There are two narratives about Ichiro Ozawa, the Secretary-General of the Democratic Party of Japan (DPJ). One is that he is a wizard at elections. This reputation was enhanced by his masterminding of the DPJ’s 2009 electoral strategy that helped bring about the first real change of government through the ballot box in sixty years.

The second is that, rather than being a politician of firm convictions, Ozawa is a machine politician animated by the desire to secure and retain power for its own sake. Investigations into alleged corruption fuel this narrative.

It is uncontroversial to note that politicians seek power; opposition parties have fewer tools to change policy. Beyond that, this second narrative is fundamentally wrong: Ozawa’s political career since the early 1990s has been driven by a political project, a project that cannot be reduced to a simple desire to get him and his party elected. Instead, it is about reshaping Japan’s institutions of governance.

What is our basis for making this claim? Collectively, we worked for Mr Ozawa for a total of seven years, in periods of both opposition and government, from 1994, just after the fall of the anti-LDP coalition government, to 2000, when he led the Liberal Party out of its coalition with the LDP. We sat in on scores of meetings, both public and private, with domestic and foreign audiences, both inside and outside Japan.

A number of these meetings undoubtedly had a direct effect on his, and his party’s, electoral chances. But for many this was unlikely. Further, regardless of the setting and political circumstances, what was common across these meetings was the political message. Instead of assuming that his words and actions are part of a plot for securing and retaining power, it’s better to assume that Ozawa means what he says. Yes, winning elections is undoubtedly important for him, but it remains a means to an end.

What Does Ozawa Want?

If we are right about Ozawa, then there are two questions to be answered. First, what does this political project consist of? And second, why does such misunderstanding persist about Ozawa’s nature? In his biography of Shigeru Yoshida, John Dower notes that Yoshida focused on ‘large matters: the desirable structure of the state, and the ideal role of the state in international affairs.’ This could have been written in a biography of Ozawa, and captures the essence of his thinking.

In his writings and conversations Ozawa has consistently focused on the need for individuals, and Japan as a nation, to shoulder greater responsibilities. This stems from his belief that Japan’s institutions of governance were well suited to the Cold War, but must now be fundamentally transformed if Japan is to prosper.

This may sound grandiloquent. But the institutional changes Ozawa has helped bring about, and others that the DPJ has proposed with his support, have important implications for the way interests are aggregated in Japan, and therefore for policy outcomes. He has especially supported two sets of institutional changes: electoral reform, and increasing the ability of elected officials to make decisions relative to Japan’s ministries and agencies.

Electoral reform has been promoted at different times for decades. But Ozawa was pivotal in creating the first non-LDP government for 38 years, and helping turning proposals into law. In doing so he succeeded where others failed, and it is now standard to attribute important reforms in Japan’s political economy to this change, from the financial sector to welfare and security policy, and of course to the change in government itself.

On the second, Ozawa is not the only proponent of increasing the power of politicians relative to bureaucratic officials. Former Prime Minister Hashimoto Ryutaro, for example, played a crucial role. But Ozawa has been advocating such changes longer than any other senior politician. He also views this project as unfinished, and it is now the focus of his energy.

Institutional changes he has helped put in place include the removal of bureaucrats from Diet deliberations and the introduction of state secretaries within the ministries. Both were implemented while Ozawa’s Liberals were in coalition with the LDP (1999-2000), and despite opposition from that party.

Extensions of these reforms are now supported by the DPJ leadership, and are included in its electoral manifesto. Increasing the number of political appointees within the ministries, for example, should lead to greater political participation in the deliberative councils, or shingikai, that are the engine rooms of Japan’s brand of corporatist decision-making. Those who have sat through many of these councils know they can be effective, but can also limit the pace and depth of policy change. Greater political participation should change this inherent incrementalism. Ozawa’s belief in the need for reorganising Japan’s postwar institutions extends to foreign policy. This does not mean he wavers on the importance of the US-Japan alliance. On the contrary, like Yoshida he views the alliance as indispensable to Japanese and regional security.

But, while believing that Japan’s strategic interests lie with the United States, Ozawa also does not think this precludes Japan from acting in its own interests in issues unrelated to the defence of Japan, even when they diverge from Washington’s position. Also, like Yoshida, Mr Ozawa does not see China as an ally, but neither does he understand it as Japan’s adversary.

How does he see his own role in this process? In Blueprint for a New Japan Ozawa notes his political heroes as Toshimichi Okubo, Hirobumi Ito, Takashi Hara, and Yoshida. This suggests two things about how Ozawa understands politics and his role in it. First, he believes in the ability of leaders to shape the political environment; for Ozawa, individuals can trump structure in determining outcomes. Second, he sees the role of leadership as crucial in crises. Furthermore, as Ozawa has been saying consistently for the past two decades, and as we heard him repeat many times, he believes Japan’s ongoing problems stem from a crisis of governance. He also thinks he has an important role in driving reform.

There are differences between Yoshida and Ozawa, of course. Yoshida was a diplomat for the majority of his career. Ozawa, on the other hand, entered parliament at the age of 27 by taking over his father’s seat. As Prime Minister, Yoshida focused on consolidating conservative rule. Ozawa, meanwhile, has never been Prime Minister, and has stated that his goal is to transform the system put in place by Yoshida. On a personal level, Yoshida is reported to have been voluble, while Ozawa can be taciturn. But an essential similarity between the two lies in their focus on Japan’s position within history, and the importance they ascribe to leadership in ensuring their country is able to meet the challenges they see their country facing.

Why the Misunderstanding?

If we are right about Ozawa, why does the alternative narrative—that Ozawa seeks power for its own sake—remain credible? There are four big reasons.

First, Ozawa has a poor relationship with the Japanese print media. He rarely conducts doorstops, or burasagari, which are a common element of the press interaction with politicians. In fact we remember this happening only once in our time at Liberal Party headquarters, the day after the news broke that then Prime Minister Keizo Obuchi had suffered a stroke. He also rarely conducts one-on-one interviews with the broadsheets. Opportunities for the press to question Ozawa are therefore limited to weekly press conferences. Further, there’s little doubt that Ozawa can come across as imperious at these.

Compounding this problem, as Katsuyuki Yakushiji of the Asahi Shimbun has noted, is the fact that Ozawa tends to disappear from public view at crucial political moments. We’ve never asked him why he does this, but it does mean that he is least available at the time when information is most sought by the press and public. This absence of information, and his lack of clarity in putting his views at such moments, inevitably raises questions about whether he is engaged in backroom dealing.

Second, as his former secretary and lawmaker Ishikawa Tomohiro, indicted on February 4, is quoted as saying, in Ozawa’s office the word of the boss is law. In fact, we think this is perhaps Ozawa’s central conundrum: while he is defined by his commitment to improving the quality of decision-making in Japan’s democracy, his organisational instincts and management of information reflect his political apprenticeship within the faction of former Prime Minister Kakuei Tanaka. This has worked to his detriment: Ozawa is often accused of strong-arming others, as was the case with Yoshida and Tanaka. He seldom explains his decisions, even to close friends. It can also lead to overreaching.

A prime example is Ozawa’s role in the Socialists’ decision to leave the government and enter into coalition with the LDP. He has since stated that allowing this to happen was the biggest mistake of his political career; if this had not occurred he thinks the LDP would have split within months. The tendency to over-reach doesn’t help build trust; the list of politicians who were once friends of Ozawa but are no longer so is a growing one, as we saw first-hand during our time at the New Frontier Party (NFP, or Shinshinto) and Liberal Party.

Third, Ozawa has spent periods of his post-LDP career involved in political manoeuvring, from working to establish the anti-LDP coalition government of Morihiro Hosokawa in 1993, to reaching agreement to enter into coalition with the LDP in 1998, to negotiating in 2007 with then-Prime Minister Yasuo Fukuda over a possible coalition between the DPJ and the LDP. But our experience is that this is not indicative of a desire to seek power for its own sake, as his critics would have it. In fact almost the entire time he has been a politician of note Ozawa has been in opposition. Is it really surprising, then, that he has engaged in such manoeuvres in order to bring about a change of government? And, despite failures, has succeeded in this endeavour twice.

Further, the history is often misrepresented. To take one example, the most important reason for the breakup of the NFP was not Ozawa’s destructive tendencies. Rather, it was hedging by the Komeito. There is not space here to elaborate on all the important events, but it is worth mentioning a few. When the Komeito dissolved itself to join the NFP in 1994, it hedged its bets by keeping Upper House members and members of the Tokyo Metropolitan Assembly out of the party. Further, in the Tokyo Metropolitan Assembly election in June 1997 the Komeito did not follow through in its promise to support NFP candidates. As a result, all the Komeito candidates were elected with NFP support, while none of the NFP candidates were successful. Quite reasonably, given this, during the summer and autumn of 1997 Ozawa attempted to properly integrate the Komeito with the NFP. But in December 1997, after Ozawa was reelected President of the NFP, the Komeito decided to end its alliance with the NFP and withdraw its members from that party. The party then collapsed.

This hardly matches the narrative of Ozawa the destroyer. In truth, experiences like these suggest to us, perhaps rather mundanely for critics seeking some secret motive to Ozawa’s actions, that he is simply human: he formulates strategies designed to achieve his goals. But he also makes mistakes and is also taken in by others at times.

Finally, the most serious charge levelled at Ozawa is that of corruption. We have never been privy to how Mr Ozawa manages his finances, and have no information on the veracity of claims made against him. Further, we believe politicians should be transparent in how they manage political funds. But we think such accusations should be tempered by the fact that Ozawa has never been indicted, let alone found guilty, of corruption. Further, the public prosecutor’s office just completed an extraordinarily thorough investigation into his personal finances, including seven hours of questioning, and did not identify grounds for charging him with criminal behaviour.

Proponents of the Ozawa-as-corrupt narrative also point to his tutelage under Kakuei Tanaka and Shin Kanemaru. We obviously did not work for him during this time. But no evidence from this period establishes Ozawa’s criminality. The only case in which Ozawa has been found to have done wrong is the Recruit Cosmos Scandal of 1989, more than 20 years ago, or over half of Ozawa’s political life. But if we are to define Ozawa’s career by this episode, then surely it is incumbent upon us to tar Kiichi Miyazawa, Yasuhiro Nakasone, Keizo Obuchi, Masajuro Shiokawa, Yoshiro Mori, Kochi Kato, and others with the same brush. That this is not done suggests a double-standard at work. Further, if Ozawa’s goal were personal enrichment, it’s unlikely that he would champion campaign finance reform, as he has done for twenty years. Indeed, limiting corporate donations makes little sense if we try to understand Ozawa through the narrative created by his critics.

What Does This Mean for Now?

The investigation into Ozawa’s finances has undoubtedly damaged the DPJ’s popularity. But setting this aside, if we are right about Ozawa’s real motives, then what does this mean for policy?

It’s first worth noting that Ozawa does not run the DPJ; policies that come out of the party are not a perfect reflection of his will. In the short term, we think it’s likely that Ozawa will focus on the Upper House election. There is no contradiction between this and the argument we’ve made above. One constraint on the DPJ as it seeks to implement its electoral manifesto is its coalition with two minor parties: the Social Democrats, who are leftist, and the Japan New Party, which is conservative. If the DPJ wins an absolute majority in the House of Councillors in July, it will have more room to manoeuvre, even if it remains in coalition with those two smaller parties.

Also, Ozawa remains Secretary-General of the DPJ. This doesn’t mean he is absent from policy debates; he cannot fight an election without being involved in determining the policies upon which to run. And he can also over-reach in ways that frustrate his colleagues, as we noted above. But it does mean he is likely to focus with greater intensity the responsibilities of his formal role. This reflects his view that the cabinet should be the central organ of decision-making, as well as his long-standing criticism of the separation of party and government during the LDP’s period in power.

In the medium-term, our experience from the Liberal Party coalition with the LDP and Komeito suggests that our policy expectations for the DPJ should be set by what is in the electoral manifesto. Mr Ozawa places great weight on these documents as compacts with the voting public. Long negotiations in 1998-1999 over forming a coalition with the Obuchi government, for example, focused on reaching a detailed policy agreement, and Ozawa, Hirohisa Fujii, Yoshio Suzuki and others, spent their eighteen months in coalition fighting for implementation of the policies they and the LDP had agreed upon.

Certainly it is reasonable to point out that Ozawa’s views on the role of government have changed over time, increasingly emphasising the need to embed liberalisation in a set of social welfare institutions. This is undoubtedly good electoral politics. But it does not amount to evidence that he doesn’t believe what he says. If we look at the arc of politics in the United Kingdom, or indeed in the United States, Ozawa has, in fact, changed with the times. Also, we think a big reason Ozawa is interested in deregulation is that it implies reducing the power of the ministries and agencies to determine market outcomes. This means he will continue to champion this goal.

It’s also worth noting that Ozawa is willing to leave the detailed design of policy to others. For much of the 1990s, for example, he used former Bank of Japan official Yoshio Suzuki to help formulate economic policy. And when formulating security policy, he consulted with Hideaki Tamura, a retired Air Force general, and others. If there were a wide divergence between the DPJ’s legislative program and Ozawa’s views, this dynamic might have been different, but we don’t think this is the case. He is meticulous when he needs to be so, but he is also willing to leave considerable discretionary powers to trusted colleagues.

Finally, there is the question of what all this means given the recent investigation conducted by the prosecutor’s office. We have no special information about the particulars of the case. But if our assessment is right, then we think it’s unlikely that Ozawa will resign unless he determines that the political costs threaten the ability of the party to achieve its objectives. Our experience is that Ozawa is certainly a political animal, but it is politics with a purpose. He engages in politics to bring about a set of changes that he believes will increase liberty and make Japan more active internationally. Portrayals of Ozawa that forget this miss what is most essential about him.

This article is the first of a two part feature on Ichiro Ozawa, and first appeared here in the February issue of The Oriental Economist Report.

Takashi Oka worked for Ichiro Ozawa from 1994-1998, after a forty-year career in journalism with the Christian Science Monitor and other publications. Llewelyn Hughes worked for Ozawa from 1997-2000, and is currently Assistant Professor of Political Science and International Affairs at George Washington University.

1. Japan: Ozawa will be secretary-general
2. The electoral consequences of Mr. Ozawa
3. Ozawa: The Shiva of Japanese politics, creator and destroyer

At the beginning of 2009 the global financial crisis struck hard at the real economy of China. While the whole country suffered, not all regions suffered equally. Looking at two industrial cities on which the crisis had a very different impact helps to explain the reasons for the uneven effect of the crisis, and highlights opportunities for policy reform.

The city of Dongguan in Guangdong province provides a telling example of the severe shock experienced by migrant workers in the wake of the crisis. Dongguan is located in the Pearl River Delta Region which has a high concentration of export-oriented labor-intensive enterprises and migrant workers. As early as the second half of 2008 due to a sharp drop in export orders some enterprises in Dongguan, shut down while others substantially reduced production. As a result, a large proportion of migrant workers in the city lost their jobs. An official source indicated 20 million migrants returned home earlier than expected because of the fall in demand for exports.

If you drive several hundred miles up along the highway from Dongguan, you’ll arrive in another coastal city, the city of Quanzhou, in Fujian province. There you’ll find a completely different picture of labor market. Unlike what happened in Dongguan, there was actually a labor shortage in Quanzhou. Moreover, a 20 per cent increase in the wages of migrant workers was reported in 2008, despite the fact that the crisis had already hit the coastal regions of China in second half of the year. The coexistence of such contrasting phenomena when both cities faced the same crisis must indicate that something extraordinary was happening in the labor market. When one considers the labor shortages witnessed between 2004 and 2007, one cannot help but conclude that the ‘Lewisian Turning Point’ was present even during the financial crisis.

Not long after the Chinese New Year, an official survey showed that 95 per cent of migrant workers returned to industrial cities to work, and surprisingly 97 per cent of these returning workers found jobs. What is more, the total number of migrant workers in urban areas increased from 140 million in 2008 to 150 million in September 2009, the biggest jump in the past 6 years. This is outstanding considering that the growth in migrant workers had been slowing down since 2003 as a result of decline in the working-age population in rural areas. This was due partially to an expansion in the construction sector, and partially to the ease at which the economy can create new jobs.

The agricultural sector no longer stands as a pool of surplus labor for three reasons. Firstly, since agriculture has become much more mechanized, migrants returning to rural areas have found themselves unable to find work. This has encouraged massive numbers of rural laborers to permanently migrate to cities. Secondly, the majority of migrant workers now consist of second-generation migrants, who unlike their parents’ generation, have never wanted to work in the agricultural sector. Thirdly, due to various changes in land distribution, such as expropriation, subcontracting, and the return of land to collective farms, some migrants who used to rely on farm work are now unable to do so. Given that migrant workers do not have any formal access to the safety net enjoyed by the urban population, they cannot afford to be unemployed, and they were bound to return to cities and be reemployed in sectors other than manufacturing. This is pretty much like what happened to Japan after the 1960s when it stepped into its Lewis Turning Point.

During this Lewis Turning Point period, the better functioning and more supply-dominative labor market has prevented both urban and migrant workers from suffering long duration unemployment. The two cities mentioned above reacted to the crisis differently because of institutional obstacles engendered by the hukou system. The hukou system discouraged both the labor market readjustment of migrant workers and the provision of social protection to migrant workers.

Some people think that reform of the hukou system is simply impossible. If one views hukou not as simply a declaration of the place of residence but as a guarantee of equal access to urban public service, however, it can be optimistically expected that in 2010 the hukou system can be reformed as part of the general progress of social security programs moving to better cover rural residents and migrants.

This is part of the special feature: The 2009 in review and the year ahead.

Cai Fang is Director of The Institute of Population and Labor Economics (IPLE), Chinese Academy of Social Sciences (CASS).

1. China’s migrant problem: the need for hukou reform
2. Achieving real progress in China’s hukou reform
3. Making real hukou reform in China

The EU views China with a combination of awe, ignorance, fear, confusion and ambition. It is awed by China’s rise. It is largely ignorant of China. Real knowledge of China, and Asia more generally, is pathetic in Brussels, as it is in all European capitals with the partial exception of London. European sophisticates constantly disparage American insularity, but knowledge of Asia is far superior inside the Beltway, and in think tanks and universities in the United States, than it is anywhere in Europe. Ignorance mixed with arrogance is not an American preserve; it is found in abundance on the Old Continent, as any visit to a Parisian intellectual salon will reveal.

Then there is fear of China, especially when relations with it are viewed in militaristic, zero-sum terms. Perhaps that reflects an atavistic French world-view. And confusion reigns, for the EU, being a non-nation-state hybrid, has no foreign policy towards China and is often undermined by the foreign policies of its big three member-states (UK, France and Germany). Last, despite these drawbacks, the EU’s ambition is to be a privileged interlocutor and at the top table with China. That reflects the EU’s self-image as a ‘power’ in the world.

EU power

The EU is a ‘power’ in one sense: its market size. It is the biggest economic space on the planet, the biggest trading region (accounting for about a fifth of world trade), and the biggest region for foreign direct investment (accounting for almost half the stocks and flows of outward and inward FDI). This real economic power has two pillars: the Single Market and the Common Commercial Policy. The EU can promote or restrict access to its internal market, which it uses as a bargaining chip to gain access to foreign markets. It is no accident that internal-market and trade policies are the two most centralised components of EU policy-making. They are as ‘hard’ as EU power gets. And they encourage the EU to export its ‘regulatory model’ to the rest of the world through trade negotiations and other means. That applies to labour and environmental standards, climate change, product and food-safety standards, competition rules, government procurement regulations, all the way to Corporate Social Responsibility, human rights, democracy and animal welfare.

But EU power is severely constrained in every other way. Unlike the United States and China, the EU has no collective military power. Rather it advertises ‘soft power’ through diplomacy, support of international organisations, international law and foreign aid. But this is a bit of a joke — mere postmodern hot air. It is no substitute for hard power. As Les Gelb, the president emeritus of the Council for Foreign Relations in New York, quips, soft power is like foreplay; it isn’t the real thing. Asians are acutely aware of this, for Asian elites are almost without exception hard-boiled realists. They do not buy effeminate soft-power talk. Soft power as a replacement for hard power is in reality the denial of power. For the EU, given its inability to exercise real political and military power in the world, soft power translates into hyperactivity in international organisations and the elevation of process over substance. Bureaucratic running around in international forums is the EU’s foreign policy; it is an end in itself. EU foreign policy is impotence in search of Viagra – that never comes. The EU’s choice of a new president and foreign-policy chief is as vivid an illustration as any of this pathetic reality.

International organisations and multilateralism have their place. But the EU vastly overestimates their importance in terms of their ability to solve global problems. Usually, large-group activity in international organisations is a lot of sound and fury that delivers stalemate, not results. That is the ‘UN way’, and it can also be seen in WTO negotiations, the IMF and the World Bank. More important for global problem-solving, inside and outside international organisations, is small-group cooperation. That usually requires cooperation among big powers that have both hard and soft power. Emerging non-Western powers – China in the lead – must inevitably play bigger roles in these concerts. Since 1945, such cooperation has almost invariably required the initiative and leadership of the United States. Here the EU is incapable of leading or co-leading; and there remains no substitute for US leadership.

The EU also suffers from a paradox. With enlargement and greater market size it is weightier in the global economy. But at the same time its decision-making has become more fragmented, making it more difficult to coordinate national positions and speak with one voice. That decreases its ability to wield collective power abroad. In the one arena where the EU is a global heavyweight — trade policy — competence is divided on several issues, notably services and investment. An enlarged EU makes it extra-difficult to have credible positions in international negotiations on services and investment. The Lisbon Treaty is supposed to overcome these problems by streamlining decision-making. But that may not be the result, especially with greater power for the European Parliament (EP). On trade policy, market-sceptical forces and single-issue fetishists in the EP may complicate decision-making and tilt policy outcomes in a more protectionist direction.

Finally, the global economic crisis has made the EU more defensive and inward-looking. As a rule of thumb, the EU has a more liberal trade policy when the internal market is opening up and integrating. But trade policy becomes more protectionist when the internal market is under stress and deprived of the oxygen of market reforms. That is roughly the situation today. The internal market is buffeted by crisis-induced member-state measures (most obviously on subsidies) that result in protectionism against other member-states. And there is no structural reform agenda. That inevitably makes the EU more defensive with third countries.

EU-China relations

The EU and China have the world’s second most important trade-and-investment relationship (after the transatlantic relationship). The EU is China’s biggest trading partner. China is the EU’s second biggest trading partner and its biggest source of goods imports. European multinationals have poured investment into China and are prominent in east-Asian supply chains (in which China is usually the last assembly stage before finished products are exported back to the West). Such deep commercial relations lead inexorably to commercial and political tensions, as they do in US-China relations.

EU-China relations parallel US-China relations in some ways. The EU, like the United States, claims ‘unfair’ Chinese competition from an allegedly undervalued exchange rate, trade surpluses and hidden export subsidies. And it complains of lack of access to the Chinese market due to weak intellectual-property rights, standards requirements meant to protect domestic producers, and restrictions on services, investment and government procurement. China bemoans its lack of ‘market-economy status’ in the United States and EU, in addition to other protectionist measures such as trade remedies, standards restrictions and peak tariffs.

But the EU and United States also have different approaches to China – with the comparison favouring the United States. First, the EU has tried to copy the US-China Strategic and Economic Dialogue, the high-level forum used to address market-access issues and defuse bilateral tensions. But the EU-China High-Level Dialogue has come to nought. It has not gone beyond official exchanges of established positions and shallow summitry. It has not led to deeper engagement on key issues. That was abundantly clear at the last EU-China summit in November.

Second, the EU is worse than the United States at pushing market-access priorities with the Chinese. The latter take American negotiators seriously because they make concrete demands from a relatively focused priority list. This is backed up by market intelligence and vigorous lobbying by US companies and industry associations. EU negotiators have a reputation for presenting their Chinese counterparts with a long laundry-list of demands rather than a focused priority list. And European companies and industry associations are not nearly as vigorous and effective as their American counterparts.

Third, the EU has a habit of mixing non-trade issues with its trade priorities. Labour and environmental standards, climate change, democracy, human rights, and even animal welfare, keep intruding on the trade agenda, sometimes with the threat of trade sanctions. Some non-trade issues, including human rights, should be raised with the Chinese, but kept on separate tracks from trade, without threatening trade sanctions. Mixing them up allows the Chinese to exploit intra-EU divisions. This often translates into blockage on the trade agenda and supine EU backtracking when faced with Chinese pique and threats on human rights, for example. This relates to a fourth point. The Chinese are generally skilful and successful at exploiting intra-EU divisions, especially among the Big Three.

And fifth, to repeat, the EU has no hard power. That, in combination with all the above, causes Chinese leaders and officials to treat their EU counterparts with less seriousness, and even respect, than their American counterparts. One thing the Chinese do not respect is wimpishness. And there is a strong whiff of that with EU soft power.

Razeen Sally is Director of the European Centre for International Political Economy (ECIPE).

This article also appeared here at the ECIPE blog ‘Trade Matters‘.

1. EU-China relations: Disappointment after Copenhagen
2. Hatoyama victory a watershed in Japanese post war history: a view on the Japanese election from China
3. US, China and Australia’s Asian century: a view on Hugh White’s argument

At the Copenhagen climate summit, there are some misunderstandings and differences of opinion on China’s commitment to cut the intensity of its carbon dioxide emissions per unit of GDP by 40-45 per cent by 2020 compared with the 2005 level. Detractors argue that China’s efforts in emission cuts are not ambitious enough, and even believe that China’s target does not transcend the BAU (Business As Usual) scenario.

First, we should have a comprehensive understanding of the BAU scenario in international talks on climate change. Generally, the BAU scenario means adhering to an established economic and social development path without any policy adjustment. Specifically, the BAU scenario in greenhouse gas (GHG) emissions refers to the amount of GHGs discharged in order to maintain the current economic and social development momentum.

With regard to China’s BAU scenario, firstly, China’s energy consumption and GHG emissions will continue to increase for a long period given that China is still at the middle stage of industrialisation and in the process of accelerated urbanisation. This kind of growth path, which is in line with development norms, should certainly be reflected in the BAU scenario. Secondly, the formulation of a BAU scenario is closely related to the choice of the starting point. If we take China’s ’10th Five-Year Plan (2001-05)’, characterised by fast industrialisation and urbanisation as the starting point, then the policy targets proclaimed and the achievements in the ’11th Five-Year Plan (2006-10)’ should not be included in China’s BAU scenario.

Second, the distinction between ‘relative reduction’ and ‘absolute reduction’ should be specified. ‘Relative reduction’ means the amount of GHG emissions that can be reduced in the future compared with the BAU scenario by adopting suitable policies. ‘Relative reduction’ does not mean the amount of emissions is cut to less than that of the benchmark year, rather it means less emissions than that emitted by the previous development path. It is the margin or deviation of two different development paths. ‘Absolute reduction’ means the amount of emissions some time in the future is absolutely less than that of the benchmark year.

The two emission reduction models adopt different scenarios as well as different benchmarks. However, what is neglected by a majority of people is that when developed countries pursue ‘absolute reduction’, it would grant them more emission quotas compared with adopting ‘relative reduction’ if their peak amounts of historical emissions are taken as the benchmark and they commit to the same reduction range as the developing world. The story is just opposite for developing countries, for which the ‘relative reduction’ model is more favorable.

Therefore, we cannot come to the conclusion that the path of ‘absolute reduction’ can definitely contribute more toward curbing global warming than the approach of ‘relative reduction’. In this regard, it is a question of different national interests. For wealthy countries that have passed the peak of emissions, the commitment of ‘absolute reduction’ theoretically could let them discharge more than their BAU scenario, of which they are well aware.

Third, wealthy nations are demanding an exorbitant goal of emission reduction from the developing world. According to the calculation of the average value of the six SRES (special report on emission scenarios) in the fourth estimate report of the Intergovernmental Panel on Climate Change (IPCC), in order to reach the most practical target of intensity at 550ppm, if developing countries reduce emissions by 30 per cent by 2020 under their BAU scenarios, the amount of emissions of developed nations not only need not to be cut to less than the 1990 level but could also increase by 15 per cent.

Obviously, once the target of global emission reduction is confirmed, the reduction amount of developed nations and the developing world would plunge to a relation of ebb and flow. The demand that developing countries should cut 15-30 per cent under their BAU scenarios by 2020, in fact, creates conditions for developed nations to reduce or even escape from undertaking obligations in cutting emissions.

Fourth, China’s reduction promise is ambitious no matter what kind of BAU scenario is applied. The BAU scenario is a sort of forecasting of the future based on various assumptions, which should be in line with facts and truly reflect the economic and social development course. China’s BAU scenario should be formulated on the basis of the ’10th Five-Year Plan (2001-05)’ period during which China saw rapid industrialisation and urbanisation.

Therefore, China’s promise of 40-45 per cent cuts per unit of GDP is by no means inferior to any commitments made by wealthy nations. Moreover, if the factors of energy structure readjustment and the changing forms of forest and land use are included, China’s reduction target would be more significant.

Ma Xin works for the National Development and Reform Commission, China. Li Jifeng and Zhang Yaxiong are from the State Information Center, China.

This article first appeared here in the China Daily.

1. Garnaut’s conditional emission reduction targets
2. Carbon emission targets and investment in clean technologies
3. Garnaut’s targets and the simple arithmetic

Plenty of people have argued against fiscal stimuli. ‘Don’t call the ambulance!’, they say. Usually these have been political conservatives, but in the United States, strong opposition has also come from some influential economists. In some cases similar arguments were made against fiscal stimulus during the Great Depression.

There are the seven main arguments against fiscal stimuli, which I shall examine below.

1. Recovery of the economy
The first argument is that the economy is already recovering so we no longer need a fiscal stimulus. Perhaps the economy would have recovered without the stimulus. Nonetheless, we should stop the stimulus now.

The central issue here is that success of fiscal stimulus cannot be seen clearly. A fiscal stimulus is successful to the extent that something doesn’t happen, that is, if there is an absence of severe economic turmoil. When judging the success of the fiscal stimulus, one must compare the current situation with the correct counterfactual situation.

The best example here is the Japanese experience in the nineties. In the absence of huge prolonged fiscal deficits there would have been a deep recession, perhaps even a depression. Non-financial companies devoted themselves to reducing their debt (owing to the ending of an earlier bubble) and hence did not borrow, but added to national savings.

This is described in detail by Koo, where the episode is described as a potential balance sheet recession. The net effect of this lack of private sector demand combined with Keynesian fiscal policy was a long period with a low positive growth rate. Did this reflect a failure of the fiscal policy? Koo convincingly argues that the counterfactual situation for Japan would have been a negative growth rate – that is, a deep recession – much worse than the low-growth that Japan experienced.

2. Ricardian equivalence
A Ricardian equivalence happens when a government borrows to finance a deficit and the far-sighted taxpayers anticipate that taxes will go up in the future to repay this debt. Taxpayers will save more to prepare for this extra tax. Thus, cutting taxes now and raising them later will not make taxpayers any richer, and total spending will not change. There is therefore no point in a fiscal stimulus.

While this description is an oversimplification, such Ricardian equivalence is the favourite idea of some modern macroeconomic theorists. It is described and discussed, for example in the textbook by Mankiw, though it is not approved. But David Ricardo, who formulated the idea, did not regard its key assumptions, as realistic. Moreover, the case of the Japanese economy in the nineties does not support it: household savings as a percentage of GDP actually declined while public debt was accumulating.

The US ‘Reagan’ episode of 1982 to 1987 is very relevant here. Substantial tax cuts led to a big budget deficit. But over the period the household savings ratio actually fell. I analysed this episode concluding that a combination of citizens’ lack of concern for the future and their confidence that some kind of remedy would eventually appear, likely influenced both government policy and the private sector’s savings behaviour. This meant that there was both public and private profligacy, rather than the profligacy of the public sector being offset by the prudence of the private sector.

3. Need for prudence, not excess optimism
A third argument is that recession – like the Great Depression – may be caused by a consumption boom or a speculative bubble. The problem is too much optimism and not enough prudence.

It must be wrong to deal with the consequences of this undue optimism by increasing the fiscal deficit. Too much spending – whether for consumption or just speculation – should be answered by corporations and individuals cleaning up their balance sheets, not by the government imitating the follies of the private sector and messing up its own balance sheet.

However, when private spending declines, to maintain or restore aggregate demand either government spending must increase, or tax cuts, handouts and so on should stimulate private spending. That is Keynesian policy. But what about prudence? The answer is that extra spending, whether by government or the private sector, should be directed towards investment rather than towards consumption or speculation. That is, at least, one alternative. The other is that extra demand for domestically produced goods and services could come from higher net exports – more exports and lower imports.

4. Output Gap
Some critics of fiscal stimuli deny that an output gap exists or, more realistically, they argue that the stimulus, including its potential multiplier effects, exceeds the output gap. If the stimulus exceeds the output gap then the measured multiplier in real terms will be low. Inflation may happen instead of the desired increases in output. This is an empirical issue.

Stimulus policy is often designed to forestall an output gap. If such a policy is successful, then it may seem like the stimulus policy was useless, since the output gap never materialized. This is discussed in point 1 above: a mistake may be made in choosing the counterfactual situation to compare the current situation to.

5. Interest rates
Another argument is that fiscal expansion will crowd out private investment (and also consumption) through raising interest rates. This is very clear in the IS/LM model. The LM curve is given, representing a given real money supply, and fiscal expansion shifts the IS curve to the right, so that the interest rate rises while interest-sensitive investment and consumption decline.

Here, an important feature of fiscal stimulus policies must be noted. Constant monetary policy is defined not as a constant quantity of base money determined by the central bank, but as a constant interest rate policy determined by the central bank. When the government increases the fiscal deficit and hence sells more bonds (potentially raising the market interest rate) the central bank is assumed to go into the market and buy sufficient bonds to keep the interest rate at its target level. If one thinks of monetary policy as consisting of management of base money, then one can regard monetary policy as being accommodating to fiscal policy. (This assumption is explicitly made by the International Monetary Fund here.

6. Real wages too high
The output gap may be caused by real wages being too high. Now, there is a fairly subtle point here, closely related to the model of Keynes’ The General Theory. Can an increase in nominal aggregate demand, whether brought about by monetary or fiscal policy, increase output and employment?

Suppose we have a model with diminishing returns, perhaps because of a fixed capital stock combined with a varying quantity of labour, or a model in which the quality of labour declines as employment increases. Next, assume given nominal wages but flexible product prices. An increase in aggregate demand will then raise the price level relative to the wage level so that the real wage falls. The real wage and employment are determined simultaneously. This was, more or less, Keynes’ General Theory model.

In the Great Depression, the reduction in aggregate demand actually caused the price level in the United States (and also in Australia) to fall relative to the wage level, so that real wages rose. Keynes clearly was influenced by this historical fact. In this case one cannot say that high real wages ‘caused’ high unemployment. Rather, the decline in aggregate demand did so, with real wages being endogenous.

This issue is interesting from an Australian point of view. In the late seventies and early eighties Australia had an unemployment problem which – in my view at least – was caused by bloated real wages. Because real wages were (more or less) rigid because of centralised wage determination and trade union pressure to ensure indexation, any increases in nominal aggregate demand that raised the prices of goods and services would be followed by increases in nominal wages. The employment benefits of nominal demand increases brought about by fiscal or monetary policies would then erode or disappear. Keynesian demand expansion policies would be pointless. I discussed this analytically here. But this has not been the situation in the recent crisis. Real wages are not rigid, and increased unemployment in Australia has not resulted from increases in real wages.

7. Market failure in economic models.
Finally, for completeness I mention one approach that was popular at the time of the Great Depression but is somewhat discredited now. Some economists use models in which market failure is not possible or, more sensibly, in which such failure can happen briefly, but natural forces – without government intervention – eliminate it gradually.

Conclusions
Peoples’ attitudes to active counter-cyclical fiscal policy are influenced by their views on two issues. Firstly, is the weight placed on government failure relative to market failure? Secondly, is the danger of another Great Depression greater than the danger of increased inflation?

This crisis is a major case of worldwide market failure. That can hardly be questioned. But can governments be trusted? It is too early to judge and compare government reactions, and there is important scope for research here. But on the broad issue, let me refer to Keynes.

Keynes was certainly critical of governments. In his view, governments did the wrong thing after the First World War at the Versailles Treaty negotiations – so he wrote in The Economic Consequences of the Peace. The British government did the wrong thing in 1925 when it returned sterling to the gold standard at an overvalued parity – so he wrote in The Economic Consequences of Mr Churchill. And the American, British and other governments failed during the Great Depression, especially by adhering too long to the gold standard, and by remaining preoccupied with budget balancing. But he did believe that governments can get it right, and he believed in his own ability, and indeed duty, to persuade governments to make correct policy.

The other underlying issue is whether one thinks the danger of another Great Depression is greater than the danger of increased inflation. I think that older people (like myself), are likely to weigh heavily the danger of another depression. One’s opinion about this may depend on how much one knows about the Great Depression. I find the concern about inflation in present circumstances surprising, though one has to accept that it is reasonable to focus on the ‘exit’ from the crisis, so as not to lay the foundation for another inflationary or bubble period.

On this subject, it is interesting to reflect on German attitudes. One can understand that at the time of the Great Depression, many Germans were preoccupied with the danger of inflation. They had the recent memory of the socially and economically destructive hyperinflation of 1923. This affected the policies of the Weimar Republic governments, both in encouraging them to adhere to the gold standard and unwisely balance their budgets.

It is harder to understand why, in more recent times, the Germans (or some of them) appear to have been more concerned with inflation than with unemployment, bearing in mind that the unemployment of the later Weimar Republic years, caused by the Great Depression, had such a destructive political effect. This memory cannot have been forgotten. I guess that the answer is that in recent years generous unemployment and other social benefits, combined with the more recent fashion of short-time working, have moderated the extent and adverse effects of unemployment in Germany.

1. Reviewing the arguments against fiscal stimulus
2. Too much fiscal stimulus in India?
3. China’s health care and the fiscal stimulus

The climate change conference in Copenhagen is supposed to negotiate the successor agreement to the Kyoto Protocol. But negotiations have been blocked by a seemingly insurmountable obstacle. The United States is at loggerheads with the developing world, especially China – now the world’s largest emitter of greenhouse gases (GHG) –and India. Fortunately, there might be a way to break through this roadblock.

On the one hand, the leaders of India and China are clear: They won’t cut emissions until after the United States and other developed countries have cut theirs first. After all, the industrialized countries created the problem of global climate change, and got rich in the process. Developing countries shouldn’t be denied their turn at economic development, they argue. As the Indians point out, Americans emit more than 10 times as much carbon dioxide per person as they do.

On the other hand, the U.S. Congress is equally clear: It will not impose quantitative limits on U.S. GHG emissions if it fears that emissions from China, India, and other developing countries will continue to grow unabated. Indeed, that is why the Senate was unwilling to ratify the Kyoto Protocol ten years ago. Why should U.S. firms bear the economic cost of cutting emissions if energy-intensive domestic aluminum smelters and steel mills, for example, would just migrate to countries that have no caps and cheaper energy? (A problem known as leakage.) Global emissions would simply continue their rapid rise in a different part of the world.

In June, the U.S. House of Representatives passed the American Conservation and Energy Security Act, also known as the Waxman-Markey bill, which (among other things) would set targets for domestic GHG emissions. It seeks to address the issues of leakage and competitiveness by penalizing imports of carbon-intensive products from countries that were deemed not to be doing their share to fight global climate change.

But that particular provision won’t do the trick. First, it won’t legitimately level the playing field – by equalizing the price of carbon at home and abroad – and thus won’t support international climate efforts without distorting the market. Rather, it seeks to buy off energy-intensive industries that fear international competition, even at the cost of meeting its objectives. Indeed, President Barack Obama courageously warned of its protectionist dangers. (The same flaws are found in similar measures that have been adopted by the European Union, although it at least has the legitimacy of having ratified the Kyoto Protocol and of already having begun to cut emissions.)

Furthermore, such political reassurances to domestic industries that fear losing their competitiveness are insufficient. The bottom line is, emission cap legislation is unlikely to pass the Senate as long as major developing countries haven’t accepted quantitative targets of their own.

Global issues of leakage and competitiveness can only be effectively addressed at the multilateral level. Thus, the diplomats preparing for the Copenhagen negotiations need to do two things. First, they should pursue a set of multilaterally agreed upon guidelines for countries that want to adopt import tariffs or other border measures against non-participating competitors. If such measures are properly designed, they can be fully consistent with World Trade Organization guidelines, accomplishing the objectives of the international climate change regime without violating the international trade regime. Otherwise, each country will adopt whatever measures are demanded by its own domestic industry; the resulting measures will lack legitimacy and will fail to accomplish their ostensible purpose. Second, negotiators should coalesce on a specific mechanism for setting the actual numbers that signatories of a Copenhagen Protocol can adopt as their future emission targets. The framework must address the three gaping holes in the Kyoto Protocol: the absence of a mechanism for setting targets in the long run, the lack of participation by many major emitting countries, and the lack of faith that signatories will fulfill their commitments.

I see one, and only one, practical solution to the apparently irreconcilable differences between the United States and the developing countries regarding binding quantitative targets: Washington would agree to join Europe in adopting emission targets, something along the lines of the big cuts specified in the Waxman-Markey bill. Simultaneously, in the same agreement, China, India, and other developing countries would agree to a path that immediately imposes binding emission targets on them. These would be targets that in the first five-year period simply follow the so-called business-as-usual path, defined as the rate of increase in emissions that these countries would experience in the absence of an international agreement, as determined by experts’ projections.

The idea of developing countries committing only to business-as-usual targets will be met with loud objections from both environmentalists and U.S. business interests because it doesn’t obligate China or other developing countries to cut emissions. But this commitment is far more important than it may sound at first. Specifically, it precludes carbon leakage from undermining the environmental goal. The developing countries can’t go above their set business-as-usual paths as they would in the absence of this commitment and, therefore, can’t exploit developed states’ emissions reduction efforts by expanding carbon-intensive industries. This step mitigates the competitiveness concerns of carbon-intensive industries in developed countries.

Such an approach recognizes the reality that it would be irrational for China to agree to substantial cuts in the short term. Indeed, the developing countries, for their part, may object when asked to take on any kind of binding targets at all, at this stage. But they should realize that they would gain in strictly economic terms from such an agreement. The commitment, in an international system of emission permits trading, would give China the ability to sell permits at the world market price. How do we know Beijing would come out ahead? It is currently building roughly 100 power plants per year to accommodate its rapidly growing energy demand. The cost of shutting down an already-functioning U.S. coal-fired power plant is far higher than the cost of building a new low-carbon plant in China. For this reason, when a U.S. firm pays China to cut its emissions voluntarily, thereby obtaining a permit that the U.S. firm can use to meet its emission obligations, both parties benefit, even in strictly economic terms. The environmental benefit is that China’s aggregate emissions would voluntarily fall below its business-as-usual commitment from the beginning.

Of course, the next step to this solution requires that China and other developing countries make cuts below their business-as-usual path in future years and, eventually, make cuts in absolute terms as states gain confidence in the framework. But the developing countries must agree to the principle of making cuts similar to those made by Europe, the United States, and others who have gone before them, taking due account of differences in income. Emission targets can be determined by formulas that: (1) give lower-income countries more time before they start to cut emissions and (2) lead to a gradual convergence of emissions per capita over the course of the century, while (3) taking care not to reward any country for joining the system late.

Realistically, no country (rich or poor) will abide by targets in any given period that entail extremely large economic sacrifices relative to the alternative of simply not participating in the system. It’s time to stop making sweeping proposals that assume otherwise, and to pursue instead the narrow thread of the politically possible.

This article first appeared here in the Bulletin of the Atomic Scientists.

1. What China really delivered at Copenhagen
2. Comparing the Copenhagen climate targets
3. India and the Copenhagen summit

Although some in the media try to interpret the length of President Obama’s stay in China on his inaugural trip to Asia as a sign of the strength of US-China bilateral ties, the public opinion polls within China reveal a somewhat different perspective.

Global Times, China’s leading news website in English, found in an online poll that 86 per cent of the 8,100 respondents said they either ‘do not anticipate’ or ‘do not care much’ about the coming visit of the US President. The poll by another semi-monthly in Chinese, Globe and with Sina.com on ‘the US in Chinese eyes’, made an interesting comparison with a similar poll before Bill Clinton’s visit to Beijing and Shanghai.  In the poll 11 years ago, 69.1 per cent of the respondents saw the US as ‘a powerful economy’.  Less than one third out of 16,726 polled still think so today, nor see ‘the US as a land of opportunities’.

The gap between Chinese perceptions of America a decade ago and those today are a footnote to a series of events that have affected the United States in the interim:  9/11, the Enron scandal, WorldCom and Arthur Andersen, the Iraq War, the subprime mortgage crisis, and the global financial meltdown. The gap also suggests a disillusion over the moral high ground America has taken, and over which officials in Beijing often feel a headache when it comes down to discussions on issues like human rights. The other side of the coin, however, is China’s strong economic growth and the inflation of a nationalistic complex among the younger generation.

Given Mr. Obama’s charisma and his skill in communication, it is understandable the White House team put weight on a town hall-style meeting with ‘young Chinese leaders’ born after 1980 on Monday in Shanghai. Sensitive issues, like freedom of belief and speech for example, can be spoken out in public there, leaving talks later in Beijing to take place in a more cooperative tone. As President Obama left for Tokyo on Thursday, the format of the meeting, such as whether it would be broadcast live on television and the internet, was still to be settled.

The vast agenda that awaits President Obama in Beijing will not be as easy as the talks with Chinese youngsters. The two sides hold vastly different positions on a lot of issues. In the economic realm, China will focus on US recognition of its market economy status, President Obama’s commitment against protectionism, and the elimination of barriers against Chinese investment in the US. The White House on the other hand will insist on revaluation of the RMB exchange rate, intellectual property rights protection, and market access to Chinese service industries. Among nontraditional issues like a coordinated stance on climate change, it will be even more difficult to make headway, especially if the people in Beijing see President Obama heading for the Copenhagen Summit with empty hands. Some of Obama’s aides have already lowered goals for the China trip in a cautionary tone.

The common understanding is that this trip will bring no gift. On the contrary, the anticipation is for a lot of pressure for Chinese commitment from its US counterpart including, for example: a possible financial stability framework between Beijing and Washington; in the international arena, a commitment for resource input in Afghanistan and Pakistan; and cooperation on the nonproliferation effort against North Korean and Iranian nuclear ambitions.

There is still one possible high point for this visit however, when James Steinberg, Deputy Secretary of State talked about ‘strategic reassurance’ to China. Uncovering the meaning and content of ‘strategic reassurance’ is an important interest for the Chinese leadership in talks with President Obama.

Xue Chen is research fellow in Strategic Studies at the Shanghai Institutes for International Studies (SIIS).

1. Obama goes to China
2. Obama and Asia – Weekly editorial
3. President Obama comes to Canberra – Weekly editorial

Prime Minister Stephen Harper’s attendance at the APEC leaders’ meeting in Singapore this weekend shouldn’t be treated with a yawn – the meetings are part of a complex game in which our ideas, as co-chair with South Korea of the G7/G20 process in 2010, will count.

Asia Pacific Economic Co-operation could evolve significantly in the next few years. The unique region has the world’s four largest economies: China, India, Japan and the United States. China and India, the world’s most populous countries, are currently its most dynamic economies. Japan, with Australia’s help, has pushed for regional trade and financial institutions to attract the two increasingly important emerging giants into co-operating on regional projects, rather than pursuing rivalries.

Competition behind the scenes explains the region’s alphabet soup of organizations, as China, which sees itself as Asia’s natural leader, supports ASEAN’s Asians-only initiatives. As Asians often say, ‘Don’t treat China as a threat – but don’t forget China is a threat.’

APEC’s potential lies in how it balances economic and political influence in the region. With the United States distracted by its own foreign policy and domestic challenges in recent years, APEC’s progress has been incremental and ad hoc. This year, President Barack Obama’s willingness to re-engage will have a major impact on APEC’s future. India, not yet a member, wants to join when a 10-year membership moratorium expires in 2010. It is already a member of the East Asia Summit, along with Australia and New Zealand, and of the G20.

The Singapore APEC marks a new trajectory as countries sympathetic to transpacific ties host subsequent summits: Japan in 2010, the U.S. in 2011 and Indonesia in 2013. This sequence could set the stage for deeper economic co-operation and security, and political dialogues that dovetail with global talks in the G20. A transpacific free-trade area, which China has resisted, will return to the agenda. Beyond competition for influence, close intergovernmental co-operation on domestic reforms is required to meet the collective challenges of climate change, manage fallout from the global financial crisis and restore trade-liberalizing momentum.

Asian exporters were hit hard by the global financial crisis when consumers in advanced countries stopped shopping and started saving; the drop in imports cascaded through regional production networks. China and India were unique in that they continued to grow throughout the crisis. Now, their neighbours expect them to help restore growth as they shift to strategies encouraging domestic and regional demand.

Here, China has a strong hand to play. It is financing new infrastructure links with Southeast Asia and already has a strategy to rebalance its lopsided investment-driven economy. China is shifting its growth away from investment toward consumption, services and less energy and capital-intensive production. With a less capital-intensive industrial structure, growth will rely more on productivity than investment in physical capital. The shift requires complex changes in incentives: to households to consume more; to China’s myriad job-creating small private businesses to diversify into services; and to reduce the policy bias favouring polluting, export-oriented state enterprises.

To become a credible counterbalance, India will have to find the political will for labour-market reforms that would facilitate its participation in East Asia’s dynamic production networks and open new modern-sector jobs for people trapped in agriculture. Japan must restore its tattered credibility in regional trade by tackling its agricultural trade protection.

U.S. re-engagement will be a source of new vigour, if it is willing to take initiatives on trade and security. APEC’s long-term prospects will also be influenced by Chinese-Indian co-operation. The two have recently found common cause in the climate-change negotiations. Their formal agreement to co-operate in negotiating and mitigation could be a template for the future (although five years of bilateral free-trade discussions have led nowhere).

A reinvigorated APEC agenda should also have a more strategic focus. As membership expands, a steering group should be created – of the four giants and the five G20 members (Australia, Canada, Indonesia, South Korea and Mexico) – to ensure coherence between regional and global priorities and initiatives. Canada should push such a sensible but revolutionary idea in Singapore.

Wendy Dobson, a former associate federal deputy minister of finance and a professor at the Rotman School of Management, is author of Gravity Shift: How Asia’s New Economic Powerhouses will Shape the 21st Century. This essay appeared in Canada’s Globe and Mail on 13 November.

1. India’s significance to APEC
2. Canada and the Asia-Pacific: Joining EAS should be top priority
3. Japan in the spotlight in the lead-up to APEC

Embarking on his first trip to Asia as President, Barack Obama returns to a region where he spent a portion of his childhood and where his popularity remains high despite his worsening political standing at home.

Obama confronts a landmark decision on intensifying the U.S. military commitment to Afghanistan, America’s unemployment rate, and the likely defeat of his health care package in the U.S. Senate. One might conclude that his nine-day Asian tour constitutes a sentimental journey back to the early days of his presidency when it seemed his own country and most of the world was at his feet. Nothing could be more deceptive.

The Obama administration now confronts a historical crossroads in Asia that could shape the United States’ international standing for decades. How well the president fares in Japan, China, South Korea and at the APEC summit in Singapore may determine if Washington can recapture some of its influence which was damaged by the Bush administration’s regional indifference. If things go badly, the U.S. could become marginalized in arguably the most economically and strategically dynamic region in the world.

Obama’s initial stop will be in an increasingly turbulent Japan. Traditionally one of America’s most stable allies, it has now elected an uncharacteristically populist government that threatens to revise long-standing basing arrangements for U.S. military personnel and to shift the country’s foreign policy away from privileging the U.S. alliance toward adopting a distinctly regionalist posture. The President must convince Prime Minister Hatoyama that shared ideals of nuclear disarmament and regional prosperity cannot be realized independently of a viable U.S.-Japan security relationship. Hatoyama’s determination to put an end to Japanese refueling operations in the Indian Ocean, his ambiguity over Japanese contributions to peacebuilding in Afghanistan and his initial East Asia Community proposal that appeared to exclude U.S. membership (since modified to accommodate possible American involvement) all appear to compromise this objective.

Sino-American relations have become the key factor for Asian stability. Obama’s visit to China following his stop in Japan will reinforce this point. The most immediate issues to be raised with China’s leaders relate to managing the global economy, cooperating on nuclear proliferation (especially in respect of North Korea and Iran), coordinating climate change policies and a dialogue on human rights.

Harder and more substantive long-term issues are likely to be underplayed in talks with his Chinese counterparts. China’s military modernization and power projection are reconstituting Asia’s balance of power. Convincing China’s leaders to assert greater authority over a conservative and powerful military will not be easy but is a precondition for avoiding future regional conflicts. Other geopolitical concerns between Washington and Beijing include coordinating their respective approaches to stability in central and southern Asia; addressing security differences in the East and South China Seas, and reaching common ground on managing North Korea once Kim Jong-il departs the scene. Without systematically addressing these longer-range contingencies, no amount of photo opportunities or oratory involving America’s popular young president will overcome looming problems in this most critical bilateral relationship.

The Obama administration’s recent decision to sign ASEAN’s Treaty of Amity and Cooperation (TAC) and its assistance to Indonesia, the Philippines and Thailand in building up their capabilities to neutralise terrorist movements are positive and substantive indicators of greater U.S. involvement in Southeast Asia. The APEC summit could be a catalyst for the United States to relinquish its tendency to exercise uncompromising asymmetrical security politics via its bilateral alliance network. This outcome remains unlikely, however, when U.S.-Japan security ties are fragile and U.S.-China differences remain acute.

South Korea is Obama’s last stop on his Asian visit. His discussions with South Korean president, Lee Myung-bak, will occur soon after a naval skirmish between the two Koreas along their contested western sea border. Prior to this, North Korea’s relations with the U.S. had been warming and Washington had planned to dispatch a special envoy to Pyongyang as a means of reconstituting the Six Party Talks on North Korean nuclear disarmament. Following the naval incident, U.S. Secretary-of-State Clinton announced that visit would still go ahead. This is consistent with Obama’s diplomatic style of engaging potential adversaries rather than confronting them.

U.S. conservatives argue that this is the wrong course if American power is to be respected and American influence is to be sustained in Asia. They argue that ‘engagement without reciprocity’ will enhance Chinese power and alienate U.S. allies. This premise ignores evidence that the Bush administration was guilty of imperial overstretch and accelerated the decline of U.S. power in the region. The mark of enduring international influence is a great power knowing when to engage or disengage strategically and when to negotiate judiciously. Obama has staked his presidency’s foreign policy success on that principle. What happens in Asia this week may vindicate or discredit his approach.

1. Obama and Asia – Weekly editorial
2. Obama and East Asia – Weekly editorial
3. Obama and East Asia: No Room for Complacency

APEC leaders’ agenda at their Singapore meeting on November 14-15 should include expanding membership to India when the ten-year moratorium expires in 2010.

A positive decision would have at least two significant implications. The APEC region is home to the world’s four largest economies (China, India, Japan and the United States) and it makes no strategic sense to exclude one of the four – especially when India is already a member of the East Asia Summit and the G20. Despite China’s view of its own size and connectedness as a compelling argument for the leading role in the region, it will have to get used to the fact that India, while much less integrated, is and will be of vast size as well. An implicit goal of Asia’s regional organizations is to attract the giants to cooperate in the production of regional public goods that help secure global economic stability. Fostering deeper integration through trade and investment ties raises the costs of aggressive military or political behavior.

The second significant aspect of India’s potential APEC membership is that it has reached out to integrate with the Asian economies despite the fact that its domestic economy is less open and faces huge legacy problems left over from its socialist past. India has joined the race towards sub-regional trade agreements with ASEAN, Singapore and others — and has even considered a bilateral free trade agreement with China. India needs the peer pressure and encouragement of APEC’s variable-speed liberalization processes to undertake reforms that could allow it to be a new hub in the region’s production networks in which it does not yet participate to any great extent.

India has much to gain by joining APEC but what could it contribute? There is little evidence yet that it has a world view or an Asia-Pacific view. Much of the hype on India’s economy is based on hope that Indians will gain confidence to compete in world markets, and that the central government, handed a mandate to govern in the May 2009 elections, will tackle the binding constraints on India’s long term growth: a population that is only 60 percent literate; persistent government deficits; restrictions on land, labor and finance and abysmal physical infrastructure. Infrastructure bottlenecks are being cleared, the private sector is helping address illiteracy and restrictions on FDI inflows are being dismantled as Indian corporations gain confidence. But farmers and others still lack confidence to reduce outdated trade barriers.

APEC is at a ‘hinge’ in its history. Beginning with the Singapore meeting APEC has a five-year window when it could make major strides forward on economic integration and political dialogue as Japan takes the chair in 2010, followed by the United States in 2011 and Indonesia in 2013. Its unique potential relative to the many ASEAN-linked regional forums is to be a channel for deeper trans-Pacific ties including US engagement in regional projects.

India will be a positive contributor to APEC if it balances APEC’s goals with its own domestic preoccupations and security challenges. India’s recent agreement with China on combating climate change is a step forward in bilateral cooperation. With India a member, APEC should set up a steering group consisting of the four giants and G20 members (Australia, Canada, Indonesia, South Korea, Mexico and Russia) to develop a strategic agenda for regional initiatives while ensuring their coherence and linkage with global priorities.

Wendy Dobson is former associate deputy minister of finance in Ottawa and professor at the Rotman School of Management, University of Toronto. She is author of ‘Gravity Shift: How Asia’s New Economic Powerhouses will Shape the 21st Century’.

1. Canada and APEC gamesmanship
2. The pay-off from APEC – Weekly editorial
3. Japan in the spotlight in the lead-up to APEC