Playing by the rules

In an important recent Financial Times opinion piece, U.S. National Security Advisor Tom Donilon says: "As part of an open international economic order, nations must play by the same rules"and goes on to emphasize "strengthening the international rules" and ensuring that "governments abide by these rules."

It all sounds refreshingly fair, firm, and right. But it’s not. In fact, it’s a repetition of things that have been said by every U.S. administration of the past fifty years and it is based on false assumptions and ,false linkages, false logic that make it unlikely to happen and perhaps even undesirable.

Let’s start with the assumptions. Donilon says: "As it has been for decades, our network of alliances and partners (in Asia Pacific) will remain the foundation for the region’s prosperity." Well, there is some truth to this, but the main truth is that it has been the relatively open American market and the indulgence of the region’s mercantilist trade policies by the United States that have been the foundation of Asia’s prosperity over the past sixty years.

Donilon says the "rules" include: "trade that is free and fair, level playing fields on which businesses can compete, intellectual property that is protected everywhere, and market driven currencies ( I guess he means exchange rates). That is a recitation of what Americans think and have often said the rules should be, but it is not at all what Asians think of as the "rules."

It’s actually a bit confused. Fair trade, for instance, is usually understood to be opposed to free trade, and the original Bretton Woods rules included fixed rather than floating exchange rates. Indeed, it was the United States that unilaterally abrogated the rules by floating the dollar. So Asians have never really accepted purely market driven exchange rates as part of the rules. Nor have Asians ever embraced the Anglo/American notion of Adam Smith style unfettered free markets, free trade, and free investment. Indeed, one of the architects of Japan’s economic miracle, Naohiro Amaya , once said to me: "We did the opposite of what the American’s told us."

Donilon says "our common values are a fundamental source of strength." But countries like Singapore, Vietnam, and Malaysia do not share the American view of democracy, and it was Singapore’s founder, Lee Kuan Yew, who famously said: "look east", meaning to look at Japan as the model of economic development rather than toward the United States.

Pioneered by Japan, the East Asian economic development model (itself based somewhat on the 19th and early 20^th centuries American model) calls for government suppression of domestic consumption, strong incentives for and even compulsory saving, channeling of the savings into strategic industries with big economies of scale and rising technological content, emphasis on and strong incentives for exports including currencies managed to be undervalued, and strong tax and other incentives for investment. Governments develop five and ten year plans that serve as serious guides to allocation of resources, regulatory development, and developmental direction. They also use a variety of tools including state owned or guided enterprises, government procuremen and encouraging "buy national" attitudes to retard import penetration of the domestic market and to induce inward investment and transfer of technology to domestic based industries. These are not Soviet style centralized economies. They use market forces, but the market is seen as a tool rather than an end in itself. As Amaya said, this is a model very much the opposite of the free wheeling, laissez faire American model. So Asian rules are not what Donilon or other Americans are thinking of when they speak of the "rules" , but they are, in fact, the rules that have largely prevailed in the Asia Pacific region over the past half century. Despite the ritual incantations of successive high level U.S. officials, the American rules have never been enforced either for reasons of U.S. economic ideology or of larger geo-political strategies.

At this point, it is clear that the Asian rules work. It is the Asian economies that are vibrant and growing while it is the U.S. economy that finds itself stagnating and in decline. It is an American conceit that our Asian economic partners embrace our views of how to run an economy. But they do not. Nor does it seem likely that they will meekly submit now to some new U.S. rule enforcement campaign.

Rather, the best course might be for Washington to embrace Asian rules and begin to "look east" for its own economic revitalization model. The old adage that says: "if you can’t lick ‘em join ‘em" never seemed so apt.