Impact of the Rise of China and India and its Implications
for the U.S.-Japan Economic Relations
Remarks by Yasuhisa Shiozaki
Senior Vice Minister for Foreign Affairs
U.S.-Japan Forum
July 10, 2006

I am very proud to be given an opportunity to speak to you about the impact of the Rise of China and India and its implications for the U.S.-Japan Economic Relations. It is not just an issue of great magnitude in the long run, but also it has critical implications in setting strategies towards the problems ahead of us, such as the one now debated in the UN Security Council with respect to the North Korean missile launches. So please allow me to touch upon the North Korea issue first. By the way, let me remind you of that I am Senior Vice-Minister for Foreign Affairs, neither Economy nor Finance, which might disappoint you, I am afraid.
Moments after North Korea launched a series of missiles in the morning on July 5th, Japan and many major countries issued immediate condemnations and initiated talks on disciplinary response against the North Korean acts that undoubtedly endanger global peace and stability. The support for us remains overwhelming in the global society to take unified, strong and effective measures in response. After the missile launch, even the Korean government had to slow down its sunshine policy by suspending all shipments of humanitarian aids to its northern neighbor indefinitely. The people living in Nakhodka city, Russia, hundreds miles away from the sea spot where missiles plunged, protested against the local North Korean Consulate, to hear of the news of missile launches by North Korea without any pre-announcements.
On the other hand, China and Russian governments are taking a soft line in the UN Security Council for some reasons. Japan, and U.S., I believe, could have tolerated it, as long as Beijing and Moscow keep leverage over Pyongyang, on the background that they, mainly China, are the most important mentor and supplier of indispensable goods to North Korea. We could understand that it also may be important for the perspective of humanitarian support to the neighbor. But this time, missile launches clearly proved that a mere humanitarian assistance does not translate political influence over a failed nation.
I think this case presents a good implication for the discussion of the impact of China and India in the global society.
India has a long history of democracy. In contrast, China has not. But both countries have adopted a unified stance on the needs of multi-polar world with the background of their growing economic power. We may have to admit that they have a potential.
The rise of both nations would present not only economic dynamism, but also a possible instability to the Asian region and the world at large. Only a medium- to long- term pursuit of democracy and sustainable sound economic growth of both China and India ensures significant opportunities. Japan and U.S., therefore, must observe not just our national interests in economic, security, environment, and other issues, but also our shared fundamental values of democracy, human rights, free speech, rule of law and distribution of the wealth, so that we could shape peacefully rising China and India that will be able to play as a reasonable, responsible, and reliable partner in the international community. We are observing the developments over North Korean case as a key indicator that demonstrates how China could become a global player. Apparently, China faces numerous challenges in this context.
The U.S. and Japan must carefully manage the simultaneous rise of both China and India. We may also have to take different approaches between the two, taking into account of their different developmental stages as per capita GDP statistics shows. Both nations have history of thousands of years of trade and cultural exchanges, while a lot of tensions exist due to their complicated history of rivalry and regional conflicts. India may be concerned about the China's southern advancement policy and strong influence over Pakistan, Nepal and Myanmar in the context of both economic and security policies. On the other hand, China may be concerned about the India's nuclear weapons programs and its nuclear technology cooperation with the U.S.
History warns us that to accommodate rising powers has rarely been an easy task. In my view when a nation has a pride duly inherited from its glorious past, with an sense that she has been victimized by outside forces, attaining equilibrium between the two tends to be tricky. A rapid economic growth awakens the nation to both of those elements, pride and nervousness. I am saying this in part because this sounds by all means familiar to the Japanese but in not a small part because China and India might have a chance go through a similar path soon down the road.
While there is no panacea to remedy such a growing pain, only democracy can make a long-term ease. It therefore follows that the U.S. and Japan should never tire in their combined effort in bringing in more economic opportunities to India in order for it to further enhance its already established democracy, and encouraging China to attain, sooner rather than later, greater political freedom without which it cannot possibly play an integral part to manage the global society. It also should be added that given the rapidity with which both China and India grow, the effort ought not to be put off but accelerated.
More specifically, on India, discrepancies amongst classes and between regions hinder the country from unleashing its growth potential to the fullest extent. If history is any guide, what Japan did after the war to bridge the gap between the rich regions and the poor may well be of some inspiration to the Indians. To start with, infrastructure development in the areas of transportation and utilities holds key to distribute the wealth more evenly, which will then require sustained inflow of capital from overseas.
I should say that Japan is committed in continuing to provide aid capital and guide its effective use, so as to lessen the disparity in India, which is already the largest recipient of Japanese ODA loans. For the same reason, a sound domestic banking system that could generate the nation's savings and direct them to the developmental projects would be of equally vital importance to the people in India.
I am of a view that in so doing, and with rule of law and financial transparency more firmly respected in India than in most other developing nations, India could grow increasingly driven by domestic consumer spending.
On China, I have some reservations as to its long- term sustainable sound economic growth, while its records have been phenomenal. There is crucial uncertainty regarding the viability of its paradoxical political theory of "socialistic market economy." Also, political legitimacy of Communist Party regime as national governance structure might well have a chance to be challenged. Many economic risks, such as non-transparent decision-making of bank lending practice, week corporate governance system and inadequate disclosure, might be associated with the above basic political elements. On a society front, major riots are frequently reported. There is huge disparity among locals. Social infrastructure and safety net, such as pension system, is still extremely limited. All these factors indicate an existence of social unrest and instability in China, which make us nervous if we try to portray a bright future of sound and stable growth of China.
In the interim economic tasks continue to mount in China, such as Renminbi reform, liberalizing capital control, respecting intellectual property rights, but you may have to be careful if you need a result of reforms so fast. Fore example, before making currency regime flexible and transparent, China needs to create financial markets, e.g., futures market and bond market. These prerequisites may have to be completed during the course of the reform, which make the reform process of China so bumpy.
Less transparent and less flexible foreign exchange policy by China has negative impact on the global imbalance of capital and trade flow. At the same time, it gives unnecessary speculation in the global financial markets. Similar situations could be found in the areas of defense spending. China's rapid military build up and its non-transparent nature of military spending raised many suspicions in the regional security front.
What is lacking here is more coordinated effort in the region for confidence building both in the economic and security policy. The shared confidence could realize the new 21 century order in Asian region, which is consistent with a peacefully rising China. For that purpose, democracy, transparency and the rule of law must be well-established in China.
Lastly, I would stress on the Japan's role against the background of the rise of China and India. An important task for Japan is to demonstrate its full potential in furthering peace and prosperity in this region, above all. To be sure, it was the first time this weekend for Japan to submit major Resolution to UN Security Council. Without any substantial contribution and cooperation in Afghanistan and Iraq, which has been determined by Prime Minister Koizumi, Japan could not have taken a tough position before the five permanent members of UN Security Council regarding North Korea issue. Moreover, if Japan is not even a non-permanent member, the resolution might not have been submitted after all.
In the recent G8 Foreign Minister meeting, only Japan's Foreign Minister spoke up the risks of North Korea, while other members focused only on Iran. But the outcome clearly proved North Korea to have been the most urgent risk in the global scene. I believe Japan, as a permanent member of UN Security Council, could instrumentally contribute to the peace and prosperity of the world. Of course, in order to serve as a global leading model as a permanent member, Japan must address many more challenges both domestically and internationally.
Japan hopes to stay as a frontrunner in the world community in the 21st century by committing ourselves to sharing important global responsibilities. I can assure you that the four prospective candidates for post Koizumi in the LDP will all agree on bearing the tasks. In that sense, whoever takes the position of post-Koizumi administration, there will be no substantial policy swing from now. Japan without Koizumi, in a nutshell, will be more or less the same as Japan with Koizumi, even though the political style might change slightly.
As a frontrunner, Japan must keep its economy strong. It has to be open to the investment, trade, people and knowledge coming in from outside. Japan must join in the field of global rule making process. Therefore, for one example, Japan must actively take part in the international accounting convergence process with IASB and FASB. With the continued structural reforms, empowered men and women, the new Japan climbs further up the value ladder of economy, which makes it all the more crucial for post-Koizumi administration to continue reengineering its economy and statecraft, which might require political pain.
To make strong and open economy, Japan must enhance more active international cooperation in close collaboration especially in Asian region. Asia is a region of diversity with many ethnic, cultural, religious, and historical backgrounds. Therefore it would be more desirable to set up many different layers of regional dialogue channels, rather than to restrict the number of fora of communication. In 2002, Prime Minister Koizumi proposed wider community building in Asia through economic partnerships, which entailed creation of the East Asian Summit. EAS is the only regional forum that includes not only Japan, Australia and New Zealand, three of the established democracies that constitute the Asian side of APEC, but also India, which is another democracy in this growing part of the world. Therefore I strongly encourage the friends and colleagues from the U.S. to consider paying much more positive attention to the EAS and taking part in some way.
To conclude, the U.S. and Japan now jointly endeavor to extend the significance of our alliance to a global context, both in the economic and security policy. With the rise of China and India, our alliance becomes much more significant in protecting our common fundamental values. We don't know for sure if Asia will someday stand on a structure that is three-legged; Japan, China and India. But one thing for sure, we are living in the most exciting transition period of time. The U.S. and Japan should combine knowledge, power, and experiences so that China and India will get integrated into the global order with minimal disruptions, and benefit from the rise of the two nations. This is a challenge for us, but as least for a politician, problems never emerge to be feared. They do only to be solved, like the case to be decided in New York today.
Thank you very much.