Thailand and Japan: what a difference China makes

30 October 2000

Exactly two years ago, Chang Noi was in Japan. The Japanese government had just announced the Miyazawa Scheme to rescue Southeast Asia from the financial crisis. Japanese companies cheered their government’s initiative; they could remember how good profits were in the region before the crash. Journalists specializing in Southeast Asia hoped for a rapid recovery and a check on the USA’s growing power in the region.

Today the focus has dramatically changed. The newspapers hardly mention Southeast Asia any more. The journalists who once specialized in the region are now covering China, India and Korea. Officials in the Ministry of Finance don’t want to discuss the Miyazawa Scheme. Companies have their sights set on China and India. Southeast Asia has slid off the mental map. China has become a fixation.

“The Japanese government is afraid of China,” explains one of the journalists whose beat has changed. “In the past Japan cultivated Southeast Asia in order to face up to China. It still thinks the same way. But from the Japanese perspective, Indonesia was the foundation of ASEAN and the leader of the region.” The crisis has changed all that. “Indonesia has become a big problem,” says a rising star in the Finance Ministry. “It has such ethnic complexity. It has no tradition of democracy. It’s such a large part of the region. In the past, other countries respected Indonesia’s leadership, or at least pretended to. But now the country’s political importance has dived. That has made China relatively more important in the region. But other countries are nervous about China. So if Indonesia is unstable, then Southeast Asia is unstable.”

“Japan had hoped to play the go-between with the US and China”, notes a Tokyo University professor who advises the Japanese government on regional affairs. “With Southeast Asian countries’ support, Japan was going to bring US into APEC as a forum for talking with China. But then Clinton went off and shook hands with China without bothering about us. Japan is feeling rather isolated.”

The finance official echoes the same theme “We feel isolated because the EU is becoming more united, the US and China are so big, and ASEAN is deteriorating.” Japan is now negotiating a free trade agreement with Singapore. “The value of the trade between the two countries is tiny,” notes the official, “but the agreement is symbolically important. We look at NAFTA and we look at the EU, and we ask ourselves what do we have that is comparable. The Singapore agreement will be a model. Korea will be next. Then we will try to extend to other countries.”

The aim is not only commercial. The shadow of China has influenced this move as well. Japan hopes these agreements will limit China’s freedom to extend its political influence through Korea and Malaysia-Singapore.

The emergence of China is also pulling the attention of Japanese firms away from Southeast Asia. But here the logic is very different. For Japanese officials, China’s sudden emergence is a diplomatic problem. For Japanese firms, it is a commercial opportunity. They know the fabled size of the Chinese market is illusory. Many have already been badly burnt in China. But where else can they look for growth? Their domestic market is dead. Southeast Asian growth has evaporated. The US boom compensated for the Asian slump, but now that too is fading. China looks like the last frontier, the last hope for Japan’s export-fixated industry.

Japanese producers are also looking to China as a cheap location. But they are looking with some trepidation. Over the past decade, Japanese firms have learned that China is not an easy place. State policies change without warning. Local governments do not follow the central government’s lead. Corruption is complex. Companies which require big upfront investments (steel, chemicals) are very nervous about making the leap. Automobile makers are nervous too, but Toyota has committed because the market is simply too large to ignore. Electronic firms are less inhibited. Their initial investments are smaller. Most of the investment is in machines which can be moved if things go wrong. China is training the manpower, and building the infrastructure to attract them. “Many Japanese electronic firms are waiting only for China to devalue its currency before they make the move”, says the Tokyo University professor.

But, this eclipse of Southeast Asia may be short term. Others in the Japanese bureaucracy and academia are already thinking beyond current problems. “Before the crisis, Japan believed that Southeast Asia would become more integrated with Japan through simple market forces, without alarming the US”, says a Kyoto professor who advises the government on regional policy. That belief has disappeared. “The government now sees that integration won’t happen without more intervention, more efforts at building the right institutions.”

Out of this rethink has come three Japanese policies towards the Southeast Asian region: build a zone of currency stability; promote supporting industries; develop human resources.

To develop the currency zone, an Office for Asian Monetary Affairs was established in the Ministry of Finance in late 1997. It helped develop the scheme of swapping currency reserves announced in Chiang Mai last December. It hopes to move beyond this to a fully fledged Asian Monetary Fund, incorporating China. It believes US opposition has now been tempered by reality. It is waiting for the right timing.

For supporting industries, two special offices for Asian trade were established in MITI around the same time. They have been working on schemes to transfer Japan’s experience with developing small and medium firms, including one scheme with Thailand’s industry ministry. For human resource development, the upgrading of Chulalongkorn University’s engineering faculty is the first project to tap expertise from the University of Tokyo and a new fund under the Japan Bank for International Cooperation.

The choice of Thailand to pioneer this scheme is probably not mere chance. In many small ways, Japan is looking to Thailand for some regional leadership. “Our firms have sunk a lot of investment in Thailand,” notes the finance official, “and there is a lot of over-capacity. We don’t need to look anywhere else in the region. Especially for automobiles, Thailand is the centre.” In the emerging new diplomacy, Thailand again has a special role. Its relations with Japan are solid; its relations with China are good. Thailand may have some utility as a go-between. But in Japan’s diplomacy, a lot depends on personal contacts. “Japanese officials know Surin well, and admire Supachai a lot”, says the Kyoto professor.

The political and economic map of Asia is being redrawn on a scale not seen since the end of the second world war. And the process is far from finished.