 41, 44, 47, 59, 62–3, 64, 65, 71, 121, 150; colonisation 37; East Timor 14, 44, 59, 72, 73, 241, 247; economic development of 37–40, 57; EU (general) 6, 11, 27–8, 30, Chapter 3 passim, 236, 255; EU integration 51, 53, 56, 59, 61, 67–9, 74; financial crisis (East Asian) 40, 43, 66, 69; France 37, 66; future challenges 43–5; Germany 66; growth triangles (SREZs) 40, 51; GSP scheme (of EU) 46, 48, 53, 63–5, 74; guanxi 38, 40; Hong Kong 64; internationalisation of 37–40; inward FDI 38, 48, 51–3, 57, 66, 68, 70; Japan 38, 40, 41, 47, 59, 65, 71; Korea 40, 41, 47, 59, 63, 64, 65, 66, 71; Netherlands 37, 66; origins and evolution 40–2; Portugal 44, 59; Preferential Trading Arrangements (PTA) 41; regionalism 40, 41, 43, 51, 67–9, 220, 222, 230, 231; Spain 37; Taiwan 63, 157, 167; trade and trade policy 38–40, 41–5, 49, 51–7, 59, 61–9; UK 37, 46, 66; USA 37, 38, 40, 41, 46, 47, 48, 53, 54, 61, 65, 73; WTO 65, 74, 75 audio-visual products industry, see electronics industry Australia 41, 47, 48, 206, 220–1, 225, 230–1, 246 Austria 25, 68, 109, 138, 166, 169, 180, 202 Australia-New Zealand Closer Economic Relations Agreement (ANZCERTA) 221, 233 automobile industry 24, 64, 84, 90, 91, 95, 111, 112, 138, 174, 175, 189, 191, 202–4, 206, 207, 208, 213, 214 banking industry 26, 32, 146, 178 Belgium 25, 68, 87, 109, 138, 165, 166, 167, 169, 180, 202 Benelux 90 bilateral investment treaties 135 Bretton Woods 1, 46 Britain, see United Kingdom (UK) Brittan, Sir Leon, 34, 147, 175, 177, 183

Brunei 37, 40, 42, 64, 70 Burma, see Myanmar Cambodia 37, 40, 41, 48 Canada 39, 41, 47, 57, 89, 130, 156, 160, 199, 206, 195, 220, 225, 230–1 Central and East Europe (CEE) 39, 42, 43, 48, 58, 69, 89, 130, 156, 160, 195 chaebol 25, 186, 189–92, 194, 196, 204–5, 207, 208, 210–14, 241 chemical industry 23, 64, 83, 84, 107, 138 139, 140, 155, 169, 189, 191, 204, 206, 214 China: anti-dumping duty regime of EU 29, 134, 136, 140, 141, 143, 146, 149, 151, 182–3, 185; APEC 124–5, 226; ASEAN 38, 40, 41, 44, 47, 59, 62–3, 64, 65, 71, 121, 150; ASEM 30, 31, 71, 144, 241, 246; Belgium 135; Chinese diaspora 125, 161, 167, 185, 225; Cultural Revolution 131; East Asia 124–5; Economic and Technical Development Zones (ETDZ) 121, 127, 225; economic reform process 119, 120–4, 126–8, 134, 137, 157; environment 127, 136; EU (general) 6, 22, 23, 27, 28, 29, Chapter 5 passim; EU integration 131, 136, 143; financial crisis (East Asian) 124, 143, 147, 150; France 131, 136, 137, 138, 148; future challenges 126–8; geopolitics 129–31, 148–9; Germany 135, 136, 138; ‘Great Leap Forward’ 119; ‘Greater China’ 161–2, 185–6; GSP scheme (of EU) 132, 139–40, 146, 151; guanxi 38, 40, 121, 125, 191, 225; Hong Kong 121, 124, 125, 135, 143, 148–9, 151, 157–63, 176–9, 182–6; impact on world economy 119–20; inward FDI 119–20, 121, 124, 125, 126, 135, 137–8, 150, 151; Italy 135, 138; Japan 90, 118, 125, 135, 137, 140, 149, 150, 151; Korea 125, 129, 188, 191, 193, 199, 200, 202; MFA regime (of EU) 34, 183; National Industrial Development Zones for New and Advanced Technology (NIDZNATs) 121, 127, 225; People’s Liberation Army (PLA) 123; QRs (of EU) 134, 139, 181– 2; Soviet Union 125, 129, 131, 136; Special Economic Zones (SEZs) 121–2, 123, 135, 151, 158, 225; state-owned enterprises (SOEs) 122, 126, 144, 147; Taiwan 121, 132, 137, 141–2, 148–9, 155, 157–67, 168, 172, 175–6, 184–6;

Index

township and village enterprises (TVEs) 123, 144; trade and trade policy 22, 23, 119–20, 124, 125, 126–8, 129–51, 161; UK 135, 136, 138, 143, 148–9; USA 118, 125, 129, 131, 134–5, 136, 138, 143, 145–7, 149, 151; WTO 29, 33, 118, 124, 125, 142, 144–50, 255 Clinton, William 147 COCOM (Paris Co-ordinating Committee) 129, 132, 135, 149 Cold War 1, 90, 96, 118, 129–31, 148–9, 188, 194 colonialism 37, 45, 153, 157, 163, 176–7, 186 Commission of the European Communities (CEC), see European Commission Common Agricultural Policy (CAP) 29, 53, 55, 61 Common Commercial Policy (CCP): ASEAN 27, 28, 46, 49, 53–7, 62–5, 69, 74; China 27, 28, 29, 132–7, 139–40, 141, 143, 146, 149, 151, 182–3, 185, 132, 139–40, 146, 151; general 5, 6, 27–30, 236; Hong Kong 27, 28, 159, 176, 177; Japan 27–9, 87–8, 90–5, 114; Korea 27, 28, 199–200; Taiwan 27, 28, 164, 167, 172–5 Common Foreign and Security Policy (CFSP) 236 competition policy 32, 97, 101, 102, 175, 207, 228, 254 complex interdependence 8–9, 10, 73, 150, 185, 217, 248 Confucianism 18 core-periphery divide 13, 126, 144, 151, 233 Council of Ministers (of EU) 27, 60, 62, 132, 139, 166, 177, 236 Cultural Revolution 131 Daewoo 192, 197, 214 Deng, Xiaoping 119, 120–3, 124–5, 134, 142, 143, 157 Denmark 25, 68, 109, 138, 164, 169, 180, 202 dependency theory 14, 74, 151, 218 developmental state 18, 21, 78–9, 87, 154, 189, 191, 251 Directorate-General 1 (of the European Commission) 27, 31, 34 East Asian Economic Caucus (EAEC)/ Grouping (EAEG) 220, 231

311

East Timor 14, 44, 59, 72, 73, 241, 247 economic and monetary union (EMU) 58, 61, 69, 106, 115, 143, 184, 248, 252; see also euro economic security 9, 14, 256 Economic and Social Commission for Asia and the Pacific (ESCAP) 220 eikokubyo 95 electronics industry 23, 64, 66, 84, 90, 91, 111, 139, 153, 159, 183, 189, 191, 199, 208, 213, 215, 234 environment 8, 13, 14, 15, 32, 34, 59, 64, 74, 98, 106–7, 116, 127, 136, 142, 143, 150, 207, 225, 254, 256 ESPRIT 7 euro 69, 106, 115, 252 Europe Agreements 69, 214, 252 European Atomic Energy Community 236 European Coal and Steel Community (ECSC) 235–6 European Commission: ASEAN 49, 60, 62, 63, 65; China 132, 134, 136, 139, 140, 141–3, 147, 149; general 27–9, 31, 235, 236, 240–1, 244; Hong Kong 176, 177, 182–3; Japan 78, 88, 90–2, 95–6, 100–1, 115–16; Korea 196, 198, 199, 204–5, 206–8; Taiwan 164, 165, 166, 167, 171, 174 European Council 94, 236 European Court of Justice 236 European Free Trade Area (EFTA) 131, 238 European Investment Bank (EIB) 66, 142 European Parliament 65, 166, 236 European Political Co-operation (EPC) 27, 46 European Union (EU): APEC 235, 236, 238–9, 252–3, 257; ASEAN 6, 11, 27–8, 30, Chapter 3 passim, 236, 255; ASEM (general) 30–2; China 6, 22, 23, 27, 28, 29, Chapter 5 passim, 255–6; East Asia (general) 5–7, 10–12, Chapter 2 passim; enlargement 238–9, 248, 252; FDI (general) 14, 24–5, 27; financial crisis (East Asian) 21–2, 25–6, 250–2, 254, 256, 257; governance 5–6; Hong Kong 6, 22, 25, 27–8, 30, 176–86, 255–6; integration 235, 238–9; Japan 6, 22, 23, 27–9, 57, Chapter 4 passim, 255–6; Korea 6, 22, 23, 24, 27–8, 30, Chapter 7 passim, 255–6; Maastricht Treaty 236; market access strategy 34; New Asia Strategy 28, 45, 50, 240, 253, 255–6, 257; regionalism 61, 235–9; sub-

312 Index regionalism 237; Taiwan 6, 22, 25, 27–8, 30, 163–76, 184–8, 255–6; trade policy, see Common Commercial Policy (CCP); USA 4, 6, 8, 94, 103–7, 252, 253–4, 257; WTO 32–5, 254–5 ‘Eurosclerosis’ 51, 199 export oriented industrialisation (EOI) 38, 43, 153, 155, 158, 188–9 export processing zones (EPZ) 40, 155, 225 financial crisis (East Asian): APEC 229–30, 231–3; ASEAN 40, 43, 66, 69; ASEM 21, 31–2, 249, 251; China 124, 143, 147, 150; EU 21–2, 25–6, 250–2, 254, 256, 257; general 17, 20–2, 25–6, 35, 250–2; Hong Kong 21, 159, 183–4, 186; Japan 21, 85, 106, 117; Korea 20–2, 26, 187, 190–1, 192, 193, 209–10, 211, 215–17; Taiwan 157, 186; USA 21, 251–2, 254, 257 financial services 33, 140, 142–3, 146, 175, 179, 190, 191, 201 Finland 25, 68, 109, 138, 169, 180, 202 foreign direct investment (FDI): ASEAN 38, 48, 51–3, 57, 66, 68, 70; China 119–20, 121, 124, 125, 126, 135, 137–8, 150, 151; Hong Kong 182; Japan 24–5, 82–4, 92–3, 96, 107–14, 115, 116; Korea 24–5, 66, 190, 192, 193, 196, 197, 204–5, 210–15; Taiwan 155, 171–2 foreign economic policy 1, 87, 150, 216 ‘Fortress Europe’ 28, 67, 74, 92, 108, 139, 238 France: ASEAN 37, 66, 68; China 131, 136, 137, 138, 148; general 5, 23, 25, 27, 28, 251; Hong Kong 179, 180–2; Japan 87, 90, 93, 109, 113; Korea 202, 215; Taiwan 163–4, 167, 169, 174 Free Trade Area of the Americas (FTAA) 44, 231 Fujian province 121, 161 gaiatsu 81, 82, 104, 106, 113, 115 General Agreement on Trade in Services (GATS) 33 General Agreement on Tariffs and Trade (GATT) 3, 33, 42, 87, 88, 90, 94, 132, 139, 144–5, 162, 166, 176, 177, 199, 238; see also WTO Generalised System of Preferences (GSP): EU scheme 11, 28, 46, 48, 53–4, 63–5, 74, 132, 139–40, 146, 151, 164, 174, 183, 199–200, 206; Japanese scheme 233; US scheme 38

Germany: ASEAN 66, 68; China 135, 136, 138; general 23, 25; Hong Kong 179, 180; Japan 88, 95, 96, 109, 113, 117; Korea 194, 202, 211, 212, 215; Taiwan 163, 165, 166, 167, 169 globalisation 1, 9, 10, 103, 107, 110, 115, 186, 208, 217, 240, 247–8, 256–7 Government Procurement Agreement (GPA) 105, 146 ‘Greater China’ 161–2, 185–6 Greater East Asian Co-Prosperity Sphere 77, 222 Greece 68, 109, 138, 169, 180, 202 ‘growth triangles’, see sub-regional economic zones (SREZs) Guangdong province 157, 159, 161 guanxi 38, 40, 81, 82, 121, 125, 161, 191, 225 Hawke, Bob 221 hegemonic stability (theory) 3–4, 73, 115, 149, 150, 185, 254 Hong Kong: anti-dumping duty regime of EU 159, 177, 182–3, 185; APEC 162, 226; ASEAN 64; China 121, 124, 125, 135, 143, 148–9, 151, 157–63, 176–9, 182–6; colonialism 176–7; economic development 157–60; EU (general) 6, 22, 25, 27–8, 30, 176–86, 255–6 EU integration 184; financial crisis (East Asian) 21, 159, 183–4, 186; France 179, 180–2; Germany 179, 180; ‘Greater China’ 161–2, 185–6; GSP scheme (of EU) 183; guanxi 161; international status 162–3; inward FDI 182; Italy 179, 180; Japan 180; Korea 183, 194; MFA 179, 183; Netherlands 179, 180; Singapore 183; Taiwan 161–2, 167, 171–4, 179, 184–6; trade and trade policy 23, 54, 159–60, 176, 178–9; UK 135, 143, 148–9. 157, 158, 163, 176, 177, 179, 186; USA 178–9, 180; WTO 162, 176, 178, 182 Honda 78 Hyundai 197, 211, 314 ICI 171 import substitution industrialisation (ISI) 153, 188 India/Indian subcontinent 41, 47, 246 Indonesia 14, 20–1, 37, 38, 40, 42, 54, 55, 59, 62–3, 64, 65, 66, 70, 72, 157, 230, 241, 247 Information Technology Agreement (ITA) 33, 146, 234, 253

Index

Institute of Pacific Relations 220 intellectual property rights (IPR) 29, 32, 60, 65, 87, 140, 144, 196–8, 207, 228 ‘internal’ barriers to international trade 33, 34, 35, 56–7, 174, 205, 207, 210, 217, 233, 254 International Labour Organisation 64 International Monetary Fund (IMF) 3, 8, 20, 26, 40, 82, 162, 176, 190–1, 193, 209–10, 213, 215, 216–18, 251 International Tropical Timber Organisation 64 Intra-National Free Economic Zones (INFEZs) 223 Ireland 25, 68, 109, 138, 165, 166, 169, 180, 202, 215 Italy: ASEAN 68; China 135, 138; general 25; Hong Kong 179, 180; Japan 88, 93, 109; Korea 202, 212; Taiwan 169 Japan: anti-dumping duty regime of EU 91, 93–4, 101, 108; APEC 81, 225, 230; ascendant economic superpower 1, 77–81; ASEAN 38, 40, 41, 47, 59, 65, 71; ASEM 30, 31, 59, 71, 106, 116, 241, 244, 246; Belgium 87; China 90, 118, 125, 135, 137, 140, 149, 150, 151; deregulation programme 29, 85, 98–101, 104, 113, 115, 116; East Asia 81–2, 220–3, 256; employment relations 79–80; EMU/euro 106, 115; EU (general) 6, 22, 23, 27–9, 57, Chapter 4 passim, 255–6; EU integration 88, 92, 94, 95, 106, 108, 111, 115; FDI in Europe 24–5, 82–4, 92–3, 96, 107–12, 115, 116; financial crisis (East Asian) 21, 85, 106, 117; ‘flying geese’ model 81; France 87, 88, 90, 93, 113; future challenges 84–6; gaiatsu 81, 82, 104, 106, 113, 115; Germany 88, 95, 96, 113, 117; GSP scheme 233; Hong Kong 180; industrial structuring 83–4, 107, 108, 110; inward FDI 112–14; Italy 88, 93; Keidanren 79, 88, 90–1, 114, 115; keiretsu 77–80, 85, 97, 107, 113, 115, 189, 191–2; Korea 188–9, 191–2, 193–4, 196, 198, 199, 200, 202, 208, 211–12, 213, 216, 217; market access issues 101, 113; Meiji regime 77, 78, 86; Ministry of International Trade and Industry (MITI) 79–80, 85, 91; Ministry of Finance (MOF) 79, 85; Netherlands 86, 87, 88, 96, 113; outward FDI 82–4; Portugal 86, 93; production-

313

management methods 77, 110; recession (1990s) 85–6; SEM 88, 92, 94, 95, 108, 111, 114, 115; sogo shosha 78, 107; Spain 86, 93; structural impediments to import 78, 92, 97, 98, 100–1; Taiwan 153, 154, 155, 164, 168, 171; Tokugawa regime 77, 82, 86; trade and trade policy 4, 22, 23, 57, 77, 82–3, 86, 90–5, 97–107; Triad and trilateralism 76, 84, 87, 92, 96–107, 115, 116; UK 86, 87, 88, 93, 95, 96, 110, 111, 112–13, 116, 257; USA 4, 77, 78, 82, 84, 86, 87, 92, 95, 98, 102, 103–7, 108, 110, 112, 115; VERs (of EU) 90, 92, 93, 101, 112; WTO (and GATT) 33–4, 87, 88, 90, 94, 101–2, 105, 106, 116, 254–5; zaibatsu 77–9 Japan Economic Research Centre ( JERC) 220 Keidanren 79, 88, 90–1, 114, 115 keiretsu 77–80, 85, 97, 107, 113, 115, 189, 191–2 Kia Motors 190, 192 Kim, Dae-jung 190–1, 192 Kim, Young-sam 190 Korea: anti-dumping duty regime of EU 199, 204–6, 214; APEC 226, 230; ASEAN 40, 41, 47, 59, 63, 64, 65, 66, 71; ASEM 30, 241, 244, 245, 246; Australia 206; Canada 199, 206; chaebol 25, 186, 189–92, 194, 196, 204–5, 207, 208, 210–14, 241; China 125, 129, 188, 191, 193, 199, 200, 202; East Asia 193, 218; economic development 188–91; EMU/euro 211; EU (general) 6, 22, 23, 24, 27–8, 30, Chapter 7 passim, 255–6; FDI in Europe 24–5, 66, 196, 197, 210–14; financial crisis (East Asian) 20–2, 26, 187, 190–1, 192, 193, 209–10, 211, 215–17; Five Year Plans 188–90; France 215; ‘frugality’ campaigns 34, 207, 208, 209; future challenges 193–4; Germany 194, 202, 211, 212, 215; GSP scheme (of EU) 199–200, 206; HCI drive 189; Hong Kong 183, 194; IMF ‘bailout’ programme 26, 190–1, 193, 209–10, 213, 215, 216–18; inward FDI 190, 193, 196, 204–5, 214–15; Ireland 215; Italy 212; Japan 188–9, 191–2, 193–4, 196, 198, 199, 200, 202, 208, 211–12, 213, 216, 217; KEDO 218; liquor tax regime 196–7, 198–9, 207, 209; MFA 206; Netherlands 212, 215; North Korea 188, 194; OECD

314 Index membership 30, 190, 217, 218; outward FDI 190, 192, 196, 204–5, 210–14; segyehwa 190, 193, 213; SEM 199, 205; Sweden 198; Switzerland 198; Taiwan 153, 154, 157, 164, 173, 174, 188, 194, 200; Thailand 205; trade and trade policy 4, 22, 23, 24, 55, 190–1, 193–210, 211, 216–18; UK 202, 211, 215; USA 188, 193–4, 196, 198, 199, 201, 202, 207, 208, 217; WTO (and GATT) 34, 190, 198, 207, 208, 209, 217 Korean Peninsula Energy Development Organisation (KEDO) 218 Kuomintang (KMT) 153, 154, 161, 162, 164, 166 labour standards 32, 64, 74, 150, 254 Laos 37, 40, 41 Latin America 39, 44, 46, 48, 50, 57, 60, 66, 89, 130, 156, 160, 195, 248 LG (Electronics) 192, 196, 197, 211, 214 Lome Convention 46, 54, 132 Luxembourg 164 Mahathir, Mohamad 61, 81, 230, 241 Malaysia: APEC 229, 230–1; ASEAN 37, 38, 40, 42; ASEM 241–2, 248; China 157; EU 20, 46, 54, 57, 59, 61, 62–3, 64, 65, 66, 70, 72 Mao, Tsetung/Maoism 29, 119, 120, 121, 129, 157 Marxism/Marxist analysis 12–15, 74–5, 116–17, 151, 186, 218, 248–9 ‘market-oriented, sector specific’ (MOSS) negotiations 92, 95, 104 Mediterranean Basin 50, 238 Mekong River Regional Triangle 40, 223, 224 Mexico 42, 43, 226, 251 Microsoft 8 Middle East 39, 89, 130, 156, 160, 195 Millennium Round 178, 185, 253, 255 Mongolia 173 most favoured nation (MFN) clause 48, 70, 82, 87, 88, 105, 125, 132, 145, 146, 200, 209, 217, 228, 233–4 multinational enterprises (MNEs)/ multinationals 7, 8, 10, 12, 13, 14, 70–1, 74, 81, 114, 116, 121, 123, 125, 129, 151, 167, 185, 186, 213, 218, 241, 248 Multi-Fibre Agreement (MFA) 10, 11, 53–5, 62, 134, 159, 173, 179, 183, 206 Multilateral Agreement on Investment (MAI) 33

Mutual Recognition Agreements (MRAs) 98, 201 Myanmar 37, 40, 41, 42, 44, 45, 61, 73 national treatment principle 32, 105, 145, 180, 199, 228 neo-liberalism/neo-liberal institutionalism 6, 7–12, 13–14, 32, 73–4, 115–16, 149–51, 185–6, 217–18, 241, 248 neo-mercantilism 4–5, 7, 74, 87, 91, 114, 148, 184, 199, 216 neo-realism 2–7, 12, 32, 72–3, 114–15, 148–9, 184–5, 216–17, 241, 247–8, 254 Netherlands: ASEAN 37, 66, 68; China 138; general 23, 25, 27; Hong Kong 179, 180; Japan 86, 87, 88, 96, 109, 113; Korea 202, 212, 215; Taiwan 169 New Asia Strategy (NAS) 28, 45, 50, 240, 253, 255–6, 257 new international division of labour (NIDL) theory 12–13, 14, 117 New Transatlantic Agenda (NTA) 16, 240 New Zealand 41, 47, 48, 220–1, 225, 230–1, 246 non-governmental organisations (NGOs) 7, 116 non-tariff barriers (NTBs) 43, 53, 55–7, 90, 95, 200, 207 North American Free Trade Agreement (NAFTA) 42, 44, 230, 233 North Korea 17 3, 188, 194 official development assistance (ODA), see aid ‘open regionalism’ 44, 70, 74, 209, 228, 233, 238–9, 253 Opium Wars 157 Organisation for Economic Co-operation and Development (OECD) 30, 32, 33, 88, 106, 190, 209, 217, 218, 221, 240, 255 Pacific Basin Economic Council (PBEC) 220 Pacific Economic Co-operation Conferences 221 Pacific Free Trade Area (PAFTA) proposal 220–1, 228, 234 Pacific Trade and Development (PAFTAD) conferences 220–1 Pan-Pacific Union 220 Papua New Guinea 226 Park, Chung-hee 188–9 Patten, Christopher 177

Index

Peugeot 171 Philippines 21, 37–8, 42, 54, 55, 57, 59, 62–3, 64, 66, 70, 157 Plaza Accord 29, 38, 92 Portugal: ASEAN 44, 59, 68, 72; China 138; general 14, 25, 27, 28, 241, 247; Hong Kong 180; Japan 92, 109; Korea 202; Taiwan 164, 169 post-colonialism 12, 14, 36, 37, 72, 74, 186 realism 2 regional integration agreements (RIAs): see also regionalism regionalism: ASEAN 40, 41, 43, 51, 67–9, 220, 222, 230, 231; East Asia 51, 219– 35; Europe 51, 235–9; inter-regionalism 238–46; sub-regionalism 51, 222, 223–5 relational power 3, 86, 95 Renault 171 Russia 41, 47 Samsung 191, 192, 196, 197, 213, 214 Santer, Jacques 21, 177 semiconductor industry 95, 159, 191, 208, 213 Shanghai 122, 157, 162 SIJORI (Southern Growth Triangle) 40, 223, 224 Singapore: ASEM 240–2; ASEAN 37, 38, 40, 41, 42–3; EU 46, 54, 55, 57, 59, 60, 62–3, 64, 66, 71, 72; general 21, 25, 28, 223; Hong Kong 159, 183; Taiwan 173, 174 Single European Act (SEA) 92, 95, 108, 136, 236 Single European Market (SEM): ASEAN 51, 56, 61, 69, 74; China 136, 139; general 10, 28, 236, 250, 252; Japan 88, 92, 94, 95, 108, 111, 114, 115; Korea 199, 205, 214 small and medium-sized enterprises (SMEs) 51, 78, 154, 155, 173, 192, 194, 201, 212 Southeast Asia, see Association of Southeast Asia (ASEAN) Southeast Asia Treaty Organisation (SEATO) 220 South Korea, see Korea South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) 221 Soviet Union 125, 129, 131, 136

315

Spain: ASEAN 37, 68, 72; China 138; general 25, 28; Hong Kong 180; Japan 86, 93, 109; Korea 202; Taiwan 169 Special Co-ordinating Committee of ASEAN Nations (SCCAN) 46 Structural Impediments Initiative (SII) 92, 95, 104 structural power 3, 33, 35, 82, 86, 95, 116, 144, 146, 208, 217–18, 233, 254 sub-regional economic zones (SREZs) 40, 43, 51, 161, 222, 233, 237, 248 sub-regional trading arrangements (SRTAs) 221–2, 233 surplus capacity (theory) 9–10, 11, 74, 116, 150 Sweden 25, 68, 109, 138, 165, 166, 169, 180, 198, 202 Switzerland 175, 198 Taiwan: anti-dumping duty regime of EU 167, 172, 173, 175, 185; APEC 162, 226; arms trade 137, 167; Asia-Pacific Regional Operations Centre (APROC) 155, 167, 185; ASEAN 63, 157, 167; ASEM 246; Austria 166; Belgium 165, 166, 167; colonialism 153, 163; China 121, 132, 137, 141–2, 148–9, 155, 157–67, 168, 172, 175–6, 184–6; Denmark 164; economic development 153–7; EU (general) 6, 22, 25, 27–8, 30, 163–76, 184–8, 255–6; financial crisis (East Asian) 157, 186; France 163–4, 167, 169, 174; Germany 163, 165, 166, 167, 169; ‘Greater China’ 161–2, 184–5; GSP scheme (of EU) 164, 174; guanxi 161; Hong Kong 161–2, 167, 171–4, 179, 184–6; international status 162–3, 164, 166; inward FDI 155, 171; Ireland 165, 166; Italy 165, 167, 174; Japan 153, 154, 155, 164, 168, 171; Kuomintang (KMT) 153, 154, 161, 162, 164, 166; Korea 153, 154, 157, 164, 173, 174, 188, 194, 200; liquor tax regime 172, 174, 175; MFA 173; Mongolia 173; National Development Plan 155, 167; Netherlands 153, 163, 164, 165, 166, 167, 169, 171; North Korea 173; outward FDI 171–2; Portugal 164; Singapore 173, 174; SMEs 154, 155, 173; Sweden 165, 166; Switzerland 175; trade and trade policy 4, 156, 162, 164, 167, 168–70; UK 162–3, 165, 166, 169, 171; USA 153, 155, 163, 164, 167, 168, 174–5, 176, 184–5; Vietnam 173; WTO

316 Index 144, 147, 162, 165, 166, 172, 174, 175–6, 184–6 telecommunications industry 23, 33, 60, 66, 106, 138, 139, 146, 159, 178, 191, 196–8, 201, 207, 209–10, 226, 228 textile industry 54–5, 62, 64, 65, 74, 75, 102, 132–4, 139, 153, 155, 158, 159, 164, 172, 173, 179, 182, 188, 191, 196, 204, 206, 222 Thailand 20–1, 37, 38, 40, 42, 54, 55, 59, 62–3, 64, 65, 66, 70, 157, 229, 230 Thomsen-CSF 167 Trade Assessment Mechanism (TAM) 98 Trade-Related Investment Measures (TRIMs) 32, 65, 228 Trade-Related Intellectual Property rights (TRIPs) 32, 146 Transatlantic Free Trade Area (TAFTA) 254 transshipment 159, 182–3, 185 Triad 29, 76, 84, 87, 92, 96–107, 115, 116, 213, 240, 248, 253–4, 256–7 Tumen River Regional Triangle 193, 223, 224 ‘two-level games’ 9 United Kingdom (UK): ASEAN 37, 46, 66, 68; China 135, 136, 138, 143, 148–9; general 3, 23, 25, 27, 28, 30; Hong Kong 135, 143, 148–9, 157, 158, 163, 176, 177, 179, 186; Japan 86, 87, 88, 93, 95, 96, 109, 110, 111, 112–13, 116, 257; Korea 202, 211, 215; Taiwan 162–3, 165, 166, 169, 171 United Nations (UN) 3, 162 United States of America (USA): APEC 4, 226, 229–30, 232–3, 257; ASEAN 37, 38, 40, 41, 46, 47, 48, 53, 54, 61, 65, 73: ASEM 240, 244, 245–6; China 118, 125, 129, 131, 134–5, 136, 138, 143, 145–7, 149, 151; EAEC/G 221–2, 230–1; East Asia (general) 4, 6–7, 22, 210–13, 253–4, 256; EU 4, 6, 8, 94,

103–7, 252, 253–4, 257; euro 252; financial crisis (East Asian) 21, 251–2, 254, 257; GSP scheme 38 hegemony 1, 3–4, 6, 103, 106, 115, 131, 149, 185, 247, 252, 254; Hong Kong 178–9, 180; Japan 4, 77, 78, 82, 84, 86, 87, 92, 95, 98, 102, 103–7, 108, 110, 112, 115; Korea 188, 193–4, 196, 198, 199, 201, 202, 207, 208, 217; Taiwan 153, 155, 163, 164, 167, 168, 174–5, 176, 184–5; unilateralism 11, 106, 115 WTO 8, 33 Uruguay Round (of GATT) 27, 32, 42, 58, 59, 62, 94, 139, 144, 190, 206, 226, 228, 230, 231, 238 Vietnam 37, 40, 41, 42, 46, 48, 62–3, 64, 66, 173 Volkwagen 171 voluntary export restraints (VERs) 28, 90, 92, 93, 101, 112, 173–4, 206 World Bank 3, 18, 19, 162 World Trade Organisation (WTO): APEC 225, 227–30, 232, 233–4, 253; ASEAN 65, 74, 75 ASEM 31, 241–2, 246, 248, 255; China 29, 33, 118, 124, 125, 142, 144–50, 255; East Asian countries (general) 11, 254–5; EU 32–5, 254–5; general 3, 8; Hong Kong 162, 176, 178, 182; Japan 33–4, 87, 88, 90, 94, 101–2, 105, 106, 116, 254–5; Korea 34, 190, 198, 207, 208, 209, 217; Millennium Round 178, 185, 253, 255; Ministerial Meetings 33; new trade issues 16, 32–3, 35, 75, 254–5; Taiwan 144, 147, 162, 165, 166, 172, 174, 175–6, 184–6; USA 8, 33; (see also GATT) Xiamen 121 Yangtze Delta Development Zone 122 zaibatsu 77–9, 189 ZOPFAN 40