Free Trade Areas: Legal Aspects and the Politics of U.S.

, PRC and Taiwan Participation

by Jacques deLisle November 10, 2006

http://www.fpri.org/pubs/20061110.asia.delisle.freetradeareas usprctaiwan.html China and the Politics of FTAs with East Asia

For China, as for the U.S., there are several powerful and durable reasons for pursuing some FTAs and broader integration in a liberal international economic order-and for being wary of FTAs and other liberalization measures-that are not rooted in the simple liberal economic logic of the WTOs international law of FTAs. Compared to the U.S., the political dimension is even larger for Beijing and the commitment to the relatively radical economic liberalism ideals behind FTAs (or of the broader international trade regime) less established and robust. First, a broadly liberal international trading order that includes China serves the national economic interests that reform-era Chinese leaders have defined. For nearly thirty years, economic development has been the predominant goal, pursued through market-oriented reform at home and openness to the international economy. Especially in the early years but also continuing today, Beijing has pursued a Chinese variation on the venerable East Asian development strategy of export-led growth and attendant specialization according to Chinas evolving comparative economic advantage. On almost every assessment, trade and foreign investment have made disproportionately large contributions to Chinas growth. Foreign investment-especially in the early years but continuing to some degree today-has been skewed toward export sectors. Thus, the link between foreign investment liberalization and seeking a liberal external environment for trade came early-and has stayed long-for reform-era China. Especially during the final pre-accession period, Chinas zealous and protracted pursuit of membership in the WTO-the key global institution for trade liberalization and the treaty-based regime that defines the fundamental international legal framework for FTAs-reflected the close connection between the PRCs integration in a liberalizing international trade regime and domestic economic reform. A quite plausible and widespread view-reportedly embraced by no less than then-Premier Zhu Rongji-held that WTO membership and the resulting openness to

international trade and investment would prod necessary reforms of domestic enterprises by subjecting them to competition from-and transformative partnerships with-foreign firms. In recent years, the link between trade and investment has added another dimension. As Chinese firms have heeded the governments call to "go out," their early and prospective investments abroad include a significant share in ventures that focus on exporting inputs or goods to China or marketing Chinese-made goods abroad. Further, Beijing has stressed that there is no significant tension between its interests in the high politics of international security affairs and these low politics of economic integration with the outside world. From the early days of the reform era, economic development and, thus, the engagement with a liberal international trading order that helped fuel such development was seen as indispensably providing the material preconditions for national strength, including military modernization. In more recent years, key PRC foreign policy doctrines such as Chinas "peaceful rise" or Chinas "new security concept" assert the lasting compatibility between the PRCs strategic interests and Chinas ongoing integration with the international economy. Second, on the other hand and as the asymmetrically non-free-trade quality of real-world FTAs facilitates and reflects, PRC ideology and practice have stopped well short of establishing significant FTAs or even providing much support for trade liberalization beyond the extant international norms. When seeking WTO entry and since becoming a member, China has remained largely a "regime taker"-accepting the existing rules, including the basic MFN/NTR principles, and pledging to abide by them. For a time during its protracted pursuit of accession, Beijing had sought to benefit from many of the special exceptions that permit developing or post-socialist transitional countries to employ limited protectionist policies or to benefit from special preferences allowing asymmetrical access to foreign markets. In the end, China received few concessions on this score, consisting mostly of limited phase-in periods for meeting standard WTO obligations and implementing particular pledges of access to Chinese markets (particularly through foreign investment) that were incorporated in Chinas protocol of accession. Since joining the WTO, the PRCs few departures from mainstream positions have consisted mostly of fairly tepid support for a developing countries agenda that has included moderately illiberal elements. And Beijings creation of FTAs or FTA-like arrangements has been limited, with Closer Economic Partnership Agreements for the already-deeply-integrated Hong Kong and Macao SARs, a significant but long-term effort focusing only on the ASEAN group, more speculative or rhetorical talk of FTAs with Japan and Korea or with the members of the Shanghai Cooperation Organization, and a complicated discourse over a CEPA or FTA-like arrangement with Taiwan for which Beijing insists conditions are not yet ripe.

Seperti AS, China juga berada pada posisi yang juga menginginkan perolehan dari illiberalism asimetris dan selektif yang datang dari partner dagang yang tidak seimbang dan lebih besar dalam negosiasi bilateral atau multilateral terbatas yang dihasilkan dalam FTA yang menjadi fitur umum dalam kerangka ekonomi internasional. ACFTA merupakan diplomasi China dimana sebelumnya tahap principal perennial dari China dalam hubungan internasionalnya dan banyak Negara ASEAN mengenai sengketa Laut China Selatan dengan Negara ASEAN. Rejim WTO dan Politik China dan struktur regulator mengijinkan apa yang disebut semisneaky protectionism, dan divergensi liberalism lebih banyak disbanding ( much less) prinsip FTA dalam perdagangan international. Rejim yang berpusat pada WTO kekuatannya relative terletak pada kebijakan hukum nasional dan kebijakan yang, ketika diimplementasikan, impede or distort perdagangan dengan cara transgress kewajiban WTO. Mekanisme The WTOs formidable formal dispute resolution dan politik multilateral dari non-keanggotaan (compliance) yang menantang farless efektif ketika hambatan perdagangan mengambil banyak overlapping bentuk yang utama dalam daftar complain mengenai perilaku China. Bentuk tumpang-tindih ini sulit dideteksi dan berhubungan dengan otoritas pusat, sulit untuk dibuktikan dan diukur, dan tidak langsung terhubung pada perdagangan: proteksionisme local; kolaborasi berbayang antara otoritas local dan pemerintah-pengusaha; keputusan bisnis yang berhubungan dengan perdagangan berdasar pada pertimbangan disamping penawaran senjata atas harga dan kualitas; implementasi yang buruk bagi WTO_conforming atau investasi asing trade-affecting dan aplikasi mereka terhadap proyek spesifik; dan kebijakan nilai tukar tetap yang confers keuntungan perdagangan yang tidak jelas fungsinya atas renminbis much-disputed degree atas devaluasi; dan selanjutnya. These overlapping issues include those that are difficult to detect and to attribute to central authorities, those that are hard to prove and measure, and those that are not immediately related to trade: local protectionism; shadowy collaboration between local authorities and governmentlinked enterprises; trade-affecting business decisions that are based on considerations other than arms-length bargaining over price and quality; poor implementation of WTO-conforming or WTO-mandated national laws and policies; opaque de facto subsidies to state-owned companies; trade-affecting foreign investment rules and their application to specific projects; and a fixed exchange rate policy that confers trade advantages that are an uncertain function of the renminbis much-disputed degree of undervaluation; and so on. Third, as this list of complaints suggests, Chinas uneven and ambivalent approach to trade liberalization generally-and, by extension, the deep if narrow liberalization that each FTA would bring-can be partly explained in terms of something like interest group politics with Chinese characteristics. The PRCs sharply expanded engagement with the generally and increasingly liberal international trade order has notoriously delivered unevenly distributed benefits (and expectations of benefits) within China. The well-known, simple story has been one of support for trade liberalization from the "winners"-central and southern coastal provinces, internationally competitive sectors (initially, light industry and export-oriented enterprises), ministries associated with those sectors and with foreign trade and investment, and elite leaders (including the so-called "Shanghai gang") whose political careers were rooted among the winning areas. It was, of course, former Shanghai chief Jiang Zemin who, as president and general secretary, led

China through its accession to the WTO, closer economic integration with Hong Kong and Taiwan, the genesis of the ASEAN-China FTA proposal, and the adoption of the "three represents" as an ideological embrace of the rising, largely coastal urban and often internationally engaged stratum of entrepreneurs. On the other side of the story, there has been growing discontent and resistance focusing on the costs of WTO-mandated changes, trade liberalization more generally, and reform and opening still more generally among the "losers"-inland and northeastern provinces, unreconstructed state enterprises, inefficient industrial sectors, ministries associated with them, and an increasingly restive laid-off or poorly paid collection of factory workers, dispossessed farmers (their land-use rights often lost to development projects), and rural-to-urban economic migrants. Amid growing concern about resulting threats to political and social stability, President and Party General Secretary Hu Jintao and Premier Wen Jiabao have paid more attention, and given greater voice, to these constituencies concerns and views amid the Hu-Wen leaderships largely successful drive to increase its power at the expense of Jiangs acolytes among the PRCs top elite. The implications for Beijings approach to FTAs, and trade liberalism more broadly, are more complex than the simple story might seem to suggest. Even some of those who have been "winners" in Chinas long era of reform and opening might not be interested in, or be sure to benefit from, a series of true FTAs. A coalition in which some members thrive because of limited protectionism would fragment in a shift to a genuine free trade regime. Moreover, FTAs in practice are forged with specific partners. The contemplated FTA with ASEAN would involve partners with a very different profile of complementarities with Chinas economy than has been the case with the industrialized nations of the West and Northeast Asia that have been mainstays of Chinas export- and foreign investment-led growth strategy to date. The CEPA with Hong Kong and arrangements that might increase economic integration with Taiwan also would change the relevant composition of Chinas trade, though mostly by building upon established trends. Floated ideas of Japan-Korea-China or SCO FTAs would have still other distributive effects (indeed, with especially striking contrasts likely between these two). More broadly, trade liberalization and related undertakings that are well short of FTAs face potentially growing resistance and opposition. For some initial losers, the WTO era has meant successful adaptation, reduction of influence or simple disappearance. And many initial winners continue to face a bright future. As WTO obligations have come fully on line, and if the currently stalled WTO process resumes its prior "mission creep" toward greater liberalization, however, even former "winners" in China face the prospect of becoming "losers" and many losers may face more severe losses. Newly vulnerable sectors include banking and financial services (despite a rush of joint venture arrangements with foreign partners and substantial improvements to domestic entities), agriculture (which is losing prior protection from competition from imports), intellectual property-pirating enterprises (though enforcement and implementation have lagged) and other sectors that have been the object of specific WTO-related liberalization commitments (such as telecommunications and autos as well as financial services). While any prediction of a significant reorientation from the venerable policies of reform and opening is, at best, wildly premature, the rising protests among workers, migrants, and peasants suggest the possibility that some substance-perhaps most likely in the undramatic form of poor implementation and foot-dragging-may follow the Hu-Wen leaderships so-far largely rhetorical

shift to concern for the less well-off and an emphasis of equity and "human development" along side economic development and "GDP-ism." Fourth and finally, in the cases in which China has engaged the question of FTAs, political considerations seem undeniably to loom large. And, in China, the phenomena akin to interest group politics still do relatively little to constrain the leaderships pursuit of what it sees as the national interest. The CEPA with Hong Kong is perhaps a symbolically important step in the SARs long-evolving and pervasive economic integration with the core PRC area, but it was, by all accounts, of little economic significance, given the impending phase in of FTA-like trade rules between the SAR and the PRC under the WTO, given the already-extensive investment presence of Hong Kong firms on the PRC prior to the new openness promised by CEPA, and given skepticism about how thoroughly the mainland would implement its CEPA commitments. Tellingly, the CEPA seemed politically timed, coming at a moment when Beijing would want to buoy Hong Kongs often-troubled post-reversion administration. The possibly empty but still much-played claim that CEPA would boost the economy, along with the signal of political support CEPA conveyed, arrived amid significant local discontent with Hong Kongs Beijingmandated Chief Executives government over the floundering economy and massive protests against civil liberties-threatening legislation to implement a provision of the Hong Kong Basic Law that Beijing, at least upon reflection, decided it could wait to see implemented. (The Macao CEPA, like almost everything else Beijing does with respect to Macao, was a delayed copy of the Hong Kong model and of far less economic and political import.) The most significant PRC FTA proposal to date-the ASEAN-China Free Trade Area, envisioned as a roughly decade-long project-closely entwines politics with its economics. If the adoptionand even the pursuit-of this FTA achieves the intended and expected effect of increasing economic ties between China and Southeast Asia states, the FTA can be expected correspondingly to raise Chinas political influence in an area that is vital to its ambitions to be a major power in the region. Well before such economic effects-or even an FTA agreement-arrive, Beijings ACFTA gambit provides a means for the PRC to pursue key political ends. This includes trying to soothe regional states fears about the implications for them of Chinas rise. The ostensibly economic agenda of the ACFTA provides a focused and concrete way of presenting and selling the "peaceful rise" argument to these suspicious neighbors. The FTA gambit came amid concerted broader efforts by PRC leaders to assure Chinas near-neighbors to the south that a more rich and powerful China posed no threat, would remain focused on economic development, was committed to a stable and calm environment to facilitate that developmentalist agenda, would not use its growing clout and leverage to coerce smaller regional states, and would cooperate-and not just compete-with ASEAN states economically. The relevant background also included the PRCs having sought to cast itself as a responsible and, indeed, burden-bearing power in the international economic order and especially toward East and Southeast Asian states. The most notable move here was the PRCs pointedly proclaimed decision not to devalue the renminbi amid the massive declines in many regional currencies and despite the threat such falling exchange rates posed to Chinas crucial export sectors. This Beijing-touted past sign of good faith was ripe for packaging as reassurance about

the benign nature of growing economic dependence on China that would come with Chinas inexorable ascension and, more rapidly, with an ACFTA. The relevant context also included Chinas broader pursuit of engagement in multilateral regional fora to address a host of economic and non-economic issues. Significant examples include the various "ASEAN-plus" groupings, the ASEAN Regional Forum, and the multilateral process that produced a code of conduct to govern the often tension-ridden (and occasionally armed skirmish-producing) issue of competing territorial claims in the South China Sea. In this ACFTA (and broader) approach to Southeast Asia, there also are elements of PRC rivalry with the U.S. and Japan for regional influence, in part using FTAs to counter other dimensions of American and Japanese influence in the region and in part to anticipate the political gains that Washington and Tokyo have begun to seek through their stepped-up pursuit of FTAs with regional states. Even the purely economic dimensions of an ACFTA have some purchase here. It serves Beijings interests in diversifying its trade dependence away from the often-troublesome and meddlesome U.S. and its closest regional ally. Beijings efforts to woo and reassure Southeast Asian states surely addresses the concern that those states might otherwise be more inclined to balance China through strengthened ties with the U.S. or Japan. Notably, Beijings moves to sell the ACFTA and closer economic ties more generally to ASEAN states and other regional states have emphasized contrasts with Washingtons unappealing war on terrorism agenda-one that leads to frictions with and potentially trouble for Southeast Asian governments (especially in states with significant Muslim populations) and that distracts from the trade and development agendas that such governments have preferred to place at the center of their external relations. While the impetus behind anti-Japanese sentiments in China lies elsewhere, recurrent Chinese invocations of the history do resonate with-and may thereby exploit to Beijings advantage-lingering resentments in the region over past Japanese aggression and imperialism. Japans growing pursuit of FTAs in the region and the U.S.s foray into a Singapore FTA provide further defensive or responsive reasons for Beijing to press for the ACFTA and to oppose Japanese or U.S. FTAs with regional states. Beijings ACFTA strategy may be less promising or fruitful than it appears. Among the several possible reasons for this is the possibility that the political gains are front-loaded while the economic costs for China are yet to accrue. That is, the PRC has already been reaping some of the diplomatic benefits from its reassurance, engagement, and economics-over-politics tactics. But, with the details of FTAs still in the works and their implementation still farther off, it remains an unsettled question how much China will be willing to open its economy-and, specifically, vulnerable sectors-to the threats that true FTAs or arrangements close to them will pose, and how disappointed and discontented Chinas ACFTA partners will be if they see China as being recalcitrant or unfair in this regard. It is, of course, possible that the Chinese economy will have become sufficiently robust and competitive and the Chinese leadership sufficiently confident in the Chinese economy that Beijing will be willing and able to satisfy ACFTA partners demands and expectations. But that cannot be securely assumed. The same concerns likely will apply to other Chinese FTA proposals if they go forward. The appeal to China of a Japan-Korea-China FTA or an SCO FTA is broadly parallel to that of the ACFTA but a good deal less achievable. With Japan and Korea already among Chinas key trading and investment partners, an FTA would have significant economic potential-and peril.

With deepened economic ties (of whatever net or distributive economic impact), China could reasonably hope for increased political influence. The result could be an acceleration of what critics fear could be an asymmetric economic interdependence-driven Finlandization of Japan and Korea. While such worries and any such trilateral FTA remain speculative, Beijings efforts in that direction can provide, first, some counter-pressure to what the PRC sees as the tightening of the U.S.-Japan security relationship (driven in no small part by Chinas growing military capacity and the poor state of Sino-Japanese relations) and, second, some capitalizing on recently increased Anti-Americanism in South Korea (fueled by generational transition in South Korea and friction over Washingtons approach to North Korea). Here too, U.S. consideration of an FTA with Korea provides an additional, defensive or responsive element to PRC reasons for floating an FTA that includes the ROK. An SCO FTA remains a less serious pursuit. Its economic appeal for China is relatively straightforward. But even talk of it could enhance the economic leg of the broader diplomatic effort of China to build cooperation among central and northern Asian mainland states (including especially Russia, which chafes at its diminished global political influence) to balance and check U.S. hegemony in a one-superpower world. The most political aspect of Beijings approach to FTAs, however, has lain elsewhere. As in so many areas of Chinas foreign policy, the most volatile politics involve Taiwan-here, the question of its exclusion from Beijing-centered FTAs and its possible inclusion in an FTA with the United States.

U.S. FTAs Including, and PRC FTAs Excluding, Taiwan

While calculations of international political interests play a major role in FTA consideration for the U.S. and China (and surely their potential partners and others as well), the political element looms especially large with respect to Taiwan. There are significant economic interests at stake in potential moves that would bring Taiwan into an FTA or exclude it from one. Taiwan is, on economic grounds, an obvious FTA candidate. It has a quite open economy, one that has moved far from its more protectionist and otherwise illiberal past (which included a large role for state- or party-owned enterprises, poor intellectual property protection and the like), and one that has the high trade to GDP ratios that one would expect from a small, developed and internationally integrated economy. It is a major trading partner for both China and the U.S. As with FTAs generally, membership in FTAs with major trading partners would expand trade among the partners and increase each partners total trade and gains from trade. Failure or refusal to enter into an FTA with Taiwan, of course, would mean foregoing those effects. While these economic effects likely would not be large (especially in the case of U.S.Taiwan FTA), that does not distinguish Taiwan-including FTAs from many others that are on the table (including some currently pursued U.S. FTAs). Any given FTA, of course, would also skew Taiwans trade toward its FTA partners and away from the broader group of fellow WTO members (and, for that matter, non-WTO-member trading partners). A U.S.-Taiwan FTA could be expected to have these typical diverting effects of a bilateral FTA of increasing each partners share in the others trade (and, as with many

FTAs, this diversion effect is predicted to be larger than any trade-creation effect). An ACFTA excluding Taiwan likely would divert some of the ASEAN states trade from Taiwan to the PRC (though this would be limited given the very different economies and patterns of traded goods and services that characterize the entities on opposite sides of the Strait). It would also encourage the substitution of ASEAN-produced goods for some of Chinas imports from Taiwan, cutting into the growth cross-Strait trade that has become important to Taiwan. The more inchoate ideas of a Japan-Korea-China FTA or SCO FTA-both excluding Taiwan-would have broadly similar effects, with the economic impact for Taiwan, of course, being a good deal more significant with respect to its important trading partners in Northeast Asia than with the Asian mainland states other than China. For Taiwan, even the seemingly economic is fraught with security implications, however. The great concern for Taiwan of a Taiwan-excluding ACFTA is that it will achieve precisely the economic dependence-increasing and political ties-promoting effect between the ASEAN states and China that Beijing apparently and presumably seeks. Already relatively to thoroughly unsupportive of Taipei on issues of Taiwans autonomy and international status, Chinas ACFTA partners would be even more reluctant to roil relations with the PRC and more likely to fear Beijings use of economic leverage if they were to be too "soft" on the Taiwan issue. The real fear from Taipei is that an ACFTA would represent another potent tool, firmly rooted in Chinas burgeoning international trade prowess, in Beijings diplomatic kit for marginalizing the ROC. Much the same would apply if the PRCs notion of a China-Japan-Korea FTA were to gain much traction. The potential political loss for Taiwan would be especially great in the case of Japan, which remains the principal regional state that has the will and the capacity to work to balance China and that has recently and controversially articulated an interest in Taiwans security. An SCO FTA, of course, would be less significant, given the SCO states more limited economic relations with and lack of diplomatic support for Taiwan. Here there is perhaps some minor solace for Taiwan in the ambivalence of Chinese strategy. To the extent that the economics of an ACFTA (or a China-Japan-Korea FTA or even perhaps an SCO FTA) serves Beijings agenda of isolating Taiwan politically (and perhaps marginally weakening it economically), it is hard to square with the PRCs parallel effort to increase Taiwans economic dependence on the mainland and, thus, its political pliability on unification/independence issues. True, there is no logical contradiction between the floated Taiwan-excluding ACFTA and an even more hypothetical cross-Strait FTA or CEPA. In combination, they would pull consistently in the direction of turning Taiwans trade ties and economic interdependence away from Southeast Asia and toward the mainland. (Notably, the Taiwan governments "go south" investment policy, indeed, had sought to promote trade and investment redirection from the mainland and toward ASEAN and other regional states to counter precisely this trend.) Moreover, a cross-Strait FTA would have another significant political benefit for Beijing: it likely would take PRC-Taiwan trade relations out of the ordinary WTO framework, wherein Taiwan has sought, and Beijing has sought to avoid, occasions to make use of consultation and dispute resolution mechanisms that would cast the two as equal parties. Nonetheless, the politics would be exceedingly messy. Chinas then-minister of MOFTEC, Shi Guangsheng (and others) have declared that circumstances are not yet ripe for a cross-Strait free

trade zone, partly to press Taiwan on other interim measures (including the three links), partly surely in recognition of the Taiwanese administrations clearly expressed rejection of the idea. Whatever prospect there might be for selling a cross-Strait FTA or CEPA in Taiwan (or, more realistically, more incremental moves to reduce trade barriers and increase economic integration), those are surely diminished by the backdrop of a pointedly Taiwan-shunning ACFTA and the suspicions about Beijings intent that that engenders. At the same time, Beijings urgings of ACFTA governments (and governments of other East Asian states, including Japan) to eschew political connections with or signs of support for Taiwan-in part through arrangements that include foregoing what might be appealing economic gains that might come from an FTA that extended Taiwan-would risk ringing a bit hollow if the PRC established (or even pursued or purported to pursue) an FTA with Taiwan. Broadly similar dynamics apply to any China-Japan-Korea FTA and, to a lesser extent, to an SCO FTA. The politics of a U.S.-Taiwan FTA are simpler fare. For Taiwan, U.S. willingness to enter into an FTA would be an affirmation of the broader U.S. commitment to Taiwan. President Chen and others have phrased it as such. So too have congressional supporters of a U.S.-Taiwan FTA. While it of course formally implies nothing about statehood or state-like status, Taiwans status as a partner in an FTA-or even being under serious contemplation as an FTA partner-would imply standing with the U.S. akin to that of Canada, Mexico, Singapore, and Korea. Chinese sources have made this basic argument, suggesting that an FTA would be a step along the road to Taiwan independence. Moreover, Taiwanese sources and American supporters have played the democracy and human rights card, linking a U.S.-Taiwan FTA to support for those values, as they are embodied in Taiwan-and thereby invoking principles that also are relevant to claiming state- or state-like status in the post-Cold War international order. For precisely such reasons, Beijing does not welcome the prospect and has (albeit a bit more quietly) been no less chilly to the prospect U.S.-Taiwan FTA than it was to the more easily deterred prospects of a Japan-Taiwan or Singapore-Taiwan FTA . Partly because much of Washington does not want such diplomatic frictions with Beijing, the Taiwan FTA faces an uphill fight and, at best, a place in the queue behind others. The steepness of the hill is further increased by the waning of the influence of the Taiwan caucus and Taiwan lobbying in Congress and by the increasing tendency in Washington to regard Taiwan as a subordinate issue in the broader universe of U.S.-PRC relations. Here, the problem is largely structural, reflecting the rising relative power and importance of China. But, in additions, some of the tactics that Taiwan and its friends in Washington have pursued have contributed to the problem. This is not to say that those tactics are clearly wrongheaded. Rather, those who have used them have suffered from their encounter with a common conundrum that faces ostensibly status-unrelated moves from Taipei. The argument that a Taiwan-U.S. FTA is purely about trade and economics (and that the impediments to it are merely economic ones, such as the complaints about Taiwanese IPR protection, implementation of WTO commitments and the like) inevitably-and rightly-sounds disingenuous. Because there is undeniably a component that is political and that does have implications for Taiwans international status and standing, there is an understandable temptation to engage in arguments that address that-making the claims about security commitments and recognition of Taiwans democracy or even not subjecting Taiwan to the indignity of a "CEPA" label rather than the

ordinary "FTA" label for any agreement. Indeed, it may be almost necessary to do so, given Taiwans economic unimportance relative to the PRC and given that Beijing has politicized the issue. But once these political elements are fully on the table, the useful claim that an FTA is really just about economic interests and principles becomes unsustainable and Taiwan and its Washington allies are problematically cast in the role of engaging in "status politics" and being at fault in any resulting roiling of cross-Strait and U.S.-PRC relations. There are, of course, genuine international economic issues and domestic interest group issues for the U.S. with a Taiwan FTA. Some are relatively generic to FTAs and some are specific to the Taiwan case (including concerns over IPR, telecommunications, agriculture and pharmaceuticals). But what remains most distinctive about the case of a possible U.S. FTA with Taiwan is that, like all matters involving Taiwan, it is deeply entangled with the politics of the Sino-American bilateral relationship and the politics of Taiwans international status as a state or state-like entity.

Power in East Asia: A Conference Report

By Jacques deLisle, rapporteur March 2010 Jacques deLisle is Director of FPRIs Asia Program and the Stephen A. Cozen Professor of Law and Director of the Center for East Asian Studies at the University of Pennsylvania. On January 25, 2010, FPRI held a conference, co-sponsored with the Reserve Officers Association, examining power in East Asia and shifts in its distribution and meaning. This report summarizes that conference. Video of the conference is available at www.fpri.org/research/asia/powereastasia. Conference papers will appear in Orbis. Who has power, how much and what kind have become pressing questions for foreign policy in and toward East Asia. The relative importance of various types of powerhard, soft, smart and perhaps othersand the relationships among them have become significant concerns among international relations scholars and foreign policymakers. Perceptions of a relative decline in U.S. power and a precipitous fall in the U.S.s international image have prompted debates about their implications for the U.S.s long-term role and influence in East Asia and the prospects for Obama administration moves that some characterize as re-engagement with the region and that seek to rebuild the U.S.s stature and reputation. Chinas sustained rapid economic growth has been underwriting an ambitious increase in military capabilities. The PRCs economic success and Chinese diplomatic initiatives that have combined a charm offensive with sharp opposition to U.S. and European interference in the sovereign affairs of other states have prompted claims albeit much-disputed onesthat China enjoys formidable soft power. Assessments of how much clout Japan holds as the regions third-greatest power and how it will wield its influence have been complicated by Japans ongoing economic difficulties and the advent of a Democratic Party of Japan-led government. Still-unresolved issues in security

relations with the U.S., chronic crises over North Koreas weapons programs, and perennial questions about the limits imposed by the pacifist provision in Japans constitution add to the uncertainty. For East Asias smaller actors, including the two Koreas, Mongolia and Taiwan, power and foreign policy involve other, distinctive challenges. Constrained by their comparatively modest power resources, they face difficulties and opportunities in cultivating alternative sources of security and influence while maneuvering within space created by rivalry and stability among greater powers.

Rising China and Implications for the U.S. and East Asia
Robert Ross (Boston College) argued that, while three decades of double-digit growth have sharply increased Chinas economic power and military capability, Chinas ascension in East Asia and Chinas accretion of influencerelative to the U.S.has been uneven across the region. Chinas gains have been greatest on the Korean peninsula. By the beginning of the 1990s, the collapse of the Soviet Union and Chinas expanding economic and military resources transformed North Korea into a secure Chinese buffer state, as well as an often-troubling dependency. Over a longer period, Chinese power and influence over South Korea has developed through: burgeoning trade and investment relations; professionalization and other major improvements in PLA ground forces; and Seouls adjustment to greater prospects for Korean unification and its transformative implications for China-Korea relations. Among the visible indications are South Koreas backing down in a potential trade war with China in 2000 and, more significantly, Seouls shift toward a North Korea policy and security policy more generally (including U.S. troop deployment levels) that depart from prior patterns of one-sided alliance and cooperation with the United States. Chinas relative rise has compelled South Korea to accommodate Chinas interest in avoiding threats to its security form great power capabilities on the peninsula. Seoul also increasingly seeks security through good relations with China. Still, South Korea will remain a U.S. security partner, limiting Chinas gains. China made substantial gains in cross-Strait relations during the 2000s. This reflected the mainlands absolute and relative rise as a trade and investment partner for Taiwan. That trend was enhanced by Beijings ability to use its international economic and political clout to limit Taiwans cultivation ofand Taiwans enjoyment of reliable support fromother economic partners. It also reflects a long-growing shift in the military balance, born of PRC missile deployments targeting Taiwan, broader PLA modernization and the U.S.s declining ability to protect the island from a devastating initial Chinese assault. Among the reflections of these changes are: the Ma Ying-jeou administrations pursuit of a free trade area-like agreement with Beijing; Taiwans declining interest in purchasing weapons systems from the U.S.; Taiwans shift to an asymmetric strategy of defense (eschewing the increasingly futile attempt to meet rising PLA capabilities); and the political demise of Taiwans independence movement. Yet, more than on the Korean peninsula, across the Taiwan Strait, Chinas gains remain limited. Although Chinas overwhelming economic leverage may provide a partial substitute, Chinas ability to coerce Taiwan through military threat is still comparatively modest because an air and sea assault on Taiwan would be extremely difficult and likely would bring a very costly conflict with the United States. Beijings increased leverage has moved Taiwan toward a policy of greater accommodation (giving Beijing greater confidence and, in turn, patience in pursuit of its

reunification agenda), Taiwan remainsand will remaincommitted to buying arms from the U.S. and preserving U.S. security support. In maritime East Asia, Chinas rise has been more limited and more lop-sidedly economic. For Japan and the ASEAN states, China fast-growing and geographically proximate economy has meant a vast increase in the importance of China, relative to the U.S., as a trade and investment partner. The ASEAN-China Free Trade Agreement and talk of an East Asian free trade area reflect and reinforce these trends. On the military side, China has enjoyed no such ascension. Although the PLA has developed greater capacity to deny access to, and inflict damage on, U.S. forces, China is still far short of the force projection capability needed to erode U.S. military preeminence in maritime East Asia. Japan and several states in Southeast Asia have been increasing cooperation or consolidating security relations with the U.S. even as their economic entanglement with China has spiraled upward. Commentators Drew Thompson (Nixon Center) and Robert Sutter (Georgetown) and panel chair Jacques deLisle (FPRI / University of Pennsylvania) agreed with much of Rosss analysis but argued that Rosss account was overly deterministic and could overestimate Chinas power and influence. First, Chinas economic strength may be less than it appears. Although China seems to have weathered the global economic crisis well (so well that its apparent success has fueled new self-confidence and assertiveness in Beijings foreign policy), potentially serious weaknesses persist in Chinas economy and growth model. Chinas trade relations with East Asia have grown rapidly, but they remain a relatively small percentage of most regional states trade. For many of these states, the focus is exports, including relatively high-end goods, the markets for which are concentrated in the U.S., Europe and other developed economies. Much of Chinas export juggernaut relies on products that are assembled from imported components. Thus, raw trade numbers may overstate Chinas trade prowess and the political influence it creates. Wary of dependence that breeds vulnerability, many East Asian states pursue trade diversification and balancing strategies, as illustrated by Koreas and Taiwans pursuit of free trade agreements with the United States. Chinas international investment relations remain dominated by inbound investments while many of its outbound investments focus on natural resources. The influence afforded by outbound investment in higher value-added industries and less enclave-like sectors characteristic of U.S. and Japanese investment in East Asiais accordingly lacking for China. Panelists differed about the credibility of potential Chinese threats to hold foreign investment hostage and the leverage such threats could generate. Some argued that Chinas investment policies and practices manifested and supported Beijings interests in not disrupting international economic relations and the status quo. Some added that Chinas outbound investment has been a mixed blessing for Beijings foreign policy. It has produced: popular resentment in host countries; conflicts between the regimes agenda and large Chinese state-linked enterprises interests abroad; and the diplomatic headaches that come with new vulnerability for Chinese nationals and assets overseas. Second, some participants cautioned against overestimating Chinas military capability. They pointed to the PLAs relative technological backwardness (despite impressive recent gains) and persisting ambiguities in Chinese civil-military relations that may limit the leaderships ability to make effective use of Chinas augmented hard power.

Third, panelists argued that politics, policy choices and political will matter more than Rosss capability-focused and generally zero-sum account allowed. Chinese policys emphasis on domestic stability and economic development limits Chinas use of its power to challenge the United States. Chinas increased capacity, including naval power, was partly compatible with U.S. interests in sharing burdens of addressing natural disasters, piracy and other problems. U.S. accommodation of China was partly a matter of policy choice, and not simply an inexorable power shift. This could see significant reversal if Beijing proved uncooperative in dealing with issues ranging from North Korea to the global economy to climate change. The U.S.s ability to counterbalance Chinas rise has improved with recent shifts in U.S. foreign policy that have reemphasized comprehensive and positive relations with other states in the region. Although China has shown impressive and improving diplomatic skills, mistrust of Beijings aims, Chinas increasingly aggressive nationalism, persisting territorial disputes and questions left over from the regions bloody recent history limit Chinas potential for regional influence. East Asian states in which governments enjoy considerable autonomy from societyhave much policy discretion, and inclination, to balance or hedge against a rising China (and not just to bandwagon with it), or to improve relations simultaneously with both the U.S. and China. These tendencies are reinforced in many of these states by electorates who are wary of Chinas rise and its implications. Regional governments seek a stable external environment that they know remains dependent on a robust U.S. economic and military presence. Ross countered that an analysis of power in East Asia must remain focused on relative capacity, and thus was appropriately zerosum, because political intentions were often opaque and always vulnerable to change.

Japan: a Problematic Fascination with Soft Power

Thomas Berger (Boston University) argued that Japanese foreign policy has been fascinated with soft power, with mixed and increasingly troubled results. This focus is hardly surprising, given the limits on Japanese military power that have been an enduring legacy of the Second World War and the relatively robust soft power resources that Japan has enjoyed in recent decades. The idea of soft power in Japanese foreign policy has made a virtue of necessity, providing a rationale for Japans inability or unwillingness to devote more resources to developing hard power. It neatly dovetailed with prevalent notions in Japan of comprehensive national power and Japan as a trading power. It seized upon the soft power concept that Joseph Nye formulated to influence U.S. foreign policy debates and that gained salience for Japan as Nye took a role in Clinton administration policy toward Japan and the region. Berger concluded that, while soft power is a flawed concept, Japanese foreign policys use of it did enjoy successes. Those, however, have been limited and more recently, Japans soft power resources have seriously declined. Berger assessed three aspects: First, Japans economic success and the economic model that seemed to underpin it were long major sources of soft power, eliciting admiration and emulation throughout the region. This power waned in the 1990s and beyond as Japans share of the regional economy, trade and outbound investment fell sharply and as the Asian Financial Crisis and the Japanese economys lost decade tarnished the Japan-based East Asian Model. Declining Japanese development assistance and increasingly prosperous regional states lessened dependence on Japanese development assistance further eroded Tokyos capabilities. Although the Hatoyama government has favored soft power and, rapprochement

with China and creating an East Asia Community, prospects for success are diminished by Japans decline. Second, and looking to European examples, Japan has engaged international institutions as an arena where states interests can be reshaped as well as reflected and where soft power can be generated and deployed. Post-Cold War developments in East Asia have offered increased hope for such an approach, with the relative flourishing of APEC, various ASEAN-plus groupings, the ASEAN Regional Forum and a prospective East Asian Community. There is significant support in Japan for a policy of building regional institutions. Yet, the contrasts with Europe are daunting and discouraging: East Asian elites and publics remain more post-colonial, more nationalistic, more protective of sovereignty, more committed to norms of non-interference and less postWestphalian; the East Asian region is more internally diverse culturally, economically and politically; and East Asian institution-building has been more multi-cephalic, lacking the European Unions and European Communitys Franco-German anchor internally and clear proU.S. and anti-Soviet alliance structure externally. Third, Japans broader national image in East Asia has been a significant source of both soft power and trouble. At first, in the Meiji era, Japan emerged as an envied and imitated model of material and popular culture and Asian modernity. The pattern continued into Japans imperial period when Japan embraced a civilizing mission toward other peoples in Asia. But other aspects of Japanese imperial rule in Northeast Asia and Japanese actions in East and Southeast Asia during the Second World War severely damaged this soft power, creating history problems that still plague Japanese foreign policy and fostering congenitally anti-Japanese nationalism in Korea and China. The Postwar period brought a partial recovery as Japan redefined its image as a peace nation, a democracy and a newly pacifist victim of the horrors of nuclear warfare. While this recasting worked well in Japanese domestic politics and boosted Japans stature in the West, it worked less well in East Asia, where diverse and formidable obstacles loomed: states strategic calculations often weighed against close association with Japan; democratization in Korea, Taiwan and elsewhere closed the soft power gap and sometimes reinvigorated anti-Japanese nationalism; receptivity to emergent international human rights norms legitimated East Asians calls for revisiting the history question; and deepening regional economic integration gave new force to demands for reparations for Japans past wrongs. Berger concluded that it is sensible for Japan to continue to promote and deploy soft power, but that Japanese policymakers must take care not to overestimate its impact and to address liabilities (including the history questions and neighboring states nationalism) that remain large and intractable impediments. U.S. policy similarly should not overestimate the likely consequences of Japans recent fascination with an East Asian community and rapprochement with China. While those pursuits might produce striking symbolic moments (such as a visit by Japanese Prime Minister Hatoyama to Nanjing or, more incongruously, Chinese President Hu Jintao to Hiroshima), the challenges for U.S. policy were just as likely to come from failures, as from success, of any Japanese attempt to turn more to Asia. U.S. policy must also cope with the fact of Japans continuing belief in the efficacy and importance of soft power. Long-running predictions that Japan is reluctantly becoming realist in its approach to foreign policy have proved exaggerated. They have been dealt a further setback with the DPJs ascension to power (the

significance of which has been widely overstated) and the broader democratization of foreign policymaking in a society that is sympathetic to soft power views. Michael Auslin (American Enterprise Institute) argued that Japans soft power and its utility in foreign policy are very limited. Japans formidablebut decliningeconomic prowess translated poorly into usable influence. Japans participation in numerous international institutions had not conferred a leadership role in those institutions, which lacked the stature and significance of their European counterparts and which served more to restrain than to enable relatively powerful states in the region. In the nineteenth and early twentieth centuries, the status and influence of Japanese high culture arguably enhanced Japans power, but that did little to win converts to Japans aims during the Second World War and the postwar impact of Japanese popular culture has done little to help Japan pursue its foreign policy aims. A policy of creating soft power was even more difficult than a policy of using soft power. Japanese belief in its efficacy has been declining since its heyday in the 1990s. Paul Giarra (Global Strategies and Transformation) saw soft power as an important element in Japans international stature and the U.S.-Japan alliance, but he focused on dangers posed by inadequate attention to hard power issues by both partners. Japans preference for soft power approaches and constitutional and broader political constraints impose significant limits on Japans development of military capabilities and missions, but those restrictions are not immutable. U.S. policy increasingly has fallen short in ways that undermine the effectiveness of the bilateral alliance that is vital for the regional security infrastructure. Washington has failed to articulate a strategic vision to guide the alliance, relying on empty platitudes (for example, that the U.S.-Japan alliance is the most important in East Asia), focusing on small issues (such as the controversy over relocating U.S. forces stationed at Futenma Base in Okinawa), and underemphasizing the mundane but vital issues of cooperation, experience and trust at operational and interagency levels. Giarra expressed confidence that if and when Washington turned to the task of formulating a strategic approach, it would choose an appropriate one that Tokyo would support. Several panelists agreed that hope for more effective bilateral security cooperation stemmed mostly from hard power factors: the deterrent power of Japans substantial and high-tech (albeit nonnuclear) military capabilities; Japans strategic location (along with other U.S. friends in the region) astride the routes of potential Chinese expansion that could threaten U.S. interests; and the alliance-reinforcing power of North Korean threats and longer term challenges posed by China.

Smaller States: Finding Room for Maneuver and Cultivating Alternative Sources of Power
David Kang (University of Southern California), Alan Wachman (Fletcher School, Tufts University) and commentators Nancy Bernkopf Tucker (Georgetown University) and Katy Kondgan Oh (Institute for Defense Analyses) addressed the constraints, opportunities and strategies of smaller states in East Asia. Participants generally agreed the use of military force was unlikely, even in long-standing potential flashpoints such as the Taiwan Strait and the Korean Peninsula, but that traditional forms of power remained important features in East Asian international relations. Smaller states

in the region must operate in the shadow of the U.S., China and, in some cases, Japan and Russia. But they do not live entirely in a Thucydidean world where the weak suffer what they must while the strong do what they can. The distribution of power, alignments and conflicts of interest, and relations among the regions greater powers give smaller states some security and room for maneuver. They have protected their autonomy and enhanced their influence by exploiting this room for maneuver. They have coped with a rising China through expanding economic ties, accommodating Chinas security interests and hedging against Chinese power through maintaining or strengthening security and values ties with the United States. They have cultivated, with varying success, non-traditional types of power. On the Korean peninsula, the interests and agendas of the U.S., China and, to some extent, Japan have created a security environment that generally supports a tense status quo or, at least, resists sudden, radical changes in the existing order. Within this context, Kang argued, South Korea has derived, and sought to develop, international social status as a source of power. Generally underappreciated in international relations discourse, this type of power is complex and difficult to cultivate. Compared to other, more conventional forms of power, it is more purely given by other actors in the international system, is inherently hierarchical, and is especially dependent on a states ability to articulate its claim to such power. South Korea has been strikingly focused on its international social status, as is reflected in near-obsessive discussions of its national brand, zeal for public diplomacy and cultural ambassadors, and concern over image-damaging embarrassments (such as globally televised fistfights erupting in the legislature). Such concerns are superficial reflections of South Koreas more diffuse anxiety about its international social status and where it fits in East Asias frustratingly unsettled status hierarchy. South Koreas quest for international social status and its articulation of a claim to high status have had mixed records. South Korea has tapped into and benefited from its successes as a market economy, consolidated democracy, and, recently, cooperator on climate change issues. In more hard power-related aspects of international social status, however, South Korean conceptions have vacillated among balancing power, middle power and leader on onsecurity issues. International social status questions also have pervaded and complicated key bilateral relationships. Controversies over U.S. military deployment and command cooperation, U.S. slowness in passing the Korea-U.S. Free Trade Agreement, and Washingtons and Seouls sometimes differing approaches to the North Korean problem all have implicationsoften rankling onesfor South Koreas status vis--vis the United States. In dealing with Japan, genuine desires for a fresh start have foundered on the history question and unresolved territorial claims. Both are largely questions about who can claim the higher status: the conflict is over which sides version of the story will be the mutually accepted one. Rapidly growing economic and social ties with China (including students studying abroad) have complicated South Koreas quest for status, shifting Korean perspectives somewhat from the U.S. and toward China. This has eroded somewhat the alignment with the U.S. that has been South Koreas principal claim to status (particularly its association with global market democracy norms). For North Korea, a fundamental goal has been international social status in the minimal form of acceptance as a nation state (with the greater claim to security and a right to survival such status implies). Many of North Koreas outlandish or provocative actions reflect this quest for status: museums that display artifacts memorializing other states acceptance of North Koreas state

status; ceremonies that with great pomp and cost assert or reflect such claims; and the conviction and sentencing of two U.S. journalists for entering North Korea illegally. The last of these implicitly asserted North Koreas claim to be a state with borders to be respected like those of other states and with sovereign authority to adopt and apply rules to punish those who enter without permission. Efforts to cast former President Clintons trip to secure their release as a near-head-of-state visit showed the same mentality. This quest for status has been so important for North Korea that Pyongyang has been willing to incur significant economic costs of isolation, painful to its impoverished economy, in order to make its points about status. Oh was skeptical about whether international social status was a measurable or coherent concept, and whether national brand or image or culture meaningfully enhanced South Koreas international security and influence. She argued for a sharper distinction between the types of status the two Koreas sought, concluding that the Norths quest for survival was fundamentally different from the Souths quest for some form of regional leadership role greater than the one its economic or military power would confer. Wachman analyzed Mongolias ability to maintain autonomy despite its seemingly dire position as a small state surrounded by two great powers. Mongolia has benefited from factors beyond its control, including the space created by the distribution of power among China, Russia and the U.S. in its immediate region, the relatively good and stable relations among those three great powers during the Post-Cold War period, and the significant difficultyalso evident elsewhere in East Asiathat China faces in using its expanded economic power to political ends. Mongolias success also comes from its own wise policy. It has managed through careful diplomacy to keep both of its giant neighbors reasonably content. More strikingly, it has balanced both by making the United States a third neighbor. Mongolia has achieved this, and improved its stature, by stressing its commitment to and realization of widely shared democratic values and by becoming an active, cooperative participant in the international system. Several participants, including Wachman, Tucker and deLisle, pointed to a broadly similar pattern for Taiwan. Despite its vulnerable location close to a great power that seeks to reassert sovereignty over the island, Taiwan has enjoyed relatively high levels of security and autonomy. It has benefited from a hard power balance between China and the U.S. that has not yet shifted decisively against the U.S. and from Japans stakeepisodically and unevenly articulatedin supporting the status quo. Taiwan also has benefited from generally positive and stable U.S.China relations over three decades. (Tellingly, moments of relatively high friction in U.S.-China relations generally have not been good for Taiwan.) Taiwans success has depended on finding a shifting middle path between acquiescing in Beijings pressure for closer integration and asserting independence to an extent that crosses Beijings red line. (Significantly, the most dangerous moments for Taiwan have come when Beijing has seen, or claimed, that Taiwan has approached that line.) Taiwans success has been no less dependent on its democratic transformation, which has become a principal basis for U.S. support and a key point of contrast with the mainland. (Conversely, periodic signs of weakness or instability in Taiwans democratic institutions and processes have weakened Taiwans security.) Finally, because of Beijings sovereignty claims, Taiwan has had to focus on asserting state or state-like statusa quest for formal stature and acceptance that, among other entities in the region, only North Korea has had to undertake.

Tucker addressed threats to this status quo, including: concern in Taiwan that the U.S. might acquiesce in its Finlandization as China rises; belief or speculation in China that the U.S. is in decline and thus decreasingly able and willing to support the status quo; the risk of significantly rising friction in U.S.-PRC relations, particularly over the issue of arms sales to Taiwan; and Taiwans declining ability (or skill) in influencing U.S. policy toward Taiwan and China. Tucker then assessed the implications, especially for U.S. interests, of a fundamental shift in Taiwans status toward reintegration with the mainland. On the positive side, the risk of military conflict between two nuclear-armed great powers would decline. A perennial source of tension in U.S.China relations would be greatly reduced. Chinese nationalism, long fueled by the Taiwan issue, might become less virulent. U.S. security policy and commitments in the region could focus on other challenges. U.S. relations with allies and others in the region could improve with the easing of fears of a U.S.-China conflict and related hard choices and threatened interests for regional states. A more closely integrated Taiwan could be a stronger catalyst for democratic and liberalizing change inside China, which generally would serve U.S. aims and interests. On the other hand, likely negative consequences of Chinas gaining control, significant dominion, or much greater influence over Taiwan are serious. U.S.-Taiwan security cooperation would decline sharply, whether because the U.S. (and perhaps Taiwan) would see cooperation as no longer necessary given a radical reduction in the risk of a cross-Strait clash, or because the U.S. would see continued cooperation as too risky given the prospect that military technology and other secrets would pass to China. The U.S. would lose the strategic and intelligence gathering advantages that Taiwan has provided against the main potential rival in the region. China would be able to redirect military resources that would no longer be needed for a Taiwan scenario, and could redeploy them in ways adverse to U.S. strategic interests. Greater economic integration of Taiwan could further enhance Chinas economic power and the resources available for building military capabilities. Fundamental changes in the cross-Strait status quo, without force and with U.S. acquiescence, would accelerate Chinas rising confidence, and arrogance, in foreign policy and would sew doubts among the U.S.s East Asian allies and friends, perhaps even driving Japan to develop nuclear arms. Such developments could lead to miscalculation and increased regional instability. Prospects for vibrant and stable liberal democracy would dim in Taiwan, whether due to PRC pressure, Taiwanese self-censorship, or increased polarization of Taiwanese politics. Such developments also could have an adverse effect on democracy elsewhere in the region. Kurt Campbell (Assistant Secretary of State for East Asian and Pacific Affairs) delivered an off-the-record keynote address on current U.S. policy toward East Asia.

Southwest Economy http://www.dallasfed.org/research/swe/2005/swe0506e.html Issue 6, November/December 2005 Federal Reserve Bank of Dallas Beyond the Border Yuan Diplomacy: China, Taiwan Vie in Latin American Trade Arena In recent years, much of the talk in Central Americas business communities has revolved around competition with China in the garment trade. In the early 1990s, Chinese apparel exports to the United States were more than twice those of the countries that would become part of the Central American Free Trade Agreement (DR-CAFTA)Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua and El Salvador. By 1994, these countries had begun to capture U.S. apparel market share from China and, by 1998, had overtaken China. The DR-CAFTA countries competitive advantages included trade openings with the U.S. that China did not share. The U.S. has encouraged the apparel industry in Central America and the Caribbean islands through trade arrangements in the Caribbean Basin Initiative (1985) and related acts and agreements in 2000 and 2002. However, Chinas 2001 entry into the World Trade Organization increased its competitive opportunities in textiles and apparel. The following year, Chinas U.S. apparel sales pushed past DR-CAFTAs. The competition remains intense. Chinas apparel production costs are only 75 percent of Nicaraguas and 62 percent of Guatemalas. But the average time required for transporting textiles and apparel to the U.S. from DR-CAFTA countries is less than one-third Chinas. Overall, the average turnaround between receipt of an order and delivery to the U.S. is about four weeks for DR-CAFTA nations and 10 weeks for China.[1] Although the DR-CAFTA countries are going head to head with China in economic competition, there is reason to think that China may seek ways to buy their diplomatic cooperation. China has been devoting considerable effort to economic diplomacy in Latin America. In 2004, President Hu Jintao visited Argentina, Brazil, Chile and Cuba. Chinas vice president, Zeng Qinghong, visited Mexico, Venezuela and Peru. Chinese investment projects in those countries were

announced in conjunction with the visits. These investments seem designed largely to create stable supply sources to China and to allow Chinese firms to profit on the supply end. Many of the announced investment plans involve raw materials production, metal smelting and transportation infrastructure. Another Chinese initiative appears to be textile investments in Mexicoanother significant, though waning, apparel exporter to the U.S. Chinas investments in Latin America have been small by U.S. standards. But in Brazil alone, some 50 Chinese firms have already directly invested. In 2004, 46 percent of total Chinese foreign direct investment went to Latin American and Caribbean countries. The new projects are said to be dominated by the Chinese equivalents of Japanese keiretsularge business conglomerates with strong government ties. Chinas Latin American diplomatic forays and investments may well have political implications for its future involvement in Central America. It is no secret that China wants Latin American nations to break their diplomatic ties with Taiwan. Twelve of the 25 nations that still recognize Taiwan are in Latin America and the Caribbean. Six of the 12 are in DR-CAFTA. In some countries, China has already announced investment and aid plans substantially larger than Taiwans. Last year, Taiwanese newspapers complained that the new prime minister of the Caribbean island country of Dominica asked Taiwan for $58 million in aid and then accepted a package from China for double that amount. In response, Dominica dropped its diplomatic recognition of Taiwan. The Taiwanese argue that Chinas financial program for Dominica is part of an ongoing attempt to discredit Taiwans unusually independence-focused president, Chen Shui-bian. Since Chen took office in 2000, not only Dominica but also Macedonia, Nauru, Liberia and Grenada have all dropped diplomatic recognition of Taiwan. Taiwans ties to the DR-CAFTA countries include announcements of investment plans in Guatemala and other DR-CAFTA countries. Not to be outdone by Chinese diplomacy, Taiwans Chen made a 12-day tour of Central American and Caribbean countries in September. Taiwanese Vice President Annette Lu also made a diplomatic tour of Central America. But President Chens term of office ends in 2008, leaving plenty of time for more Chinese diplomatic efforts at reducing world support for Taiwan during his administration. It would not be surprising to see China attempt to make the DR-CAFTA countries adopt its political perspective. There are already reports that China plans textile investments in Central America. The DR-CAFTA accord includes duty-free benefits on fibers, fabrics, yarns and apparel made in member countries, giving DR-CAFTA countries an advantage over China in selling to the U.S. The tariff savings might offset some of Chinas lower production costs. Coupled with these factors, political incentives might be more reason for Chinese textile operations in Central America. It is conceivable that the Chinese might realize a price advantage from the regions spaghetti bowl of free trade agreements, perhaps by producing textiles in Mexico for manufacture into apparel in Central America. This, however, ignores the Taiwan issue. Investments, whether in

textiles or other industries, could turn up as carrots for DR-CAFTA countries that consider playing the mainland China side of the street. William C. Gruben