Economic Opportunities and Challenges in East Asia Facing the Obama Administration

Transcription

1 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 2009 Myron Brilliant Murray Hiebert Robert Reis Jeremie Waterman

2 The U.S. Chamber of Commerce is the world s largest business federation representing more than 3 million businesses and organizations of every size, sector, and region. Copyright 2009 by the U.S. Chamber of Commerce. All rights reserved. No part of this work covered by the copyrights hereon may be reproduced or copied in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, or information and retrieval systems without written permission of the publisher.

3 Economic Opportunities and Challenges in East Asia Facing the Obama Administration Myron Brilliant Murray Hiebert Robert Reis Jeremie Waterman

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5 Table of Contents U.S. Opportunities and Challenges in East Asia Why East Asia Matters to the United States... 4 Principles of U.S. Commercial Diplomacy in East Asia China Japan Korea Southeast Asia U.S. Chamber Asia Department About the Authors

6 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 2 U.S. Opportunities and Challenges in East Asia President Barack Obama faces monumental economic challenges. While he has focused initially on an economic stimulus package that incorporates tax cuts and spending, efforts to jump-start economic recovery also depend on bolstering commercial activity internationally. The U.S. Chamber of Commerce urges the administration to increase economic engagement with East Asia and pursue economic and commercial policies toward the region that will boost U.S. competitiveness at home and around the world. If the United States is successful in these efforts, financial recovery at home will be strengthened significantly. In the new world order, the United States shares responsibility not just with Western Europe and Japan but also with emerging economic players such as China, India, Brazil, and Russia. As the global community becomes more interdependent, the United States should expand cooperation with the emerging economic players to address critical challenges, including the financial crisis, rising trade and investment protectionism, climate change, and energy security. At the same time, the United States must bolster its efforts to develop an economic policy framework that supports engagement with the region to reinforce the role of markets over the state and to eliminate regulatory barriers and market distortions that have perpetuated global imbalances. 1,200,000 1,000, , , , ,000 U.S. standing around the globe has suffered in recent years and, at home, we have witnessed an erosion of public support for trade. The U.S. business community hopes that President Obama makes changing these perceptions of a matter of the highest importance. To do so, he will need to build a new consensus that involves educating the American public about the benefits of trade with and investment in the region and makes enforcement of U.S. international agreements consistent with American international obligations a top priority. He will also 0 U.S. Exports in Goods (in millions U.S. of dollars) East Asia World (Source: Bureau of Economic Analysis)

7 need to resume the traditional U.S. role as a leader on international trade and economic affairs. East Asia accounts for one-fifth of global GDP and is growing faster than other parts of the world. U.S. long-term prosperity and security are therefore tightly linked to developments in the region. Now, more than ever, the United States cannot afford to allow a global economic downturn and rising protectionist sentiment to cast a chill over trans-pacific relations. In the immediate term, the United States must work with the developed and emerging economies of Asia to coordinate stimulus measures and pull the global economy out of a painful recession. It is also critical that the United States works with Asia to guarantee balanced economic development and an open international trading and investment system. This means pressing Asian economies to move away from their long-term dependence on weak currencies and export-led growth toward policies that create greater domestic consumption and increased openness to imports. Asia has a complicated and changing environment whose relations with the United States are a hybrid of dynamic economic growth and political cooperation, coupled with considerable suspicion. U.S. influence in the Asia-Pacific, while still strong, is evolving. The administration needs to quickly demonstrate to Asia that its economic, political, and security ties with the region are enduring. At a time of political transition in the United States, this paper addresses questions about the fundamental goals of U.S. economic policy toward East Asia and how they should be achieved. It provides some general and specific policy prescriptions for how the administration can advance broad U.S. economic and commercial interests in this region. 3

8 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 4 Why East Asia Matters to the United States The United States has important geopolitical and security interests in East Asia, which Washington has pursued carefully for decades. Through its alliances with Japan and Korea, the United States has played a vital role in maintaining peace and stability in Northeast Asia for more than 50 years. U.S. influence in East Asia remains strong, but it has been diminished in relative terms given China s emergence as an important regional power and the increasing political and economic integration among Asian countries. China s emergence has added complexity to the U.S. role in Asia. On the one hand, the United States must work with China as a partner on global and regional issues such as the denuclearization of North Korea and Iran. On the other hand, the United States counterbalances Beijing s growing influence in the region, including in Southeast Asia, an area which has 570 million consumers with growing incomes and which straddles some of the world s busiest shipping lanes. The United States can reap substantial benefits from a more active and visible economic engagement with East Asia. A stronger U.S. economic presence will elevate America s ability to perform its security roles in East Asia and achieve its other political and economic goals. The new administration should make a sustained effort to guarantee that our alliances remain strong and ensure that U.S. exporters and investors have wide access to Asian markets. Washington should promote a habit of cooperation with major East Asian countries on multilateral trade rules, energy security, and other issues on which the United States and countries in the region share common objectives. Active American leadership and visibility will increase U.S. influence in economic policy discussions in East Asia. It will also allow the United States to argue against nonmarket, state-led models of economic development that governments in the region may find alluring as the global financial crisis, for which the United States is largely blamed, continues to unfold. In this environment, it will become even more essential for the administration to actively engage its regional counterparts to highlight the rationale for continued economic development, trade,

9 2007 Global GDP by Region (current prices in U.S. billions) European Union 16,906 Canada and United States 15,244 Central and Eastern Europe 1,832 Commonwealth of Independent States and Mongolia 1,696 Middle East 1,400 Western Hemisphere 3,609 Africa 1,100 Northeast Asia 9,222 South Asia 1,219 Southeast 1,280 Other Developing Asia 166 (Source: International Monetary Fund,World Economic Outlook Database, October 2008) and investment. Without such engagement, U.S. economic interests in the region could be harmed as governments turn to models that could undermine the competitiveness of U.S. businesses as well as the contributions of American workers and farmers to U.S. exports to the region. The U.S. business community believes that the argument for open markets is compelling, but it needs to be made by President Obama himself. Marketoriented policies have led to economic growth and a sharp reduction in poverty rates in East Asia and elsewhere in the last generation. Increases in average incomes in the region have created large markets for American goods and services. The prospect for greater trade with East Asia is obvious. Economic potential in Asia is greater than in any other region of the world, notwithstanding the recent financial turmoil. In 2007, the region s total GDP was $10.6 trillion, 19.6% of global economic output. East Asia s economy grew by 5.7% in 2006, the highest growth rate of any region, and its average annual growth rate in the last decade was 3.6%, the second highest of any region. Increasing innovation will add to the region s vitality and productivity. East Asia is a lucrative market and an important destination and source of direct investment for the United States. In 2007, U.S. goods exports to the region totaled $201.5 billion, 25% of global U.S. exports and more than U.S. exports to any other area except North America and Europe. U.S. direct investment in East Asia totals $454 billion, and the region s total direct investment in the United States is $320 billion. While the United States will always be present in East Asia, the shape and scope of this role cannot be taken for granted. The economies of East Asia are integrating through the conclusion of bilateral and multilateral free trade agreements between the region s countries and through discussions among the 10-country Association of Southeast Asian Nations (ASEAN), China, Japan, and Korea. Sixty percent of the imports of East Asian countries in 2006 came from within the region, and that percentage is growing. The U.S. share of the region s total imports has declined as intraregional trade has increased. Of consequence to the United States, some of the countries in the region are putting more weight on other groupings such as the East Asian Summit, which excludes countries from outside the region. 5

10 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 6 Principles of U.S. Commercial Diplomacy in East Asia The president is not starting from ground zero in Asia. The previous administration put in place some sound policies toward the region. The existing unease between the United States and some Asian countries stems from many causes, including concerns over trade practices, increasing intellectual property theft, and competition for natural resources. To address these concerns and to strengthen American competitiveness, the United States should ensure its engagement in the following ways: First, effective commercial diplomacy must start with the U.S. president. If the American government is not engaged, the ability of U.S. companies to boost exports and create jobs is undermined. The United States must move beyond rhetoric to strengthen political and economic relations with the region. Second, the United States should aim to participate at senior levels in existing East Asia forums and consider helping establish new ones to stimulate the global economy. For starters, the president should actively engage Asia to ensure that American ties with the region remain strong and relevant. The United States must be an active participant in the 21-member Asia-Pacific Economic Cooperation (APEC) forum, which includes the United States, Canada, Mexico, Chile, Peru, Russia, and the key economies of East Asia. APEC is the forum where the U.S. president can be assured of meeting regularly with the leaders of this region. It provides critically important opportunities for informal and formal conversations with other leaders on immediate and long-term economic and security challenges, including the financial crisis, energy security, and climate change. The U.S. government should actively discourage competing architectures that would diminish the importance of APEC or place the United States in an outsider role with little influence over the developing financial and economic structures in East Asia. Third, the U.S. business community should encourage robust and proactive U.S. leadership in APEC, whose members include 2.7 billion consumers and account for about 50% of global GDP and trade. APEC s annual summit presents an opportunity for the American president and Cabinet members to meet with their counterparts in the region and to push forward plans for economic cooperation and for open markets, such as the Free Trade Area of the Asia-Pacific

11 (FTAAP). An Asia-Pacific trade agreement, that includes the United States, would be of immense benefit to the U.S. economy. The United States will host the APEC summit in 2011, following Singapore in 2009 and Japan in This lineup provides these countries with an opportunity to develop a three-year plan to pursue within APEC market-opening policy goals that they share. To be effective in APEC, however, the United States will have to strengthen its commitment to the organization, provide more funding through the State Department, and engage the U.S. business community in developing a plan of work. Fourth, the United States should collaborate with the nations of East Asia to confront the global financial crisis in ways that enhance global economic growth, open markets, and transparency. Since the beginning of the crisis, the United States has worked closely with the major economic powers in East Asia. The administration can enhance this coordination going forward. Some countries in Asia have vastly different regulatory models but, in the end, these economies must work together to ensure sustained financial stability and develop appropriate oversight structures. It would hurt economic recovery if countries in Asia or elsewhere used the financial crisis as an excuse to slow down important reforms and market openings. While there is a need in the United States for stronger disclosure standards for financial institutions, there are similar needs in many countries in Asia. The United States and key economies in Asia should resolve to work for increased coordination in developing international financial standards. Fifth, the United States should continue efforts to further liberalize trade and investment in Asia. Economic liberalization in Asia has been inconsistent. Those economies that have embraced open markets have tended to see enhanced growth and improvements in the living standards of their people. Visible U.S. leadership in East Asia during a period of global economic distress is crucial and can play a role in stimulating growth and saving and creating jobs in the United States. America must resist protectionism and temptations to erect barriers to foreign participation in our market. The United States must be careful about employing Buy American provisions that could be seen as hampering consumer choices or sending chilling messages to foreign investors. Similarly, the United States needs to encourage collaboration with China and others in Asia to ensure that global trade is fair. All parties in the global community should contribute to efforts to liberalize trade, protect intellectual property rights, support international labor and environmental standards, enhance transparency in decision making, and promote an open investment climate. Without collaboration, 7

12 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 8 no progress will be made in the Doha Round trade talks within the World Trade Organization (WTO) or within APEC. The United States should not abandon bilateral and multilateral trade agreement efforts, particularly in this period of economic uncertainty. The proliferation of free trade agreements (FTAs) in the Asia-Pacific that exclude the United States will hurt American exporters and U.S. economic welfare. The exclusion of the United States from regional trade initiatives will limit Washington s ability to advance broad U.S. commercial interests in the region. The FTAs with Australia and Singapore, for instance, have demonstrated U.S. commitment to the region, have advanced American geopolitical interests, and have increased economic activity to the benefit of U.S. companies and workers. The FTA with South Korea, which awaits congressional approval, could have even greater economic importance once it is fully implemented. Binding major trading partners to high-standard bilateral agreements, including FTAs and bilateral investment treaties (BITs), that ensure labor and environmental standards and protect intellectual property will enhance the growth opportunities for the U.S. economy. Trade agreements help ensure a level playing field for U.S. companies, workers, and farmers. Because trade deals cut tariffs and other barriers to U.S. products, American exports to countries with which we have FTAs have grown about twice as quickly as exports to other countries, helping create jobs back home. This trade has also helped lift tens of millions out of poverty overseas. In addition, the U.S. government should give priority to enforcing trade agreements and challenging violations of trade agreements by foreign governments as allowed under the WTO and other international trade agreements. Officials should ensure that U.S. trading partners protect intellectual property, allow American companies to bid on government contracts, and make certain that U.S. service providers have the same rights and responsibilities given to local companies. Sixth, the U.S. business community should encourage the new administration to continue supporting the Trans-Pacific Strategic Economic Partnership

13 Agreement (TPP) to advance regional economic integration. The TPP, a trade grouping including Singapore, New Zealand, Brunei, and Chile that the United States, Australia, Vietnam, and Peru joined in late 2008, could create another center of gravity for regional integration. It could also help American companies expand significantly their trade and investment opportunities in the Asia-Pacific. The TPP, which should include cutting-edge provisions on intellectual property, investment protection, standards harmonization, labor, and the environment, could gradually evolve into the FTAAP to include all APEC member economies. 500, , , ,000 U.S. Exports in Services (in millions U.S. of dollars) Seventh, the United States should expand and deepen cooperation with Asian governments on energy security and climate change. There are many challenges to increased collaboration among developed and developing countries in the areas of energy security and climate change. These challenges must be tackled. Some efforts have been made through APEC and bilateral initiatives, such as the previous administration s U.S.-China Strategic Economic Dialogue (SED), to improve cooperation in tangible ways. Collaboration in sharing green technology is critical, but it will only take place if such technologies are protected and if barriers to investment and trade are removed. Similarly, the effort to develop a viable international agreement on climate change will not be realized unless the United States and Europe work with China and other countries in Asia to share responsibility for cutting carbon emissions. China and other nations need to commit themselves to substantive cuts in carbon emissions, but they will only do so if they have assurances from the United States and Europe that they are playing their part. Engagement directly with China is important, but the United States also needs to work with Japan, Korea, Indonesia, and other countries in the region to find mutually acceptable solutions East Asia World (Source: Bureau of Economic Analysis) Eighth, Congress must play a key role in supporting U.S. commercial diplomacy beyond granting the administration trade negotiating authority and passing Trade Adjustment Assistance. Congress should help set the administration s negotiating objectives, consult regularly with the administration during FTA negotiations, and review trade agreements carefully after they are completed. COUNTRY-SPECIFIC RECOMMENDATIONS The challenges facing the United States in 2009 require American officials to work closely with nations in East Asia on matters ranging from the global financial system to world trade architecture and climate change. In the following sections, this paper explores steps that the United States should pursue with respect to specific countries or regions in East Asia to build its engagement and presence. 9

14 Economic Opportunities and Challenges in East Asia Facing the Obama Administration China Increasing U.S. economic and commercial cooperation with China over the last 30 years has yielded significant benefits for both countries, and their economic futures are now tied together more than ever. Since 2000, U.S. exports to China have grown by more than 300%, more than double the rate of our next most rapidly growing market over the same period. This export growth has not been limited to a few industries or to a specific geographic region, and increasing exports is all the more vital today at a time of growing economic challenges in the United States and around the world. Engagement with China through the SED has helped both sides manage issues related to the global economic crisis, consumer health and product safety, thorny trade and investment matters, as well as energy security and climate change. Other dialogues, like the six-party talks on North Korea s nuclear weapons, have helped increase U.S.-China cooperation on critical geopolitical challenges. The need for increased dialogue and cooperation between the two sides to resolve complex global challenges will increase under this administration. China is responding positively in some meaningful areas. In the midst of the global financial crisis, China s efforts to stimulate domestic consumption have contributed not only to the welfare of the country but also to global economic stability. Chinese President Hu Jintao s commitment at the G-20 forum in Washington in November 2008 to reject protectionism provided an opening for the administration to achieve progress on challenging bilateral and multilateral 10

15 trade and investment issues with China. Increased efforts by the world s two most powerful economies to reduce and eliminate barriers to commerce will be central to jump-starting global growth and avoiding a return to protectionist policies that can only lead to conflict and economic devastation. In this period of financial instability, the administration will undoubtedly face mounting pressure to adopt protectionist and unilateral strategies against China s economic policies that are inconsistent with the letter and the spirit of U.S. international obligations. Such measures would be the wrong approach. The administration should protect American economic interests against discriminatory and market-distorting actions by China, but it should carefully weigh its policy responses to ensure that they are consistent with U.S. international obligations. Ill-considered actions by the United States will further destabilize the global economy, undermine U.S. economic leadership, and invite retaliation by China that harms American businesses and workers. Clear problems exist, however, that must be addressed: exchange rate concerns that contribute to global imbalances; the growing use of industrial and innovation policies by the Chinese government that disadvantage foreign companies in the marketplace; lax intellectual property protection and enforcement, including the rising threat of compulsory licensing; and product safety fears. China s policies in these areas are increasing bilateral economic tensions and, in some cases, are already adversely affecting U.S. businesses, workers, and consumers. In particular, government-initiated measures against American investors in China are on the rise. Such policies are often perpetuated through discriminatory, nontransparent rulemaking and the absence of an independent judiciary. They further exploit inadequate international rules governing such matters as investment approvals and business licensing, competition and antitrust measures, state-owned enterprises, patents and technology transfer, technical standards, government procurement, and transparency. Frequently, China s state-owned and state-influenced enterprises are the targeted beneficiaries of such polices, which work to the detriment of U.S. companies and their workers. The ability of the administration to address such challenges hinges on the following: Continuation of high-level dialogue on economic issues with the Chinese government. Increased coordination on China s commercial policy challenges among U.S. government agencies with overlapping jurisdictions. Development of new forms of negotiating leverage and long-term strategies of engagement that persuade China s leaders that discriminatory and market-distorting measures are counter to China s interests. Establishment of new multilateral agreements that promote cutting-edge regulatory disciplines in areas such as investment and state-owned enterprises, antitrust measures and competitiveness, transparency, intellectual property rights, and government procurement. Negotiation of a bilateral investment treaty (BIT) with China that significantly expands market access and ensures equality of competitive opportunity for U.S. investors across all sectors with Chinese enterprises. The administration should publicly recognize these challenges, while speaking forcefully in favor of ways to expand commercial ties between the two countries. Opportunities exist in many areas for increased cooperation and trade in services, agriculture, environmental technology, and energy. 11

16 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 12 Policy Recommendations Commercial Diplomacy and Advocacy Enhance high-level dialogue with China. The SED, launched by the Bush administration in 2006, served as an essential mechanism for managing U.S.-China economic relations. While the SED can be improved, President Obama should continue it and resist the temptation to undo its significant accomplishments. The president should appoint an official of unquestioned stature and qualifications to manage U.S.-China economic relations. Washington should engage not only Chinese officials responsible for managing trade, investment, and financial ties with the United States, but also those in charge of developing China s industrial and innovation policies at the vice premier and state councilor levels. Advance multilateral cooperation and boost international institutions. President Obama should work with allies in Asia and Europe that share common interests on economic challenges related to China s rise. The administration should build on the successes achieved by the previous administration in fostering dialogue in the Trans-Atlantic Economic Council and in the Security and Prosperity Partnership of North America and in launching the TPP. It should deepen its involvement in APEC and in the International Monetary Fund to address the economic challenges posed by China. Bolster strategic dialogue with Congress on China s competitiveness agenda. The administration should enlist the support of members of Congress in the U.S.-China economic relationship. Leaders of the House Joint Working Group on China introduced four bills on U.S.-China competitiveness in the last Congress. President Obama should work with these members to improve and pass this legislation. This legislative package would expand resources for export promotion, particularly for small and medium-size enterprises, many of which need assistance to navigate the unique challenges of China s market. Congressional Inter-Parliamentary Exchanges with China s National People s Congress are underutilized forums that can support deeper discussion on challenging legal and economic reforms in China, resolution of bilateral commercial disputes, and expanded cooperation on shared global challenges. The administration should actively support these exchanges by engaging members of Congress in strategic discussions on China and providing input to key members on pending Chinese legislation that could hurt U.S. competitiveness.

17 Measures to Strengthen Economic Ties Be direct in dealing with Chinese officials on commercial issues critical to competitiveness. President Obama should act quickly to identify and prioritize Chinese industrial policies that affect, or may affect, the economic competitiveness of U.S. workers, farmers, and businesses. He should build on the efforts of the previous administration to address unfair Chinese trade and investment practices. He should expand opportunities for American businesses to enter China s market based on the principles of equal market access and evenhanded treatment, regardless of national origin. Issues the administration should address with Chinese officials include the slowing of marketbased reforms and government intervention in the regulation of strategic sectors with the aim of cultivating national champions. The U.S. government should challenge increasing efforts by the Chinese government, often in coordination with state-owned enterprises, to take actions favoring domestic firms. Conclude a high-standard BIT with China to ensure that American companies enjoy equality of opportunity and increased market access across all sectors of the Chinese economy. The economic and commercial relationship between the United States and China continues to grow in complexity and importance. China keeps on offering a multitude of opportunities to U.S. farmers, manufacturers, service providers, and their workers. Even in the midst of a serious downturn, these opportunities are contributing to U.S. economic growth, and there is little question that China will remain one of the United States most critical markets for decades to come. 13

18 Economic Opportunities and Challenges in East Asia Facing the Obama Administration Japan During the last 12 years, the United States and Japan, a key ally, have worked successfully at the Cabinet and working levels to strengthen their military alliance. In the coming years, the two wealthiest democracies should make a sustained effort to build up other elements of their relationship. These include closer cooperation on multilateral and global issues such as economic recovery, financial reforms, completion of the Doha Round negotiations, intellectual property rights protection, energy security, and climate change. Japan is the United States fourth-largest export market. In 2007, the United States exported $62.7 billion in goods and $41.2 billion in services to Japan. Total U.S. direct investment in Japan was $101.6 billion in 2006, and total Japanese direct investment in the United States was $233 billion in Japan is a critical market. But with different economic policies, its economy could be larger and more vibrant. In recent years, the two countries have resolved a number of economic issues in the U.S.-Japan Regulatory Reform and Competition Policy Initiative launched in They have held productive discussions on investment, financial services, energy, and regional integration. Further steps could be taken to make regulation of communications, information technologies, medical devices and pharmaceuticals, and financial services more transparent, efficient, and consistent with technological innovation. Improvements in the application of antitrust measures and in tax laws affecting mergers could enhance economic efficiency and attract more foreign direct investment. Nevertheless, public uneasiness about reform and a persistent political impasse in the Diet have prevented any substantial deregulation, particularly in agriculture, since Prime Minister Junichiro Koizumi left office in Because of the domestic sensitivity of agriculture, Japan has not been as effective a leader in the Doha trade negotiations as it otherwise might have been. The U.S. administration should place high priority on encouraging economic reform in Japan and on improving the economic environment in Japan for American exporters and investors, perhaps through sectoral trade agreements, and on building a beneficial partnership with Japan on regional and multilateral economic matters. Stronger economic relations would complement and increase support in Japan and the United States for our alliance. 14 Although Japan is the world s second-largest economy with a GDP of $4.9 trillion, its long-term annual growth rate is no more than 2%, and its economy is now in recession.

19 Japan s structural economic sluggishness derives from overregulation, inefficiency in some sectors, low productivity growth, and political deadlock. An aging and declining population will worsen these problems in the coming years. Japan s national debt is more than 170% of GDP, and its policy interest rate is 0.3%. These realities limit what the Japanese government can do to address the country s problems and restore economic growth through fiscal or monetary policy. The keys to higher GDP growth in Japan lie in deregulation and market opening. 150, ,000 90,000 60,000 30,000 U.S. Exports in Goods and Services to Japan and Korea (in millions of dollars) POLICY RECOMMENDATIONS Commercial Diplomacy and Advocacy 0 Japan Korea (Source: Bureau of Economic Analysis) Promote high-level economic dialogue between U.S. and Japanese officials. The president and members of his Cabinet should include in meetings with their Japanese counterparts thorough discussions of bilateral economic questions and ways, including through deregulation in Japan, to increase trade and investment between the United States and Japan. Urge Japanese leaders to pursue deregulation and explore working-level talks on the feasibility of sectoral free trade arrangements. The objective of these talks would be to increase over time the integration of the U.S. and Japanese economies. The administration should pursue an effective dialogue on regulatory questions and should discuss the negotiation of a U.S.-Japan FTA, which would be the most effective means to achieve the economic and geopolitical benefits of economic integration between the two countries. Measures to Strengthen Economic Ties Seek active Japanese support for U.S. positions in multilateral economic discussions and negotiations. The change in the administration presents an opportunity for U.S. and Japanese leaders to take stock of the global economic issues confronting them and explore ways to cooperate in their resolution. Hold separate, semiannual subcabinetlevel consultations between the U.S. Trade Representative s Office and the departments of Treasury, State, Energy, and Justice with their Japanese counterparts. Topics that should be covered include trade, intellectual property, financial services, investment, competition policy, energy, and climate change under negotiation in international bodies, including the WTO and APEC. These discussions would build support for U.S. positions and could establish a habit of mutually beneficial, day-to-day cooperation between senior-level U.S. and Japanese officials. Use Japan s chairmanship of APEC in 2010 and the U.S. chairmanship in 2011 to achieve marketopening and structural reform goals. As the two countries follow each another as APEC chairs, Japan and the United States have the opportunity to pursue a strong agenda for two years on matters of common benefit, including trade facilitation and the Free Trade Area of the Asia-Pacific. 15

20 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 16 Korea Korea is an ally, the world s 14th-largest economy, and a country with global interests that are largely congruent with those of the United States. The U.S.-Korea FTA signed in 2007 is a high-standard agreement providing the market access and protection that modern international commerce requires. The agreement opens Korea s $1 trillion economy to U.S. companies. It also gives the United States a secure base in Asia s integrating regional market and provides a model for highquality agreements with other countries. The administration should seek early congressional approval of the FTA with Korea. A failure to ratify the agreement quickly will disadvantage American exporters and investors in competition not only with Asian countries but with the European Union, which has made good progress in negotiating an FTA with Korea. The country s complex regulatory systems and other nontariff barriers in the past have limited opportunities for U.S. manufacturing, farms, and service companies to compete and succeed in Korea s market. By eliminating tariff and nontariff barriers in every sector of the Korean market and by securing a more open and competitive Korean market, the FTA would generate billions of dollars in new U.S. exports, creating new American jobs and economic growth. The U.S. International Trade Commission has forecast that the tariff elimination under the agreement alone, if fully implemented, would increase U.S. GDP from $10 billion to $12 billion a year and would increase exports of U.S. manufactured and agricultural products from $10 billion to $11 billion annually. The United States cannot pass up these benefits. Letting the U.S.-Korea FTA languish would erode political and security relations with Korea and impede cooperation between our two countries on multilateral and global issues. It

21 would make it more difficult to deal with outstanding bilateral trade and investment issues as well. The administration should quickly establish a sound relationship with Korea s leaders to approve and implement the FTA and strengthen cooperation on multilateral issues. Korea is the third-largest economy in East Asia and has interests in Asia and beyond that are similar to those of the United States. It is a large exporter dependent on open markets and capital flows and promotes energy security. Korea has the ability and the ambition to play an active role in managing international issues. It succeeded, for example, in becoming one of the three members of the G-20 s steering committee. The United States should expand its cooperation with Korea on multilateral economic matters. The administration should continue the regular and effective dialogue with Korean officials on bilateral trade and investment questions led by the Office of the U.S. Trade Representative (USTR). In addition to the trade and investment issues dealt with in the FTA or in the bilateral dialogue spearheaded by the USTR, foreign companies operating in Korea also face difficulties with regulations and policies in such areas as tax policy and labor management rules. The administration will face immediate challenges on how to bring an end to North Korea s dangerous nuclear program. Obviously, the question of whether to establish economic ties with North Korea is a subordinate matter. There may come a time, though, when a discussion with North Korea on possible economic opportunities would be useful. The business community stands ready to offer advice and assistance to the administration on ways to expand business ties with North Korea. The business community also could help in dealing with humanitarian problems in North Korea. POLICY RECOMMENDATIONS Commercial Diplomacy and Advocacy Pass the U.S.-Korea Free Trade Agreement. Korea s market is less open than that of the United States, and the agreement would redress this imbalance for U.S. service, manufacturing, and agricultural companies. The U.S. government should not reopen negotiations on any issues, including autos, as this would prompt Korea to seek compensatory concessions from the United States. Instead, the United States should discuss with Korean officials ways of dealing with the concerns of U.S. auto companies and unions in other ways. Continue the regular, structured dialogue with Korea to discuss and resolve bilateral trade and investment questions. This dialogue has resolved many of the issues American companies continue to confront in Korea, pending the implementation of the FTA. The FTA, once in effect, would also establish forums to deal with trade and investment issues. Separately, the administration should consider the establishment of a body to deal with business issues such as tax policy, labor relations rules, and energy policies that are not within the scope of the FTA. Ask Korea to simplify its tax laws and regulations and improve the transparency, consistency, and fairness of its tax audits. Specific tax laws will minimize discretionary adjustments by tax examiners, and a clear, predictable process would encourage foreign investment. 17

22 Economic Opportunities and Challenges in East Asia Facing the Obama Administration Measures to Strengthen Economic Ties Establish regular, high-level discussions with Korean officials on multilateral trade and investment issues, energy and climate change, and the G-20 financial discussions to gain more active Korean support for U.S. positions. Korea is an increasingly influential diplomatic actor, and the United States should engage Korea as an ally in its efforts to prevail in multilateral discussions and negotiations. Consider how the business community can support positive change in North Korea and help deal with a potential humanitarian crisis. Under appropriate circumstances, the U.S. business community would welcome the opportunity to play a constructive role in U.S. engagement with North Korea. It could be part of a private-sector dialogue in association with the government-to-government negotiation of a denuclearization agreement with North Korea. Further, the business community could provide emergency humanitarian assistance. 18

23 Southeast Asia The economic, strategic, and geopolitical well-being of the United States is integrally bound to developments in Southeast Asia. With its dynamic workforce, growing middle class, and array of natural resources, including oil and gas, few regions of the world offer U.S. companies more trade and investment potential over the next decade than Southeast Asia. U.S. economic interests in Southeast Asia have grown tremendously in recent years as the region has emerged as a target in the business strategies of U.S. companies. The region has a GDP of $2.7 trillion and constitutes the United States sixth-largest market with exports in 2007 topping $170 billion and supporting 800,000 U.S. jobs. Only Japan has more investment in the region than the United States. The 10 countries of Southeast Asia are politically, culturally, and economically diverse, with a population of nearly 600 million, including a significant, mainly moderate Muslim population. U.S. policy toward the region is complicated by sometimes weak political institutions, disparate economic growth, and some terrorist threats. China, India, and Japan are rapidly improving relations with countries in Southeast Asia, prompting political and economic shifts that have created new challenges and opportunities for the United States. China s rapid inroads in the region make the presence of a strong ASEAN friendly toward the United States all the more critical to American interests. Indonesia, with its democratic government, population of 240 million, and 17,000 islands straddling a bustling sea-lane that carries half of the planet s commercial 19

24 Economic Opportunities and Challenges in East Asia Facing the Obama Administration 20 cargo, needs to be an essential element of U.S. geopolitical calculations in the region. As China steps up its attention on Southeast Asia, the time may come when countries in the region no longer look to the United States as the guarantor of regional security unless Washington seeks ways to become more actively engaged. Disregard in some countries for international norms of corporate governance, rule of law, and intellectual property protection make the region a less exciting market than it could be. The administration should actively step up its engagement with the countries of Southeast Asia and help create an environment to bolster economic growth and political stability. The administration should work to demonstrate to the region that its interest and presence in Southeast Asia is for the long term. To ensure continued access to open markets, it is critical that Washington work with governments in the region to help shape the business architecture and push for a level playing field for U.S. companies.

25 POLICY RECOMMENDATIONS Commercial Diplomacy and Advocacy Hold a summit with Southeast Asian leaders every two years and meet annually with them at the APEC Summit. Timely engagement by President Obama and senior-level Cabinet officials and respect for regional institutions will go a long way toward enhancing U.S. influence in the region. Ensure that senior-level Cabinet members, including the secretary of State, participate regularly in major Southeast Asia meetings, including the annual ASEAN Regional Forum, to help shape the region s commercial architecture. Accede to the Southeast Asia-sponsored Treaty of Amity and Cooperation. At a time when China s influence in the region is growing, this would signal that the United States wants to be fully engaged in Southeast Asia. Explore ways to invest in strengthening ASEAN as a grouping, including through increased funding to its secretariat in Jakarta. Reappoint an ambassador to ASEAN to enhance dialogue on a day-to-day basis. Explore ways to engage the repressive regime in Burma and not allow differences over Burma to get in the way of broader engagement with ASEAN. Washington should work with partners in the region (ASEAN, China, India, and Japan) to provide a carrot-and-stick approach to its military leaders to promote human rights, encourage democratic reforms, and stimulate economic development. Sanctions and harsh condemnation of the Burma s rulers have not worked to change their behavior. Alternative policies are needed to draw the military regime out of isolation. Humanitarian assistance to the people that does not enhance the military regime should be encouraged. Measures to Strengthen Economic Ties Explore with Southeast Asian countries comprehensive, commercially viable trade agreements that benefit U.S. workers, businesses, and consumers. The administration should complete the FTA negotiations with Malaysia, negotiate a BIT with Vietnam, and explore the opportunity for resumed trade talks with Thailand. Encourage Southeast Asia s efforts to move quickly toward economic integration within the ASEAN economic community, which will lead to greater economies of scale, lower costs, and increased trade. U.S. support for Southeast Asia s economic integration and strengthening of regional trade and investment structures would boost opportunities for U.S. exports to the region and improve the well-being of the region s people. Work with governments and companies to boost intellectual property rights protection. Piracy and counterfeiting hobble investment and innovation, threaten public safety and health, and shrink government revenue. Encourage regional governments to harmonize their industrial standards. This would promote ASEAN s efforts to become a regional production base, enhance competitiveness, and reduce production costs. Urge Southeast Asian governments to establish more predictable investment regimes. This would prompt increased investment by U.S. companies by reducing political risk, clarifying regulations, and spelling out procedures for resolving disputes. 21

26 U.S. Chamber Asia Department As one of the largest Asia trade practices in Washington, D.C., the U.S. Chamber of Commerce s Asia Department gives voice to policies that help American companies compete and prosper in Asia s dynamic marketplace. The Asia team consists of more than 20 policy, program, and business development experts in Washington, Beijing, and Seoul. The regional expertise of the staff enables the department and our member companies to actively shape policy debates in Asia and Washington. The department s programs include policy advocacy on trade, investment, and other commercial issues important to the American business community in Asia. The department has been instrumental in advancing key policy issues, including educating Congress and American small and medium-size companies on the benefits of an open and fair U.S.-China economic relationship, elevating the U.S. business agenda in the Asia Pacific Economic Cooperation (APEC) forum, and promoting innovation and the protection of intellectual property rights in the region. The department is enhanced by business councils that promotes trade and investment in Korea and Pakistan. 22

27 About the Authors MYRON BRILLIANT Myron Brilliant is senior vice president of International Affairs at the U.S. Chamber of Commerce. Brilliant previously served as vice president for Asia where he developed the largest Asia trade policy shop in Washington, D.C. Before joining the Chamber, he was an attorney specializing in international trade. MURRAY HIEBERT Murray Hiebert serves as the Chamber s senior director for Asia. Hiebert also heads up the Chamber s Southeast Asia team. Prior to joining the Chamber, Hiebert worked as a journalist in Southeast Asia and China with the Wall Street Journal and Far Eastern Economic Review for two decades. ROBERT REIS Robert Reis, the Chamber s senior director for Japan and Korea and executive vice president of the U.S.-Korea Business Council, works to promote U.S. business relations with these countries. Previously he served in the State Department for more than 35 years, specializing in economic and East Asian affairs. JEREMIE WATERMAN Jeremie Waterman is senior director for Greater China at the Chamber. Waterman oversees the Chamber s trade and investment policy initiatives in China. Prior to joining the Chamber, Waterman worked at the U.S.-China Business Council and at the U.S. Trade Representative s office. 23