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Interest in the future of the Pacific region has been increased in the past year by dramatic events, notably the conclusion of a peace treaty between China and Japan and the normalization of relations between the United States and China. And, over a longer period, the realization has grown that the Western Pacific region-which includes Japan, Korea, Taiwan, Hong Kong, the ASEAN countries (the Philippines, Thailand, Malaysia, Singapore, and Indonesia) and China-is one of the most dynamic areas in the world in terms of economic growth and development.
Although Japan's rate of economic growth since the 1973-74 oil crisis has been reduced from around ten percent to about five to six percent, the country still maintains a higher growth rate than any of the other industrial nations. South Korea, Taiwan and Hong Kong have been growing at about ten percent per annum, even since the oil crisis, and their trade volumes are expanding rapidly. The ASEAN countries are also performing well, growing at a rate of six to seven percent a year, which is higher than the rest of the world's developing countries. China's annual rate of economic growth has been estimated at 5.3 percent for the 1970-75 period, and China's new ten-year economic development plan which was announced in February 1978 (covering the period 1976-85) projects a growth rate of about eight percent a year (although, as we shall see, this figure may be reduced somewhat in subsequent reexaminations of the plan).
In contrast to the performance of these Western Pacific countries, economic growth in other parts of the world, with the exception of Latin America, has been much lower. With the cumulative effect of these different rates of growth, the Western Pacific will have a much larger share of the world economy by the end of this century. Already in 1977 American trade with Pacific countries exceeded that with Europe for the first time in her history.
Inevitably, Japan is playing a central role in what has been called this "great transformation."1 Particularly is this true of economic relationships: Japan's postwar economic ties to the United States have been fundamental to Japan's own progress as well as to the wider regional and world economies; Japan's trade and aid have in the past 15 years come to reach throughout East Asia; and, most recently, Japan has assumed a major external part in the new economic programs and policies of China. Yet today there is concern over the difficulties that have arisen in U.S.-Japanese economic relations, and a sense that both countries need to assess carefully the significance of China's new course and the role that each should play in relation to China. It is the purpose of this article to examine these issues as objectively as possible, from the standpoint of a Japanese who has tried for years to think and work in terms of what is best not only for Japan but for the Asian region and the world.
In 1978, Japan's gross national product reached almost half that of the United States; the level of overall trade between the two countries continued to rise, to a total of $39.7 billion, making Japan, next to Canada, the largest single trading partner of the United States.
Recent relations, however, between Japan and the United States have been increasingly acrimonious, marked by repeated confrontations over various economic issues. In the United States, characterizations of Japan's trade policy as "unfair" and as damaging to both the United States and the world economy can be frequently heard. A recent editorial in The New York Times, for example, commented critically on Japan's economic policy and concluded by saying, "American consumers have a stake in open trade with Japan, which the White House should defend. But if Japan does not look inward for future growth, our great Asian ally may become a victim of its success."2
At the risk of oversimplification, the causes for American irritation with Japan seem to fall principally into three categories. The first concerns the trade balance: Japan's global current account surplus of $16.6 billion in 1978 contrasts with an American current account deficit of nearly equal magnitude. Japan's surplus in trade account amounted to $24.6 billion, $11.6 billion of which arises from the bilateral U.S.-Japanese trade account itself. Japan is seen as having promoted exports regardless of their impact on others. Similarly, Americans argue that while their markets are open to foreign suppliers with minimal restraints, Japan in practice makes the way difficult for imports generally, and in some instances keeps the door closed completely.
Japan's so-called free ride on defense matters is a second source of irritation in the United States. The argument is that while the United States annually spends more than $120 billion on defense, Japan only spends about ten billion dollars. As a percentage of GNP, Japan's expenditure is much lower than that of either the United States or European countries. Another complaint along these same lines concerns the amount of foreign aid extended by Japan to poorer countries. Also, on a variety of international issues Japan seldom takes the initiative or leadership and this is interpreted by Americans as "narrow selfishness."
Each of these first two causes of irritation is of long standing. The third is more recent. It relates to American anxiety about future competition from Japan in high-technology industries. A typical expression of this concern can be found in the following sentences taken from the Jones Report, a Task Force Report prepared in January 1979 by the Subcommittee on Trade of the Committee on Ways and Means, U.S. House of Representatives: "If Americans perceive that our strongest industries-computers, aircraft, advanced electronics, etc.-are being overtaken unfairly, the domestic political reaction is likely to be strong." (p. 52) "We believe that the Japanese threat in these high technology areas may soon become the most explosive economic issue between our two nations." (p. 51)
Related to this concern, Americans tend to see in their past and present relationship with Japan a ready model for future difficulties with other countries in East Asia, arising from the growing volume of American imports of industrial manufactures from "new Japans." We find in the same report the following: "Further, we foresee 'Japan trade crises' recurring with other developing countries-the so-called 'new Japans' of the Far East such as Taiwan, Korea, Hong Kong and Singapore-and later other developing nations throughout the world. . . . These recurrent and developing trade crises are destructive to international goodwill and injure other aspects of American foreign policy" (p. 50).
Coming back to U.S.-Japanese economic relations in themselves, there have been, and are, complaints on the Japanese side as well. Not only in the celebrated cases of the Nixon "shocks" of 1971, but more recently, the United States has tended to engage in what seem to Japanese to be abrupt actions or pressure, sometimes touching politically sensitive areas, which create a sense of frustration and sometimes even anger in Japan. It is true that many of the shocks so far administered were to prod Japan into adopting policies which are necessary for the maintenance of harmonious relations with other countries and for delivering benefits to the Japanese consumer. In this context good advice from a close friend is often appreciated. However, if the advice becomes too frequent it may create a sense of frustration. The problem is compounded by the fact that Japanese people usually do not react immediately when they have objections or feel slighted. Instead they concede something on the particular issue-but with the result that stress builds up inside them. If such accumulated stress reaches a certain level, it may explode in an irrational form.
More basically, from a Japanese point of view American economic policy has for many years left much to be desired. The major Japanese complaints have concerned the continuing high rate of inflation in the United States and the relatively weak policy measures taken to stop or reduce it, and (closely related) the failure of the United States to economize on the use and import of oil-to the point where America's bill for imported oil in 1979 is now estimated at $50 billion. Behind these specific concerns, moreover, lies a deeper concern, that inflation rates and balance-of-payments deficits in the United States reflect low productivity growth and structural difficulties and habits. These seem reflected most strikingly in what informed Japanese see as a dangerously low rate of personal savings in the United States-now estimated at about five percent of personal disposable income, as compared with 13 percent in France, 15 percent in Germany, and 22 percent in Japan herself. I hope it will not be misunderstood if I say that some Japanese look at the American economy in a little of the same spirit that the ant reproached the grasshopper in the fable of Aesop.
The third category of irritants on the Japanese side concerns American demands for achievement of major changes, in a very short time, in the basic characteristics and thrust of Japanese economic policy and social habits. In suggesting that Japan "look inward for future growth," Americans seem to be asking that the Japanese people change abruptly the very habits that have produced the high levels of personal savings to which I just alluded, becoming in effect more oriented to immediate consumption, with a higher emphasis on imports and reduced emphasis on investment for export. I shall discuss in more detail in a moment the relationship between savings and investment, on the one hand, and the balance between exports and imports on the other. The broader point is that to bring down Japan's high rate of savings in a short period of time would be just as difficult as raising the rate of savings in the United States. Both are intricately related to broader economic and social structures. Structural changes usually take a decade or more, not one or two years.
The fourth category of Japanese complaints concerns the occasional lack of understanding by the United States of the historical and social background of many of the Japanese government's policies and practices. One such factor which influences government policy is the sense of uncertainty about the future and a feeling of vulnerability concerning the economy. Frequent earthquakes and other national calamities combined with high dependence on foreign supplies for such essential commodities as food, energy and raw materials may be the cause of this sense of uncertainty. In any case, this factor often produces a more prudent policy in the spending of foreign exchange than that found in countries endowed with abundant natural resources.
To take an immediate example, the political upheaval in Iran and resulting sharp oil price increases and supply uncertainty have led the International Energy Agency to recommend recently that its members reduce their oil consumption by five percent in 1979. Japan fully supports and accepts this policy. At the same time, since a very large part of Japan's oil consumption is for industrial production, there is bound to be some impact on Japan's growth rate in 1979, and this point does not appear to have been understood by those Americans urging that Japan speed up its growth rate sharply in order to reduce its balance-of-payments surplus.
Let us return in more detail to the causes of American irritation with Japan, starting with the issue of Japan's large balance-of-payments surplus. Undoubtedly, the size of that surplus-both in global terms and bilaterally with the United States-does reflect in part the policies of successive Japanese governments, designed to meet the sense of vulnerability and need to build up foreign exchange that I have just mentioned.3 But the present surplus also stems from certain structural factors, including the steady rise in technical advances and productivity (both in absolute terms and relative to other countries) and especially the very large surplus in domestic savings that has existed for some years.
Japan's high rate of savings-not only the personal rate just mentioned, but rates of saving by institutions-was until recently matched by very high rates of investment (almost entirely domestic), so that there did not exist that excess of savings over investment that, in standard economic analysis, goes hand in hand with an excess in exports over imports.4 However, in the period since the 1973-74 oil crisis, Japan's growth rate and rate of investment have tended to drop, while the rate of savings has remained high. One could put it that Japan's transition from a production-oriented low-consumption economy to a consumption-oriented affluent society-which might have got under way in the early 1970s and tended to follow roughly the similar evolution of the U.S. and other economies at earlier periods-was held up by the uncertainties of the post-1974 economic climate. The result is that a large surplus of savings over investment now exists and will not readily be dispelled.
In large part for this structural reason, a five-year projection of the Japanese economy published by the Japan Economic Research Center (JERC) in February 1979 has concluded that for at least the next few years the surplus in Japan's global current account is likely to continue at an average annual rate of about ten billion dollars-less than the $16.6 billion surplus of 1978 but somewhat higher than the surplus now forecast for 1979-$7.2 billion, according to the JERC estimate.5
One policy measure designed to reduce this surplus of savings is to absorb excess domestic savings by issuing government bonds to finance budget deficits. However, in fiscal year 1979 this deficit amounted to 40 percent of the government's budget (about $75 billion in absolute amount), up from 37.6 percent in fiscal 1978 and 32.9 percent in fiscal 1977. It is simply not realistic to expect significantly higher percentages of the budget to be financed by the deficit mechanism.
A second trend that would be logical at this phase of Japan's economic development would be a marked increase in capital exports, tending in effect to soak up domestic savings as well as to bring the overall external accounts into better balance. It is now fairly clear that the Japanese economy has indeed been transformed from a capital-importing to a capital-exporting economy. Signs of that shift are already evident in the statistics of the long-term capital account. In the first quarter (January-March) of 1978, Japan's long-term capital account showed a surplus of $0.34 billion while the statistics for the second, third and fourth quarters of 1978 registered deficits of $3.6, $4.1 and $5.0 billion respectively. The JERC's five-year projection of the Japanese economy forecasts a deficit in the long-term capital account of about ten billion dollars annually, reflecting the net outflow of long-term capital from Japan. This capital outflow will take the following forms: (1) increased development aid to the poorer countries; (2) lending by Japanese banks to foreign customers; (3) issuance of bonds in the Japanese capital markets by foreign governments and enterprises; and (4) direct foreign investment by Japanese companies. Ten billion dollars of capital exports will roughly correspond to one percent of Japan's GNP, a relatively low figure when compared with the past experiences of the United Kingdom or the United States. At one point during the interwar period, for example, Great Britain exported capital amounting to almost six percent of its GNP. And, during the Marshall Plan period after World War II, U.S. net capital outflows accounted for about four percent of U.S. GNP.
In short, the Japanese economy is in basic transition both in domestic terms and in terms of its external relations. But-and this gets back to my earlier point about demanding change more rapidly than is conceivable-it is unrealistic to expect a rapid reduction in the current accounts surplus in the near future, although there will be fluctuations based on short-term business cycle movements.
It should be kept in mind that apart from these domestic structural factors the high rate of inflation in the United States and its low productivity growth might also contribute to Japan's current account surplus, in particular in the bilateral trade account between the United States and Japan. At the present time, Japanese exports to the United States are leveling off (in the case of cars, actually declining in terms of units sold), while Japan's imports from the United States are sharply increasing.6 This kind of short-term improvement in the bilateral trade balance, however, cannot deal with the underlying problem. As James Abegglen has noted: "To the extent the United States tends to consume, rather than save and invest, it will consistently lose competitive advantage in the higher value-added sectors where trade among the advanced economies is concentrating."7 While Japan's economy is evolving in the direction of the American one, it remains predominantly a production-oriented economy.
The same point bears directly on the American perception that Japan's economy is unfairly closed to the exports of other countries through both visible and invisible trade barriers which prevent cheaper products from flowing into the domestic market. The result can be seen in the high prices Japanese consumers are forced to pay for imports even though the country has large reserves of foreign exchange.
Unquestionably, this American complaint has some basis. As a latecomer to the industrial world, Japan has had government policies designed to encourage and protect both industry and agriculture. Although there has been substantial progress in reducing trade barriers in recent years, old habits persist, and behind many government positions lies the reality that the ruling Liberal Democratic Party now has only a precariously slim margin over the opposition parties; it does not have the perfect control of the economy suggested by the catch-phrase "Japan, Incorporated" and must weigh very carefully the consequences of liberalizing imports, notably in such currently sensitive areas as agriculture or the procurement of state corporations.
But apart from such specific areas of political sensitivity-which have their counterparts in the United States and in Europe-the underlying balance of popular pressures in Japan is different from that in the United States, where consumer interest in low prices plays a much greater role than in Japan. Today there are signs of change in Japan-such as the recent protests raised by labor unions against the high cost of agricultural products. But until the basic transition to a consumer-oriented society has moved far enough to produce strong domestic pressure for removing trade barriers, governments in Japan will find it politically difficult to move as far as Americans and Europeans demand.
The second major category of American irritants toward Japan-concerning Japan's "free ride" on defense matters-is of course partly economic but also heavily strategic in its implications. The complaint that Japanese expenditures are too low and that Japan's security is too dependent on the American taxpayer sometimes leads to an argument that Japan's economic performance has been as strong as it has been in large part because of the absence of a significant defense burden. It is true that Japan's defense budget has consistently been less than one percent of GNP (currently it is about ten billion dollars), whereas that of the United States stands currently at $120 billion, or six percent of GNP, and has in the past been a still higher percentage.8 Undoubtedly, Japan has been able to devote to economic investment some substantial part of the resources not employed for defense; but at the same time, Japan has not had the benefit of some of the civilian economic "spin-offs" that the United States has had, for example, in aircraft and electronics development.
But the real question is one of strategic wisdom. Most senior American officials familiar with East Asia over the years have seemed to share the conclusion that any substantial increase in defense expenditures by Japan-which by the way already has the eighth largest defense budget in the world in absolute terms-would be upsetting to the stability and military balance in East Asia, and thus actually contrary to American interests. And in Japan itself, although discussion of defense issues has become more open in recent years, and support for present Self-Defense Forces more widespread, there remains very substantial opposition to any large increase in military spending and to the more assertive and nationalistic policies that would almost necessarily be implied by such increases. At the same time, it is true that recent changes in the international environment have defused domestic political sensitivity toward the military alliance with the United States-especially China's recent change in policy toward welcoming the U.S.-Japan Security Pact. With Japan's GNP now almost equal to that of the United States on a per capita basis, one reasonable measure to reduce tensions and share the cost of defense more fairly might be for Japan to assume a larger share of the burden of U.S. military expenditures incurred in the area of Japan and related to Japan's defense.
Next let us turn to the problems surrounding Japan's development assistance to poorer countries. In terms of official development assistance (ODA), Japan's contribution has been rather modest as a percentage of GNP. In 1977 it was 0.21 percent. While this figure is not much different from the assistance given by the United States (0.22 percent of GNP) and West Germany (0.27 percent), it is far below the international target figure of 0.7 percent of GNP and even below the 0.30 percent average achieved by the member countries of the Development Assistance Committee (DAC) of the OECD. In absolute terms, Japan's ODA contribution in 1977 was $1.42 billion. This places Japan third, behind the United States ($4.16 billion) and France ($2.27 billion).
Recent events, however, point toward an increase in the Japanese figure. At the Bonn summit meeting in July 1978, then Prime Minister Takeo Fukuda promised to double Japan's ODA in three years. After some bureaucratic haggling within the government, it was decided that Japan's ODA of 1977, measured in U.S. dollar terms, would be doubled by 1980. Now it appears that even that ambitious target will be surpassed. Because ODA figures are calculated on the basis of disbursement and not the commitment base, the appreciation of the yen exchange rate, the sharp increase in the aid commitment and an accelerated disbursement in recent years are likely to combine to produce a doubling of Japan's ODA by 1979, one year ahead of schedule. If the Japanese government continues expanding aid to attain, say, another doubling in three to five years, then Japan's absolute ODA figure may exceed that of the United States and make Japan the top contributor of ODA among DAC members.
In view of the enormous capital requirements of the developing countries for increased food production, energy resource development, expanded transportation and communications networks, improved urban facilities, etc., it might be desirable to have Japan continue its high rate of saving in order to fill these needs. Both Japan and West Germany are well placed to take the lead in this regard. Indeed, such an initiative on the part of Japan would contribute not only to the material betterment of the developing countries but also to the improvement of Japan's international image and, in an indirect way, to an easing of tensions between the United States and Japan. Moreover, Japanese aid should over a period of time be less and less tied to Japanese procurement sources (a problem, again, common to all donor countries); thus it would constitute a genuine form of capital export tending to siphon off domestic savings and reduce the imbalance that now contributes structurally to Japan's current account surplus. In short, a leading role in international aid fits Japan's current and future situation in somewhat the same way that a similar role fitted the situation of the American economy in the early postwar period.
The third category of irritations I have identified relates to present and future competition in high-technology industries, and the issue of whether such industries are being unfairly subsidized in Japan. On the basic issue of Japanese policy, I must be totally frank. The Japanese government has announced on a number of occasions its policy of encouraging the development of knowledge-intensive industries and the high-technology sector. This is an absolutely necessary policy in view of Japan's paucity of natural resources-88 percent of our energy needs, more than 60 percent of grain consumption, and virtually 100 percent of such vital minerals as iron ore, bauxite and copper are imported. Given this almost total dependence and the instability of foreign supplies, the development of high-technology, knowledge-intensive industries is, for Japan, a matter of life or death. The development of this sector is also necessitated by the rapid industrial progress, and consequent competition in more traditional labor-intensive industries, that has been evident in other Asian countries such as South Korea and Hong Kong-and possibly China in the future.
The issue of government subsidies is perhaps more complicated. For example, the previously mentioned Jones Report charges that Japanese government support for research and development in some areas, notably those involved with Very Large Scale Integrated Circuits, has amounted to an "unfair" subsidy. But the problem, from the Japanese standpoint, is that the costs and risks of this kind of research are now too great to be assumed by private concerns; in this respect, and perhaps in others as well, they are analogous to the research and development expenditures for defense-related projects that have traditionally been funded initially by the American government-leading in many cases to widespread later civilian sales. What is "unfair" in this kind of situation is surely very hard to define; to Japanese conscious of the vulnerability and resource-dependency of their economy, expenditures designed to permit that economy to adapt and remain competitive, while accommodating the growth and progress of other Asian nations, take on a very substantial national security character.9
This brings us directly to the problem of the rapidly industrializing nations and their increasing exports of manufactured goods. In Europe these countries are known as NICs (newly industrializing countries) whereas in the United States they are sometimes referred to as the "new Japans," as we saw earlier in the Jones Report. In any event, the emergence of these countries is often interpreted as an inimical and disturbing element in the world economy, particularly for the industrialized nations. This interpretation is based on the low wage structures found in these economies, and it reminds many Japanese of the time when, during the 1930s, Japan's rapidly expanding exports of cheap cotton textiles and other manufactures were characterized as "sweat shop exports."
Because the per capita GNP of these countries is still quite low, it is natural that their average wage rate is also low. Capitalizing on their comparative advantage over high-wage countries, poorer countries start exporting a variety of labor-intensive manufactures. But it is rather biased and misleading to characterize such exports as "unfair." In time the exporting countries' income and wages will rise, and the comparative advantage will shift-as part of a natural process I call the "dynamic change in the international division of labor."10
As early as the 1930s a Japanese professor of economics, Kaname Akamatsu, invented a theory concerning the stages of development. Literally translated from the Japanese, it is called "The Flying Geese Development Theory." In brief outline the theory explains that a country (1) starts as an exporter of primary products and an importer of simple manufactured goods. It then (2) becomes an exporter of these simple manufactured goods as it (3) begins importing more sophisticated industrial products. Finally, (4) it begins exporting these advanced products. This development process takes place at different times among different countries, thus creating a changing international division of labor.
This process is an inevitable part of the development of the world economy. No measure can stop it artificially and the advanced industrial nations would be well advised to adapt themselves to it as best they can. The newly industrializing countries also have responsibilities. They must proceed at a gradual pace in order to allow time for the advanced nations to adjust. But in the end it cannot be denied that the basic pattern of a changing international division of labor will continue into the future.
One final point of anxiety regarding the newly developing nations concerns the so-called boomerang effect, the process by which an industrialized country exports capital, technology and advanced equipment to a newly developing country and eventually makes a competitor of the latter. It is true that over time certain sectors of industry in the advanced countries will lose competitiveness to the products of the newly developing nations. But, at the same time, increased competitiveness will bring with it increases in foreign exchange earnings and purchasing power in the poorer nations, and this will contribute to expanded trade and an increase in the entire global product and income.
It is equally clear that the evolution of this process will create problems for the advanced nations where growing rigidity in the social, economic and industrial structures will prevent smooth and rapid adjustment. This rigidity is aggravated by the onset of a period of low growth. The task before the industrial nations, including the United States, Europe and Japan, is to work out policies to provide for reasonable levels of employment even in a period of relatively slow economic growth.
These last paragraphs may seem to have strayed from our original concern with bilateral economic tensions between the United States and Japan. But it is important to bear in mind that our bilateral economic problems occur in a wider international context, and in fact relate to the ways each of our two countries-along with the other advanced industrialized countries-are adapting to the basic and far-reaching changes in the worldwide division of labor that have been underway for the past decade or more, and that seem likely to speed up in the future.
As for the Japanese economy itself, I return to the point that its evolution over the next few years likewise contains basic problems of structure as well as history and habit. Changes in the economic structure of Japan should, over time, tend to reduce some of the frictions that now exist in bilateral dealings with the United States. But I am bound to note also that, if the two nations should find themselves out of step in their efforts to cope with changes in the international economic structure, new and more serious frictions may arise in this respect. Japan feels itself bound to move forward in the high-technology area, as a necessity if it is to remain economically healthy.
Now let us turn to the question of China. Early this year I had the opportunity to visit Peking to discuss economic planning and related problems with Chinese officials. Previously, in February 1978, the Chinese government had adopted a ten-year Development Plan for the National Economy which targets a four-point modernization of agriculture, industry, technology and defense. The plan, which was announced in a statement by Chairman Hua Guofeng, aims at achieving a four to five percent annual growth rate in agriculture and a growth of over ten percent in industry during the ten-year period from 1976 to 1985. The estimated total investment required for this plan is one trillion yuan (approximately $600 billion). The plan includes a target for steel production of 60 million tons in 1985 and calls for the construction of 120 large industrial projects.
At the same time that this ambitious plan was announced, the Chinese also introduced sweeping changes in their policy toward the outside world. However, because many of these changes and shifts in policy were so fundamental, and because they came so suddenly, there are a number of outside observers who doubt the permanence and reliability of this new course. Some even doubt the stability of the present regime. However, based on some of the key documents published by the Chinese government and what the author observed in Peking, it is my judgment that the present course will continue. Even if there are periodic shifts and variations from time to time, the basic task of rapid modernization will be pursued.
One of the major problems facing the Chinese in their quest for modernization has been the quality of leadership. The leadership qualities required during revolution are different from those needed for construction. For construction and modernization, and for the preparation and implementation of the plans and projects, technocrats such as planners, statisticians and efficient administrators are absolutely essential. Unfortunately these represent precisely the skills which have been neglected during the past decade or so. Under the previous revolutionary leadership these technocrats were considered anti-revolutionary or lacking in revolutionary spirit, and many people possessing such skills were purged to the villages. Intellectuals and scholars, who are needed in the new modernization effort, were downgraded and many suffered through a very difficult time. Chinese leaders now openly admit that 15 years were wasted as a result of policies which denigrated administrative and technocratic skill. Now, however, these people are coming back to the center and they are busy establishing the governmental structure which will be needed to carry out the modernization.
The organizational problems for the realization of this plan are also immense. The Chinese are aware of this. In an article which appeared in the November issues of Peking Review, for example, Hu Chiao-mu, President of the Chinese Academy of Social Sciences, evaluated some of the basic problems likely to be encountered in carrying out the plan and the theoretical base for the modernization policy.11
Some of the problems the Chinese are likely to face in implementing the modernization plan include a severe shortage of trained and experienced manpower at all levels of government and enterprise, and a need to improve greatly worker efficiency and to increase the quality of work at all levels of production. And, in quantitative terms, China has a serious shortage of domestic savings for investment, as well as a serious shortage of the foreign exchange necessary for the purchase of modern equipment and know-how from abroad. The Japan Economic Research Center has recently conducted a comprehensive study of the Chinese economy which includes an analysis of the Chinese savings and investment balance. The tentative conclusion of this study is that China will experience a capital shortage of around $200 billion over the remaining eight years of the plan if it is to be implemented fully. This corresponds to about one-third of the total investment called for in the plan.12
In attempting to deal with this shortage, the policy alternatives available to Chinese leaders are likely to be: (1) to increase efficiency in the use of capital; (2) to raise the level of domestic savings; (3) to borrow from abroad; (4) to lower the plan's targets, particularly in heavy industries; (5) a combination of the above four alternatives.
It should be noted that despite these problems, in certain respects China is well prepared to begin the modernization effort. In particular, the far-reaching social reforms carried out after the revolution have provided an egalitarian base for the work ahead. In a sense China has succeeded in distributing poverty equally-not wealth. Everyone is equally poor. But the basic necessities of life such as food, shelter, primary education and medical care are available to the majority of the population. If China succeeds in carrying out its modernization without jeopardizing this egalitarian society, it will be a unique accomplishment in human history.
At the moment, the Chinese government seems to be in the process of reexamining the modernization plan to make it more realistic and feasible. In the beginning the planners may have underestimated the costs involved, particularly the foreign exchange costs. At the same time, the Chinese authorities may have over-encouraged the ministries and enterprises involved to produce their respective modernization plans. The result was a rush of activity with many of these ministries and enterprises approaching foreign suppliers to discuss procurement and other projects. Now that the government has begun a reappraisal, many outside observers doubt the intent and seriousness of the entire Chinese modernization effort. Based on the various announcements by the Chinese government and interviews given by the leaders, it is clear that the Chinese are aware of this problem and are making an effort to allay such misgivings.
In the post-revolution period, China has succeeded in establishing an organized agriculture and in developing small- and medium-scale industries. But experience in the building of modern, large-scale industries seems to be insufficient. As a result, the Chinese are now setting aside the first two years of the plan as a preparatory period during which time they hope to absorb foreign know-how, technology and management techniques as quickly as possible.
Until recently, the Chinese government seemed to believe that the export of China's abundant natural resources would provide all the foreign exchange needed for the importation of modern equipment. For example, at one point the Chinese offered to vastly increase the export of oil, coal and other natural resources to Japan in order to pay for the import of machinery. However, it is likely that if they succeed in modernizing their economy, domestic consumption of oil will inevitably increase. In addition, further pressure on the foreign exchange reserves will occur as a result of China's likely need to continue importing sizable amounts of food grains, steel, etc., for some years to come. In view of the above it will be necessary for China to explore the possibility of stepping up its export of manufactures.
The volume of Chinese foreign trade continues to be relatively small, although it is estimated that a 40 percent increase in the value of trade was registered last year. Chinese exports and imports in 1977 were $6.8 billion and $6.3 billion respectively. These figures are small when compared with the exports of South Korea ($10.05 billion) and Taiwan ($9.35 billion). Although Japan accounts for 20.9 percent of China's exports and 33.9 percent of her imports, China's share in Japan's foreign trade in 1977 was only 2.4 percent for exports and 2.2 percent for imports.
Some Asian countries express concern over the fact that China may soon become a serious competitor with their labor-intensive manufactured goods industries. Basically, however, China will remain an inward-looking country economically and, partly because of its political system, exports of manufactured goods may not increase very rapidly even though the government recognizes the need for them to do so. Moreover, larger exports from China when they do occur will result in larger imports as well, and this will contribute to the general expansion of trade in Asia and the world at large. In addition, more frequent contact with the outside world through foreign trade will make China and the Chinese less mysterious and will facilitate a better understanding with foreign nations.
In short, China's industrialization and modernization will move forward. Even if the current ten-year plan is overly ambitious (as admitted recently by Chinese officials),13 the generally realistic and pragmatic approach to policy issues shown by the new leadership will ensure that China will eventually push its modernization plans forward. By the end of this century, Chinese production of steel and other industrial products will rank it with the United States, the Soviet Union, Japan, and West Germany, even though per capita productivity and income will remain far below that of the other industrial countries because of the immense size of its population.
On the basis of this analysis, it seems clear that the unfolding of China's economic programs over the next 20 years should be one of the great constructive developments in East Asian and, indeed, in world history. What are its implications for the rest of East Asia, and what role can be played by Japan, the United States and other industrial countries?
I have just noted that China seems unlikely to be a competitive threat to the industrializing countries of East Asia. Concern is also expressed in some Asian countries that if Japan directs an increasingly large share of its capital, including concessional loans, to China, then there will be substantially less available to other Asian nations. However, in view of China's limited absorptive capacity for foreign loans and the very cautious attitude China is likely to adopt in borrowing from abroad, Japan's ability to supply capital to the rest of the world will not be seriously affected.
At the same time, the modernization of China, with its population of 900 million, is an enormous task that will require the participation of all industrial countries. Through the enlarged economic ties formalized most recently in the agreements of early 1978, Japan expects to play a significant role, and the Chinese government has already turned to Japanese, including the present author, for advice on its current ten-year program running to 1985.14 Proximity as well as deep historical connections have naturally stimulated Japan's interest in effective cooperation with China.
Yet, as others have noted, "China's socialist system of government and economy does not lend itself readily to the incentive-driven industrial expansion that Japan obtained."15 China will undoubtedly wish to retain its own system, and will wish at the same time to diversify its sources of modern equipment. American and European interests-and in some cases governments acting directly-are already deeply engaged in developing greater economic ties with China. There should be ample room for all to play useful parts.
As pointed out at the beginning of this article, the Western Pacific region, including China, will be the most dynamic part of the world during the last part of this century. The United States, facing both the Atlantic and the Pacific, will have to measure the relative importance of these two sides of the country. Japan, for many years to come, will play a crucial economic and political role in the region.
It would be unfortunate for both the United States and Japan if our two countries were to drift apart because of continuing conflicts over economic issues. If the previously mentioned economic irritations between the two countries continue, they may damage the underlying political, social and security relationship as well. Imagine the case of a Japan, grown frustrated under repeated American shocks and pressures, becoming hostile toward that country. Such a development could endanger the very security of the United States itself. It would also mean the complete bankruptcy and ruin of the Japanese economy. This would have wide-ranging political repercussions not only in Japan but in other Asian countries as well. In a letter to The New York Times, Mr. J. Owen Zurhellen, Jr., former Deputy Assistant Secretary of State for East Asian and Pacific Affairs (1975-76) and U.S. Ambassador to Surinam, recently wrote concerning the current U.S.-Japan trade dispute:
American negotiators must be firm and must work for reasonable trade terms with Japan. If we exceed those bounds and deal with Japan as an ill-intentioned malefactor while courting China with credits and most-favored-nation treatment, then we run the grave risk of convincing our principal ally and support in East Asia that we place a higher value on a vivacious and captivating new friend than we do on an old stalwart who, however stolid and sometimes hard to work with, has stood firmly with us on the world stage and with whom we have a set of relationships, including security as well as political and commercial, of fundamental national importance.16
The present author does not agree with all that is said here because he feels that it is crucial for the stability of the Pacific region for the United States to maintain friendly relations with both China and Japan. Nevertheless, it is clear that a falling-out between the United States and Japan would have grave repercussions.
In recent years a new concept called "comprehensive security" has gained wide currency among Japanese. This concept is based on the notion that Japan's security is vulnerable in energy and food supply as well as in military terms. Hence the need for "comprehensive security measures" which include not only the improvement of military capability but also research efforts for the advancement of science and technology, stockpiling of food and energy supplies and assistance to developing countries. These measures are seen as contributing to the overall security of the nation.
Japan has a highly organized and tightly compacted economy. (Japan's per acre GNP, for example, is about ten times that of the United States.) Thus, a few hydrogen bombs could completely devastate the entire country. Under these circumstances the best strategy for Japan is to avoid any possible military attack by following a prudent diplomatic course.
However, even without a direct military attack on Japanese territory the severing of Japan's energy and food supply lines could easily paralyze the nation. Thus, one aspect of the comprehensive security measures, in addition to the stockpiling of supplies, calls for the advancement of science and technology. This will give Japan some bargaining power and enable her to guarantee the imports of food, energy and other raw materials necessary for her survival.
The security of Japan is also fundamentally dependent upon Japan's relationship with the United States. In thinking about this relationship it is necessary to stress its broad social, political and military, as well as economic foundations. Stress on these broad foundations will keep us from being overly distracted by the day-to-day business and economic problems that catch our attention. Senator Sam Nunn wrote in a recent report to the Congress as follows: "Economic problems between Japan and the United States are also of great concern in both nations. [But] they should not be permitted to disrupt United States-Japanese security relations. Both the United States and Japan must ensure that resolution of trade problems does no permanent damage to security relations."17
If the United States and Japan concentrate too heavily on current bilateral economic issues and overlook the comprehensive long-term relationship, there is a danger of our two nations moving onto a collision course. Americans must keep in mind that, for Japan, pressure from abroad is welcome if it is for the sake of broader regional and global interests, but not if it is for the narrow and sectoral interests of one country. Japan, on the other hand, must understand that her domestic policies have far-reaching repercussions on her international relations.
The visit of Japanese Prime Minister Ohira to Washington in early May seems to have served to dispel some of the misgivings on both sides and helped the two peoples to recognize their long-term and broad interests in the relationship. The Joint Communiqué on the occasion of that visit set an appropriate keynote: "Productive Partnership for the 1980s."
As for relations with China, the following remarks made by Prime Minister Ohira at the National Press Club, Washington, D.C., on May 3, 1979 are relevant: "The development of friendly relations between Japan and China, as between the United States and China, has broadened the foundation for our Asian policies. Japan will act in close concert with the United States and Western Europe to extend appropriate cooperation to China's economic development efforts."
2 The New York Times, February 19, 1979, p. A14.
4 Among economists, the standard equation for this relationship is S (savings) minus I (investment) equals X (exports) minus M (imports). The lay reader may recognize some of the contributing factors: that low savings tend to increase consumption and thus imports, and the same for high investment.
5 JERC, Quarterly Forecast of Japan's Economy, May 1979.
6 January 1979 exports to the United States were up 1.0 percent and imports up 45.2 percent compared with a year ago, and for February 1979 up 10.5 percent and 39.8 percent, respectively.
7 Abegglen and Hout, loc. cit., footnote 3, p. 166.
8 Actually, Japan's defense budget does not include some expenditures that are classified as defense expenditures in the uniform NATO estimates procedure. Under that procedure, a recent calculation is that Japan's defense expenditures would now be 50 percent higher than the figures and percentages given here.
9 A recent estimate puts Japan's research and development effort in 1976, official and private, at about 1.7 percent of GNP, slightly lower than the 2.2 percent figure estimated for the United States in 1977.
10 I develop this idea in "Dynamic Division of Labor and the International Order," in Antony J. Dolan and Jan Van Ettinger, eds., Partners in Tomorrow: Strategies for a New International Order, New York: E. P. Dutton, 1978.
11 Hu Chiao-mu, "Observe Economic Law, Speed Up the Four Modernizations," Peking Review, November 10, 17 and 24, 1978.
12 Japan Economic Research Center, Study on Japan-China Economic Relations, January 1979.
13 The People's Daily of February 24, 1979 carries an editorial to this effect titled "Emancipate Ideas and Attain General Balance."
14 For an interview with the author on this subject, see The New York Times, January 9, 1979, p. D3.
15 Ibid., comments by the writer of the article.
16 The New York Times, February 28, 1979, p. A22.
17 "United States-Japan Security Relationship-The Key to East Asian Security and Stability," Report of the Pacific Study Group to the Committee on Armed Services, United States Senate, March 22, 1979, Washington, D.C.