US and Japan Should Engage Rising China and India

Kenneth Dam, professor emeritus at the University of Chicago Law School, and Noboru Hatakeyama, chairman and CEO of the Japan Economic Foundation, are co-chairs of the US-Japan Bi-National Study Group sponsored by the Pacific Council on International Policy, the Chicago Council on Foreign Relations and the Japan Economic Foundation. The following is adapted from their final report, Responding to the Economic Rise of China and India. For a full report go to: www.pacificcouncil.org.

Tokyo — The economic rise of the world’s two most populous countries, China and India, will be a defining feature of the 21st century. Japan and the United States must resist the temptation to view the development of these two economic powers as a zero-sum game, potentially creating new geopolitical rivalries. Instead, Japan and the US should strengthen their economic engagement with China and India to create long-term partnerships for peace and prosperity that will benefit the whole world.

To this end, there are several key policies Japan and the US should adopt:

-- Japan and the US should provide technical assistance to help China strengthen domestic financial markets, the rule of law and social security systems. As it is now, Chinese capital markets are underdeveloped, contracts are hard to enforce and the banking system is shackled by non-performing loans.

The US and Japan should also increase loans and aid to India for physical infrastructure, schools and health care as well as encourage India to address its chronically large public-sector deficits and bureaucratic inefficiencies that constrain entrepreneurship.

-- While vigilant intellectual property rights protection should be pursued abroad and improved math and science education should be pursued at home, Japan and the US, world leaders in innovation for decades, should embrace and encourage growing competition in innovation from Asia.

Exports from China and India are moving up the “value chain” from low-cost production of standardized goods and services to the development, design, marketing and distribution of high-tech products. To support this evolution, Japan and the US should promote the cross-border movement of highly skilled people in science and technology with India and China. Tighter US immigration rules since 9/11 have made this more difficult.

-- Free trade should be promoted throughout the Asian-Pacific region. As long as they are compatible with the World Trade Organization, regional economic integration and openness should be promoted, with the US seeking to gain a seat in the ASEAN (Association of Southeast Asian Nations) Plus—the pan-Asian trade negotiations.

A Japan-US free-trade area could take the lead on such difficult issues as liberalization of agriculture, intellectual property rights and anti-dumping restrictions. On the domestic front, freer trade and openness can be supported and sustained by education and training polices that would empower those dislocated by globalization.

-- A high priority should be placed on reducing global economic imbalances. The US should increase national savings, starting with reducing the size of its federal budget deficit. Japan should boost personal consumption by reassuring workers and citizens that pension, health and unemployment insurance programs are sound. Japan and the US should work to increase the involvement of China and India in the deliberations of the Group of Eight and International Monetary Fund to facilitate coordination in macroeconomic growth policies.

-- Finally, the US and Japan must work closely with China and India to manage energy competition and reduce environmental degradation. New multilateral and regional institutions should be built that enhance energy security through risk-sharing and market-based mechanisms. China and India should be encouraged to adopt domestic energy reforms that increase the role of market forces.

New technologies for conservation and renewable energy should be shared. A post-Kyoto Protocol global-warming regime must be agreed to that ensures steady reductions in carbon emissions.

At this critical juncture in the advance of globalization, taking the long view is critical to sustaining the path of prosperity that has already raised the standard of living for hundreds of millions across Asia. What we do now will determine the potential of many generations to come.