SPECIAL REPORT 37

"Trialogue": U.S.-Japan-China Relations and Asian-Pacific Stability

The Asian Financial Crisis; Enhanced Trilateral Cooperation?

The dilemmas posed by the Asian financial crisis have required enhanced coordination efforts involving the U.S. Treasury in dialogue with counterparts in Japan and China. While many of these efforts have involved joint coordination and technical support to manage short-term macroeconomic responses to the challenges posed by the crisis, the United States has engaged in overt and indirect forms of gaiatsu to mobilize a response to structural problems of immediate concern, particularly in the case of Japan. And the crisis has revived the Asian values debate, with critics quick to point out shortcomings in the Japanese economic model, although the terms of debate themselves may prove to be ultimately unsatisfying and inconclusive.

Although the fundamental task in response to the Asian financial crisis is still restoring confidence through transparency, strong prudential regulation, and the willingness to admit and allow the failure and restructuring of bankrupt institutions, the critical issues posed by the crisis may differ depending on the stage of economic development. For instance, China's long-term dilemmas focus on the challenge of making its currency convertible while managing to reform inefficient state-owned enterprises; the Asian financial crisis has narrowed the margin of error to successfully manage this task while signaling useful lessons for China to gain from the Korean and Japanese experiences. Crisis is an instigator of reforms necessary to move to the next stage of development, at which point a country may only face different types of crisis and new imperatives for reform, as the Japanese situation suggests.

While coordination has been the theme of consultations between economic officials in the United States and a China that remains on the periphery of Asia's financial crisis, gaiatsu has been the by-word for describing the tone of a much more intertwined and deeper level of consultation between the U.S. Treasury and Japan's Ministry of Finance. External pressure from the United States partly results from America's profound interest in Japan dealing with its problems so as to halt the contagion effect to the global economy, including the United States. Thus, pressure in the current crisis may be seen as a symptom of the closeness of U.S.-Japan relations, more than a symbol of fraying or distance. Also, U.S. pressure has become a familiar and expected part of the Japanese policy-making process, as domestic constituencies in Japan who favor reform require external support to overcome the entrenched self-interests accompanying a bureaucratic structure which, while highly successful in the past, has failed to choose correct macroeconomic policies in the 1990s.

Does the stagnation Japan currently faces presage the failure of the Asian economic model for growth, and are Japan's current economic difficulties insurmountable? Participants in this July 9-11, 1998, "trialogue" were rightly encouraged to look beyond the vagaries of the business cycle. During the 1980s, the United States was in the economic doldrums as a result of its own savings-and-loan crisis, while Japan and others provided a small measure of reverse gaiatsu through criticism of the ballooning U.S. budget deficits. Japan's economic performance in the 1990s may be similar in many respects, but it does not mean that Japan can be counted out in the future.

Likewise, the debate over the role of government planning or public subsidies as a means of targeting or enhancing economic performance and efficiency is not likely to be settled soon. In some cases, public regulations fetter the efficiencies of the market; however, government is responsible for providing regulatory oversight to enhance those efficiencies and augment national competitiveness. The debate over how to reform the regulatory architecture for managing global capital flows reflects the debate over the extent that regulatory mechanisms are necessary or desirable. Would intervention to determine a fixed dollar-yen exchange rate, for instance, resolve the current crisis of confidence, or would the inefficiencies that might result actually limit the potential for additional capital formation needed to escape the crisis? The reality is that Asian and American models are mixed, as are the various contrasting organizational cultures even within the same industrial sectors in the United States; for instance, East Coast hi-tech organizational culture is very different and less efficient than that of Silicon Valley, which, at first glance, seems to share more "Asian" characteristics.

To address the long-term economic and financial problems more effectively, coordination mechanisms that include all the right players should be established. China's admission to the WTO might be one step in that direction, if leaders in Beijing can effect the necessary internal economic reforms to meet membership qualifications. Given China's emerging importance and its responsible, if self-interested, economic behavior in response to the Asian financial crisis, would China's inclusion in the Group of Eight make that organization more effective? Is the current level of consultation among Asian financial and banking officials sufficient? In addition to U.S.-Chinese consultations over economic matters, should Sino-Japanese economic consultations be stepped up on a wider variety of issues, or would a trilateral economic discussion of regional trends be of value?

See the complete list of Institute reports. The views expressed in this report do not necessarily reflect those of the United States Institute of Peace, which does not advocate specific policies.