 We have reached a critical mass, and there's always this little brief trade-off of it, but I notice my Japanese friends are so pumped, we're going to get started, and I'm delighted to welcome all of you here today. My name is John Hamlin, I'm the president here at CSIS, and I'm just delighted that we can welcome all of you to this is our fifth joint conference with JETRO and CSIS. Hayashi-san, thank you for giving us the opportunity to partner with you. I had dinner with Hayashi-san last night and I said, you know, I wish America had a JETRO. We need somebody that's getting us going, you know, on trade policy. It's one of the great voids we have right now in American policy. We don't really know what the hell we're doing on trade, and I hope we're going to explore a bit of that today. Since we last met, we've had some fairly remarkable developments. Of course, we have an entirely new political landscape in Japan, and it's a new landscape we're trying to understand. I mean, we obviously know Japan from long and intimate relations with Japan, but this is a new Japan, and it's a new Japan that's emerging, and it's exciting, a little confusing, but there's a great deal of interest and hope in what's going to be coming forward. And my sense is you have the same feeling about us, but you're not exactly sure where we're going. So I think we're going to explore this today. I think we have two interweaving themes that we're going to be dedicating various perspectives to learn today, looking at the way that Asia is coming together, especially economically, and then the bilateral relationship with the United States and Japan. There have always been two axes in our relations between our two countries. There's been a security axis and an economic axis, and they've pulled against each other. It's been a creative dynamic, and we've had sometimes when it was pretty tough. I can remember as a much younger guy when we had the car wars, very bitter battles. I know there are some friends in Japan who have been watching it the way that the President Toyota was treated in his hearing last week in the Congress. There's some concern about that. I would only ask you to go back and look at the videos of how American car company presidents were treated, which was really brutal. And I think there was a respect that I think has been earned by the success of Toyota and the automotive industry in Japan. And we saw that, actually. We saw that. You may not have seen it, but I hope you would take a fresh look at it because it, I think, shows a deeper understanding that we now have with each other that we're going to take into the future. We're going to take you to the future in ways that we don't yet understand. And so we're going to explore all of this together today. So I want to say thank you. I should be introducing President Hayashi, Chairman Hayashi. But we're going to let him do the closing remarks and then he's going to open our first panel session. But let me again say thank you to JETRO for the great partnership we enjoy with them. Mike Green, let me turn to you so that you can get our program going today. Thank you all for coming. We're glad you're here. Good morning. Thank you. Welcome. This is our fifth collaboration and annual conference between JETRO and CSIS on economic integration in Asia and the implications for the United States and Japan. It's a partnership with JETRO that has been enormously rich for us at CSIS and Chairman Hayashi and the rest of his colleagues at JETRO in New York and Tokyo and our own fellow from JETRO here at CSIS have put a lot of work into all of these conferences. Here at CSIS, Nick said, Cheney, Eri Hirano and the rest of the Japan share have worked very hard on the logistics and the agenda. We do this annually in a way to take a snapshot, a fresh look at trends in regional trade, investment, finance and we do so from a political economy or strategic perspective trying to integrate different points of view. So you'll find on our panel today we have business leaders, foreign policy practitioners, scholars and representatives of the U.S. and Japanese governments given their take. I will, in a moment, introduce Professor Shereishi who will set the tone for today's conference and then in the first panel Chairman Hayashi will make some opening remarks and share and that first panel will be a look at regional trade and investment trends and the political implications of those trends from U.S. and Japanese experts. Hayashi-san will share and Hidehiko Nishiyama who is the Director General for International Trade Policy at METI will speak. Professor Maria Toyoda from Gillenova who's here at CSIS as a visiting scholar and noted expert on Japanese international economic policy. Gimpatiro Aihara from Mitsui Inc. who is the chair of ABAC, the business organization and Steve Began from Ford Motor Company. So we'll get U.S. and Japanese business official and scholarly perspectives. We'll take a break and then I'll share the next panel after that which will take a fresh look at the same set of trends but from outside the U.S.-Japan relationship. We have two distinguished speakers, Wei Ping-Huang, Professor of the School of Economics at Renmin University in China and Jenny Corbert who's the Executive Director of the Australia-Japan Research Center at ANU at Australian Astronomy University. I will then make a brief, hopefully productive effort to sum up some of the trends and then over lunch we'll hear the Obama administration's perspective from Kurt Tong who is the Economic Coordinator for the Bureau of East Asia Pacific Affairs and the Senior APEC official for the U.S. So it's a pretty dense and rich agenda. I think from our discussion last night or dinner you'll find that the intersection of trade, finance and political changes this last year are quite profound. In the aftermath of the financial crisis there are clearly new trends taking root in trans-pacific trade investment but I think you'll also find that trade within Asia is also, and investment within Asia is also taking some different directions this past year. Particularly, as I think we'll hear from some of the speakers, the changing nature of Japanese-Korean and developed economies trade with China. China posted trade deficit in January so China is different in perspective on trade and ASEAN in Southeast Asia is growing dependence on China for exports. We'll get to all of that and we'll talk about some of the political implications and some of the larger strategic issues. In particular I think we will quiz some of our Japanese colleagues about what Prime Minister Hatayama has in mind within the East Asian community and we'll quiz some of our American colleagues about whether how the Obama Administration will put some details into a trade strategy for Asia. Let's set the overall direction for today's conference with an opening presentation from Professor Takashi Shiraiishi. Shiraiishi-san is one of the most respected Japanese scholars of not only U.S.-Japan relations of course but Japan relations with Asia and developments within East Asia. He's, I think it's better to say, an Indonesianist by training studied and taught at Cornell, taught at Tokyo University. He's now the president, Jeptro's Institute for Developing Economies, an executive member of the Council for Science and Technology Policy and a week or two ago was announced as one of the members of the New Defense Advisory Panel that will be making strategic and programmatic recommendations for the Japanese government as they prepare for the next midterm defense plan. So he is a true utility infielder doing Asian economics, U.S.-Japan relations security studies and is the perfect person to open up our conference. So Shiraiishi-san said thank you very much and we look forward to you setting us on the right trajectory. Good morning. I used to have a nightmare when I was still teaching at Cornell and the nightmare is to find myself in the classroom in front of the students without any lecture notes. And I had that nightmare game last night. So I guess, you know, you can see how nervous I am today. But let me try. What I'd like to do today is basically reducing Japan's foreign policy. Since the new government came to power in September last year, there is a confusion, a little bit of confusion at least caused by Prime Minister Hatuyama and others about the direction of Japan's foreign policy, especially Japan-U.S. alliance. And my argument is there is nothing fundamental. I mean, there is no fundamental shift there in the relationship. But they naturally, I mean, want to show that they are different from LDP and therefore once in a while with excitement, they might sort of hint that there is what they are doing is in fact recalibrating the relationship. And yet, sometimes they sound as if they are reviewing the relationship. And I'll argue therefore that despite all the sort of noises and so on, and despite the change in domestic politics, the international regional structure will dictate Japan's policy as it is. And also, I would suggest that there are some sort of, you know, ways in which LDP, not LDP, LDPJ government may want to show that they are different from LDP. But before going into that discussion, let me show two sort of large trends in the region of East Asia. One is here, Long-term World Economic Focus released by Japan Center for Economic Research two years ago. And here, original, I mean, our focus was done based on the year 2000 purchasing parity dollar. But I'm not really interested in absolute numbers and therefore I saw the process to make it comparative with Japanese economic size. And if you look at this table, it is quite clear that at least in purchasing parity dollar, Chinese economy by 2020 will be four times larger than Japan's, five times larger than Japan's in 2030, six times larger than Japan's in 2040 and a little bit less than seven times larger than Japan's by 2050. And by 2030, China will be five times larger, but India also two times larger and twice as large as Japan's. And ASEAN is a bit larger than Japan and United States and the European Union of course 4.5 or 3.5 times larger than Japan. That means by 2030 there will be four major powers in this world which are China, US, India and the European Union and Japan is not part of that club. And this, of course, you can debate about how close to the mark this orchestra will be. But certainly you can be reasonably sure that Japan will not be like a giant in East Asia as it was 20 years ago and Japan is a kind of middle in power in terms of economic size in 20 years and as the distribution of wealth changes over the coming 2030 years, naturally the distribution of power will also change. The question is the order might change either in revolutionary or evolutionary way and suddenly it is to everybody's interest to make sure that the regional order of East Asia will change evolutionary way as the distribution of power and wealth undergoes significant changes. Number two, the next large trend is the population trend and this is quite straightforward. By 2030 the East Asian population and here Japan is not included. The East Asian population will be something like 2.4 billion and 62% of the population will be living in urban centers and in the case of China it will be 41% Indonesia 68% and in countries like Philippines, South Korea and Malaysia the urban population will be more than 75% while even mainland Southeast Asian countries urbanization rate will almost reach 50%. Asia in 20 years will be very much urban world and yet if we think and suddenly maybe one quarter to one third of the urban population will be urban middle class people but most likely other than Japan, South Korea and Taiwan and Singapore all the other countries will not attain the kind of middle class society. That means the gap between urban middle classes and rural poor as well as urban poor will remain and therefore to manage this deepening and increasingly urban social division economic growth will remain a crucial test to manage this tension. So this is a second trend and of course what is important is how to locate its trends in the larger historical context so let me go back to history and how the system the regional international system has been structured in East Asia maybe some of you still remember the word free Asia it was a word Americans used in the 1950s and 60s when there was the Cold War and China was still staunchly communist I mean in 1950 China went communist and then there was a war in Korean Peninsula and also there were independence war into China and so on and in those era I think Americans did two things one is to contain the international communism the Americans created a regional urban sports security system with Japan, US, Korea US, Philippines, US, Thailand and so on by local security treaties and basis agreement and created US-led security regional security system. At the same time the American government especially in the 1950s encouraged the Japanese government under Mr. Yoshida and then Mr. Kishi to go to Southeast Asia to explore the market because before the war China was the second largest market for Japan and actually Japanese business wanted to expand trade with China in the 1950s but allowing Japanese business to trade with China would undermine America's containment policy and therefore basically Americans encouraged Japanese business to go south but for that Japanese government needed to normalize diplomatic relations and therefore Japan concluded reparation treaties with Southeast Asian countries and by 1960s Japanese business were back in Southeast Asia and created a kind of triangular trade system among Japan, Southeast Asia especially Southeast Asia in free Asia and the United States. So this was a kind of beginning. On the one hand we had American-led Haban spoke security system in the region and we also had the triangular trade system in East Asia and these two systems underwent enormous changes especially over the last 30 years. If we look at the American-led security system after the end of the war in Vietnam American troops were withdrawn from mainland Southeast Asia and after the revolution in the Philippines, American bases in the Philippines were also dismantled so in fact even though American-led security system remains as the most important security system in the region, the system still became a shrunk and as it shrunk Japan-US alliance became more important in this system and by now probably we can reasonably say that once US-Japan alliance is gone the security system is most likely to be gone too. The second important development was the economic front and there were two very important developments over the last 30 years. First of all in the wake of the plaza court in 1985, Japan appreciated enormously and as a result to maintain the national competitiveness, Japanese firms shifted their production facilities on to Southeast Asia as well as South Korea, Taiwan and later on to China and South Korean firms, Taiwanese firms as well as Southeast Asian firms also did the same thing in the late 1980s and therefore by the end of the 1980s the region of East Asia and in that case South Korea, Japan, coastal region of China as well as Southeast Asia especially ASEAN 4 plus Singapore became integrated without any institutional design. I mean micro-economic decisions of companies basically led to de facto economic integration of the region and in the same years China opened up its reform and by the early 1990s China succeeded in transforming itself from socialist party state to socialist market economy party state while being integrated into this emerging East Asian economy and in the past 10 years especially after the Asian crisis in 1997-98 China has emerged as a new center of triangular trade and here different from the earlier triangular trade China now imports both capital goods and the intermediate goods from Asia other than China like Japan South Korea, Taiwan as well as some Southeast Asian countries assemble and produce final products and export those products to the American market as well as European and Japanese market and therefore the kind of triangular trade emerged among China, Asia minus China and the United States and what is interesting about this development is in Asia as you know no socialist countries collapsed while in Europe socialist states collapsed and became democratic states even Soviet Union collapsed after the collapse of all these socialist states NATO expanded eastward and within the expanding NATO European Union also expanded eastward and therefore in Europe there is no tension between the security system, regional security system NATO and the economic or economic or trade system which is European Union in East Asia tension remains despite the transformation of China as well as Vietnam from socialist states into socialist market states they remain party states and even North Korea and Myanmar have survived not as successful socialist market states but rather I would say rock states and yet you know they remain and given this reality it is quite clear and easy to understand why American led security system never expanded on to we are on to the Asian mainland to include China, Vietnam and so on so there is tension on the one hand the US led security system remains or rather it became smaller while the economic or trade system expanded to include China, Vietnam and so on and now China is crucial part of the trading system and therefore there is tension and this tension will mount as China rises in years to come because China is so crucial and yet economic integration is a must because as I mentioned earlier many countries in fact many governments are still confronted with creating jobs so that managing that kind of class gap between other middle class and poor and therefore they have to continue what I call politics of productivity and therefore economic integration will proceed and that means China will remain a key part of this integration and also this is important for Japan because Japanese market is shrinking and Japanese firms can only develop hoping to exploit this expanding regional markets so the tension will not only remain but actually tension will mount as China rises the question is what to do domestically in Japan it's quite clear this tension will cause a lot of problems for any government if the LDP government opted for strengthening Japan US alliance for example Mr. Koizumi called for the global partnership between the United States and Japan and then he was criticized for neglecting Asia and now Mr. Hatoyama is calling for East Asian economic community and then well for some reason to some extent his own fault but he is being criticized for jeopardizing Japan US alliance but this is not just because of the leadership the tension itself sort of makes people nervous whichever way Japanese government tilt and so in that sense managing this tension is crucial for domestic politics but never, intentionally never go away and then what to do I think the crucial thing on the one hand is given the fact that China will rise and the distribution of wealth and power will undergo changes in many years to come then you want to make sure that the changing regional order that change will not disrupt the regional order in a correct way you want to make sure that change will be revolution, not revolutionary but rather evolutionary and one very important strategy to make sure that the change will be is to make clear that Americans will remain engaged in this region and Japan should do whatever it can take to make sure that Americans will remain engaged that means enhancing the predictability of regional order everybody knows that the change I mean the order is going to change and one thing they don't want to know is there is nothing for sure and therefore you make sure that at least Japan-US alliance will remain there and therefore all the countries in this region can build their security policy on the assumption that this alliance remains but there are two ways to make this alliance in place and I believe to give enough incentive to the Americans who are Americans who remain engaged in this region one is what Mr. Koizumi did to try to develop Japan-US alliance as global partnership and the other is instead of sort of strengthening the security side of this alliance emphasizing economic side of the alliance more and I suspect even though I have no clear evidence to show that some of the DBJ people might be thinking along the line knowing that one of the coalition partners wouldn't support the strengthening Japan-US security operation any further but in any event it is very important for the current government as well as the government to come should figure out what to do to strengthen the US Japan alliance and to send a message to the world that this alliance will remain not just for the coming five years or ten years but rather coming twenty years, thirty years, forty years that is one very important point and I'm very sure there is a very broad consensus on this the second important strategy is promoting East Asian economic integration simply because this is plus for most of the countries in this region and also this is plus for Japan because Japanese firms really need the market out there and I forgot to mention here if the urban population reaches almost 1.5 billion by 2030 and if we assume one quarter of the population are as rich as Japanese and Singaporeans that means there will be something like 300 million population very rich that means three times larger than Japanese market so definitely there is a big market out there in twenty years and therefore everybody is natural I mean it's natural for everybody excited about this prospect and yet if we look at the current situation everybody said that the United States can no longer pull the economic growth of this region from demand side and therefore now many people talk about that East Asia needs to shift from export-led economic growth to domestic demand-led economic growth and that is all fine but yet if we look at China's economic performance in 2008 and 2009 it's quite clear that the Chinese government came up with a huge economic stimulus package in 2008 and Chinese domestic demand expanded and yet this expanding domestic demand did not translate into Asia's quote-unquote domestic demand and also it has become quite clear that Japan is becoming less trade dependent as I mentioned earlier in the past ten years China imported intermediate goods and capital goods from the rest of Asia and assembled goods and then exported those goods to the United States and European Union now Chinese firms are producing more intermediate goods even though they are still importing intermediate goods from the rest of Asia and it is risky to say that this trend will stay but if this trend stays then China might become less trade dependent and less reliant on the import of intermediate goods from the rest of Southeast Asia and in that case most likely the ASEAN countries will be threatened first and there are already signs that some of the ASEAN countries are complaining about the flooding of Chinese final goods and consumer goods and also they are complaining that China is now importing less intermediate goods from their countries so for example Indonesian Chamber of Commerce already told the government that they want the government to review ASEAN-China free trade agreement so there is uncertainty and this is something we need to watch more important it became clear let me just give you one exceptional number in the first half of the 2008 China imported about 9 billion worth of consumer goods from the rest of Asia and in the first quarter in the first half of 2009 China imported about 5 billion worth of consumer goods United States in the first half of 2008 imported about 110 billion worth of consumer goods and in the first half of 2009 it imported 75 billion worth of consumer goods suddenly the decline of American import from Asia was a big shock to East Asian economies but here I want to draw your attention that China's import of consumer goods is less than 10% of American import and this mean even though China might grow very fast Chinese market will remain far smaller than the American market and that in fact is a very good lesson that East Asian community building especially economic integration alone is not enough and I think it is not time not only for Japan but also for other East Asian countries to explore FDA with the United States not only to make the region sort of open or trade but also actually that is a big plus for the region economic growth itself so in some you can already see that there is not much room for the change in Japan's foreign policy despite all the changes in domestic politics and of course I mean we should fully understand that the new government wants to show that they are different from LDP in many different ways and yet I'm very sure and we will see that in coming months that the government will stay more or less I mean maintaining the same set of foreign policies from LDP era actually the US and Japan US alliance remains and also the East Asia community building which was initially proposed by Mr. Koizumi is now highlighted by Mr. Hatoyama that these policies will remain and therefore I hope that we stay on course and hopefully can develop new ways of strengthening the relationship thank you very much