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The Power Struggle of Japan and China:

The Case Study of Chiang Mai Initiative

Dyah Ayunico Ramadhani (0706291230)

Erika (0706291243)

Muti Dewitari (0706165570)

Rindo Sai’o (0706165584)

Tri Andriyanto (070629

DEPARTMENT OF INTERNATIONAL RELATIONS STUDIES

FACULTY OF SOCIAL AND POLITICAL SCIENCE

UNIVERSITY OF INDONESIA

2009

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CHAPTER 1

INTRODUCTION

1.1. Background of the Issue

The Northeast region is indeed a complex region. The historical background among

the four countries—namely China, Japan, South Korea, and North Korea—has never been in

a pleasant situation. Japan used to be a great power in the world, before it was defeated by the

United States and its allies on World War II. Japan colonized nearly all the countries in East

Asia, including China. The relationship between the two has never been in good terms ever

since, considering the cruelty and immoral acts Japan did to Chinese people and towards the

rest of the region itself at that time. Historical perspective has in fact enormously been a

significant aspect in dominating the relationship pattern within the region. Furthermore, since

China and Japan are in fact imminent powers among the region, the relationship between

them determine the situation in Northeast Asia region.

The tense situation between China and Japan remain exist until the Asian Crisis

1997-1998. After that period, the relationship is getting better which is proved by the

increasing agreements between them, mostly on economy agreement. Currency and financial

crisis that happened on 1997 changed the whole situation in East Asia region dramatically.

During and after this crises, East Asians could not but identified themselves as those in a

same boat1. The Asian financial crisis drove East Asian economic growth to negative or very

low in 19982. The currency crisis in East Asia prompted foreign banks to call in short-term

loans and foreign investors to pull their money out of the region3. East Asian countries were

all forced to turn to the IMF for financial support and in an effort to restore investors‘

1 Accessed from http://homepage3.nifty.com/tkinoshita/research/pdf/2004/cei0624transcript.pdf , on October 1,

2009, 11.19 PM. 2 Ibid.

3 Shaun Narine, The Idea of ―Asian Monetary Fund‖: The Problems of Financial Institutionalism in

Asia-Pacific, accessed from http://www.asianperspective.org/articles/v27n2-c.pdf, on October 1, 2009, 11.12

PM.

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confidence in their respective economies4.

At that time, IMF was the only possible solution to solve the problem, yet IMF

remains unable to fix the after crisis condition of East Asian countries. The failure of IMF

then created a greater awareness of the region‘s shared interests and vulnerabilities. In

particular, it created a greater need for financial cooperation—prompting the establishment of

the ASEAN+3 Finance Ministers‘ Process and several related structures such as the Chiang

Mai Initiative and the Asian Bond Markets Initiative—at an earlier stage of integration than

in Europe5.

1.2. Research Question

This paper will try to answer this specific question: How does the power struggle

between China and Japan happen in the case of Chiang Mai Initiative?

1.3. Theoretical Framework

Great Powers Struggle in International System: Gilpin Model

To speak of the international system is to speak of transitions of great powers in it.

The form of relationship between those great powers clearly reflects their basic

characteristics as international actors. This assumption could be explicated by how the

anarchical system of international relations generates states who seek security and wealth

through means available. In Waltz‘s eye these logic of anarchy will always subsist and remain

unaltered due to the absence of a higher authority that can guarantee the security problem

which then forced the states to continuously follow adaptive `self-help'. These suggest that

two out of the three elements of political structures which are an ordering principle (anarchic

or hierarchical) and the character of the units (functionally alike or differentiated) are

constant. Hence, the distribution of capabilities as the third element is the only structural

variable in determining the political structure.6

4 Hal Hill, ―An Overview of the Issues‖, in. H.W. Arndt and Hal Hill, eds., Southeast Asia‘s Economic Crisis:

Origins, Lessons, and the Way Forward, (Singapore: Institute of Southeast Asian Studies), pg. 1-15. 5

Giovanni Capannelli, Asian Regionalism: How Does It Compare to Europe‘s, accessed from

http://www.eastasiaforum.org/2009/04/21/asian-regionalism-how-does-it-compare-to-europes/, on October 1,

2009, 05.18 AM. 6 Read Colin Elman, ―Realism‖, Marthin Griffiths (ed), International Theory for the Twenty-First Century,

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In line with Waltz‘s view, Gilpin considers states can still be understood as

self-regarding entities within an anarchic international realm. Robert Gilpin, as an important

exponent of the idea that international systems tend to be dominated by a materially

hegemonic Great Power, the rise and fall of which drives systemic evolution, believed the

international relations continue to be a recurring struggle for wealth and power among

independent actors in a state of anarchy.7 When linked to the notion of how domestic and

international developments lead to states growing at different rates, these assumptions

contributes to relative rise and fall of state to one another which furthermore cause conflict

ensues. States choose to engage in conflict because they calculate that the benefits of doing so

exceed its costs. In particular, because the international system is created by and for the

leading power in the system, changes in power lead to conflict over system leadership.8

Furthermore, Gilpin's idea of change is precisely equivalent to Waltz's. For both

theorists, change refers to surface changes within the system—changes in the distribution of

power or changes of the units—rather than to changes of the deep structure of the system

(transition from anarchy to hierarchy). They both disregarded the possibility of a fundamental

change in the system's ordering principle. In referring to the domestic agential state power,

Gilpin modified Waltz‘s approach by adding two hindering factors which are varying

domestic agential state power and socio-economic fetters. It denies the absolute domestic

agential power to the state and embraces varying or potential autonomy of state by adapting

to the international political structure. Assuming both structure domestic interest groups and

domestic state weakness can only constrain the ability of the state to conform to anarchy;

they cannot fundamentally affect the structure of the international system and the logic of

anarchy, nor change the rules of state behavior under anarchy namely following self-help

policies of adaptation.

(New York: Routledge, 2007), pg.19 7 Alexander Wendt, Social Theory of International Politics, (Cambridge: Cambridge University Press, 2003),

pg.97 8 Colin Elman, op.cit., pg. 15

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Scheme of Gilpin’s Systemic `Cyclical' Theory 9

How a certain country develop its power is then depend rely upon the conditions of

domestic agency and the existence of the socio-economic fetters. If the domestic agential

power were low, then state will not be able to prevail over these non-political fetters and

furthermore undermine the state's position in the system; while under conditions of high

domestic agency such restraints can be overcome, enabling the state to expand its power base.

These fetters comprise technological diffusion, internal social fetters and high international

military costs10

:

1. Technological diffusion which refers also to changes in the distribution of

economic power is based on the logic: when a society harnesses a high rate of technological

and productive innovation it expands. However with the rate of technological innovation

slowing down and the locus of innovation shifts to more adaptive rival states, eventually the

economy inevitably goes into decline. Therefore the more adaptive states who are awarded

with relatively high levels of domestic agential power are, most likely, capable to triumph

9 Based on John M. Hobson, The State and International Relations, (Cambridge : CAMBRIDGE

UNIVERSITY PRESS, 2003), pg. 35 10

Taken from John M. Hobson, The State and International Relations, (Cambridge : CAMBRIDGE

UNIVERSITY PRESS, 2003), pg. 35, pg.33

Resolution of

Systemic crisis

through

‘Hegemonic war’

Redistribution of Power

Capabilities

(Phase of Disequilibrium)

Socio-Economic Fetter :

Distribution of Economic

Power

Technological Diffusion

Social Fetters

High Military Costs

Adaptive Rival

States(High Domestic

Agential power)

Variations in Domestic

Agential State Power

(High/Low)

International Political

Structure:

1st Tier: Logic of Anarchy +

3rd Tier: Power Differentiation

(States have NO agency to

shape the IPS nor resists or

Buck its constraining logic)

Maladaptive

System’s Leader

(Low Domestic Agential

power)

Emergence of New

Leading Power or

Powers

(Equilibrium Phase)

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over fetters or obstacles; in this manner they will successfully imitate and improve upon the

leading technologies of the innovating states, enabling them to catch up and take the lead.

2. Internal social fetters as countervailing forces: This factor is referring to

conditions where internal environment actually hampers the process of gaining more power.

There are often moments where domestic social arrangements thwart the introduction of

new forms of technology or where social forces successfully push for higher taxation for

public welfare consumption that in effect reduce investment; thereby undermining national

economic growth. In the end, low domestic agential power of the state will hinder it from

overcoming these obstacles to economic expansion.

3. High international military costs ± foreign policy costs exceed domestic

revenues: This specifically addressed the conditions for great powers or `hegemons' that

spill out high defense expenditures such as welfare spending or `crowd out' investment and

thereby leading to economic slowdown and in turn undermine the state's military base.

Gilpin argues that a great power can maintain its power only by keeping its resources in

balance with its military commitments. Whereas rival states can `free-ride' on the

international public goods which the leading state exclusively provides and in turn promote

their own growth at the hegemon's expense.

Adaptive and successful states with high domestic agential power will be gain

noteworthy place in the international system and vice versa. The critical point brought by

Gilpin is the ability of a state -through high domestic agential power- to control through

superior adaptation in terms of economic, fiscal, social and military means which enable it to

move towards the top of the structure or keep it there. Thus it is also the adaptability of rival

states and maladaptability of the leading state that accounts for international change or at

least shifts in the international distribution of power. Through the scheme above Gilpin has

shown the dynamics that lead to the rise and decline of great powers.

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CHAPTER 2

2.1 Chiang Mai Initiatives (CMI) Description

The Asian Crisis in 1997-1998 convinced East Asian countries that countries within a

region had been dependence and vulnerable to one another. On September 1997, as the

response of the Asian Crisis occurred in the same year, The Japanese Ministry of Finance was

proposing the emergence of Asian Monetary Fund, which the reaction came from the idea

that individual countries must self-insured with large holdings of foreign exchange reserves.11

Therefore the idea of Asian Monetary Fund was rejected by the International Monetary Fund

(IMF), the United States and the rest of The Group of Seven (G-7). In period 1997-2000, in

each year there were three meetings that were attended by the ASEAN+3 countries. On the

second meeting held in Hanoi, China proposed that deputies from finance ministries and

central banks should meet on a regular basis to explore possibilities for cooperation.12

On

May 2000, the fourth meeting held in Chiang Mai, under the ASEAN+3 meeting determined

to stipulate cooperation in 4 aspects, monitoring capital flows, regional surveillance, swap

networks and training personnel13

. The result of fourth ASEAN+3 meeting after the crisis was

known as the Chiang Mai Initiative.

2.1.1 Bilateral Swap Agreements

Bilateral Swap Agreements (BSAs) have been the most successful and significance

aspect of the CMI that has been achieved by member countries, particularly in relationship

between Japan and China. Bilateral currency swap agreement is an agreement to exchange

one currency for another to reverse the transaction at a date in the future14

, which is regularly

signed among private sectors and central banks, in particular cases. This is unable to be

categorized as loans since it refers to exchange assets which are recorded as foreign exchange

reserves. The specific agreements between countries are going to be negotiated bilaterally in

11

C. Randall Henning, ―The Future of Chiang Mai Initiative: An Asian Monetary Fund?‖, accessed from

http://www.petersoninstitute.org/publications/pb/pb09-5.pdf, on October 1st, at 04.52 AM

12 ―Chapter 3: Chiang Mai Initiative‖ accessed from

http://www.iie.com/publications/chapters_preview/345/3iie3381.pdf, on October 1st 2009, at 04.51 AM.

13 Ibid.

14 Ibid.

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the Asian BSAs framework.

The basic principle of BSAs is to provide ―short-term‖ financial assistance in the form

of swaps for members in need. It is used by the members in order to stabilize the balance of

payment if economic crisis hits. In its relation with the IMF, this framework is built in

addition to supplement the financial facilities that are already provided by the world financial

institution. This simply means that agreements shall be approved by the IMF itself and it is

allowed to ruling the policy conditionally for most of the swaps within region.

There are two forms of arrangements in CMI, which consists of ―one-way‖ arrangements

and ―two-way‖ arrangements. ―One-way‖ arrangements refer to situation where only one

party has the right to draw dollars. This form of arrangement occurred in between Japan and

South Korea. In the mean time, ―two-way‖ arrangements refer to situation in which either

party can draw dollars, similar to BSAs happen in between Japan and China as well as China

and South Korea.15

Countries come to decision whether they would arrange themselves on

―one-way‖ or ―two-way‖ agreement in fact is based on the ability of the country itself,

whether it is a strong borrower or creditor, or neither both.

2.2.2 “Multilateralisation” of CMI

The discourse of the multilateralisation of CMI first declared in May 2005 in Istanbul

meeting. CMI multilateralisation essentially refers to the collectivization of common fund on

a regional basis among the members of ASEAN+3, which refers to something that more than

―bilateral‖ but less than ―global‖. The main objectives of this multilateralisation in fact are

enhancement of surveillance, clarification of activation process, adoption of common

decision making, doubling the size of the swaps and reducing the IMF link to 80%.16

The

discourse was developed when they met in Kyoto, Japan, in 2007, where the finance

ministers of member countries proclaimed that a self-managed pooling arrangement governed

by a single contractual agreement was an appropriate form of multilateralisation.17

The

15

―Chapter 3: Chiang Mai Initiative‖, loc.cit. 16

C. Randall Henning, loc.cit. 17

―The Joint Ministerial Statement of the 10th

ASEAN+3 Finance Ministers‘ Meeting, 5 May 2007, Kyoto,

Japan‖, accessed from http://www.aseansec.org/JMS_AFMM3_Kyoto_final.pdf, on October 6th

2009, at 05.41

AM.

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discussion on the multilateralisation of CMI have been there from year to year, until in 2009,

the meeting has finally decided on how much each Asian country, which refers to +3

countries, ought to reserve.

2.2. Political Interest of China and Japan in Chiang Mai Initiative: Hegemonic Pursuit

2.2.1. China’s Ambition of Being the Great Power in East Asia

Throughout the years, China has tried to exercise its own power to become the great

power18

in East Asia region. China has been a skillful participant in regional forums; its

diplomacy has without question become more and more dexterous in recent times. Since the

time of the 1997-98 Asian financial crisis, China has come to be perceived as a more

responsible regional actor, it has appeared more willing to engage in multilateral activities19

.

China is also aggressively moving towards its stated long term strategic goals of national

dominance and influence on the world stage20

; its active participation in the creation and the

implementation of the CMI, as well as its massive contribution in BSA (which for the most

part be done in a one-way BSA method) has gone some way to raise fears of a hegemonic

China dominant over Southeast and Northeast Asian countries. China‘s sheer size, its

proximity, and its authoritarian character make it hard to dispel all these fears21

. The main

reason why China really wants to be dominant in East Asia region is, in fact, because China

sees its own preeminence in Asia as a safeguarding world peace by its opposition hegemonic

nations such as the US and in the past Japan, India, and Russia22

2.2.2. Japan’s Intention to Resist China’s Hegemonic Ambition

While China has its own ambition in becoming the great power in East Asia region,

18

Cari definisi great power 19

Brendan Taylor, Towards hegemony, Assessing China‘s Asian Ambition, accessed from

http://www.securitychallenges.org.au/ArticlePDFs/vol1no1Taylor.pdf, on October 1, 2009, 10.36 PM. 20

Lynn A. Stover, Chinese ambition, accessed from http://www.au.af.mil/au/awc/awcgate/acsc/00-171.pdf, on

October 1, 2009, 10.54 PM. 21

David Capie, Rival Regions? East Asian Regionalism and Its Challenge to the Asia-Pacific, accessed from

http://www.apcss.org/Publications/Edited%20Volumes/RegionalFinal%20chapters/Chapter10Capie.pdf, on

October 1, 2009, 11.09 PM. 22

Colonel Hong Baoxiu, Deng Xiaoping‘s Theory of War and Peace in The Chinese View of Future Warfare,

edited by Michael Pillsbury, 1997, page 8. Available on the Internet, accessed from

http://www.ndu.edu/inss/books/books.html

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Japan also has its own intention regarding its participation in CMI: Japan was attempted to

resist China‘s growing influence, which was seen as detrimental to Japanese interest23

. The

rise of China as a potential superpower, whose political influence is now also backed by

continuous high economic growth, as well as its leadership in regional financial

cooperation—a position that used to be occupied by Japan—encourage Japan to increase its

participation and contribution in East Asia region, so that it could gain as much attention and

domination as China in the region. The rapid growth of China also makes Japan anxious.

Japan afraid if it did not do anything, China will become the leading power in East Asia

region. Japan needs to do something in order to limit China‘s deed, which is why Japan

decided (also) to increase its participation in CMI.

Despite the intention to resist China‘s ambition of being the great power in East Asia

region, Japan actually has another motive in its participation in CMI: Japan wants to increase

their power in East Asia region by making ASEAN countries more dependent with it. This is

shown by the evidence that Japan has provided Yen funds, equivalent to up to 60 billion US

dollars24

, in order to address short-term liquidity difficulties in Asia as a supplement to IMF

lending. As there is no free lunch, this help also does not come without charge. With its huge

loan, Japan wants to make the other East Asian countries dependent on it. We could say that,

behind the motive to resist China‘s ambition of becoming the great power in East Asia, Japan

actually also has ambition to become a great power in East Asia region.

2.3. CMI Influence in economic and political dynamics in Northeast Asia region

2.3.1. Bilateral Swap Agreement between Japan-China

It has been clearly defined that the objective of CMI is indeed aimed to create a

network of bilateral swap arrangements (BSAs) among ASEAN+3 countries to address

short-term liquidity difficulties in the region and to supplement the existing international

23

Brendan Taylor, op.cit. 24

See ―Japan‘s Contribution in Response to the Current Crisis‖, a speech by Mr. Tatsuya Tanimoto, on 8 June

2009. Available on the internet, accessed from http://www.fsa.go.jp/en/announce/state/20090608.html, on

October 1, 2009, 08.38 PM.

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financial arrangements.25

Particularly concerning BSA, it is then deemed essential to prevent

resurgence of devastating crisis like the one in 1997, to attain stable economic growth, and to

promptly provide funds for all member nations if the crisis eventually happens. These

expectations of maintaining domestic and regional economic stability further become the

main motivation for all member nations to actively involve in BSA. This spirit of propagating

BSA under the framework of CMI does not merely apply to member nations of ASEAN but

also to the other three countries; Japan, China and South Korea. On this section, the writer

will chronologically illustrate BSAs conducted between Japan and China and profoundly

analyze the role of CMI through BSA in promoting economic relation and good willing

between Japan and China.

Since the establishment of CMI in May 2000, Japan and China have been reported to

involve in only one periods of BSA. It was initiated on March 28, 2002 where Japan and

China signed a Yen-Yuan swap agreement as part of an Asian-wide currency safety net

designed to boost regional cooperation and ward off future financial crises.26

Remarkably,

this BSA, worth $3 billion, was characterized as a two-way BSA, thus it merely had symbolic

role. This can be further understood by the simple logic that both Japan and China was at that

time unlikely to face liquidity or balance of payment crisis in the short term. This likely logic,

considering both their external reserves, was indeed also realized by Chinese central bank

governor, Dai Xianglong, who stated that it was hard to imagine a situation in which China

and Japan would need to use the swap scheme.27

However then, the writer perceives that this only BSA has indicated a positive gesture

where Japan and China was willing to promote good relation in regional cooperation. Here it

can be clearly interpreted that the role of CMI with its beneficial prospects offered, is fairly

essential in ameliorating relational climate between Japan and China, considering the earlier

tension related to Beijing opposition to Japanese proposal of Asian Monetary Fund (AMF) in

25

Regional Financial Cooperation among ASEAN+3, accessed from http://www.mof.go.jp/english/if/regional_financial_cooperation.htm , 5 October 2009 17.34 26 Japan, China Sign $3-Bn Yen-yuan Swap Deal To Avert Future Crises, accessed from

http://www.financialexpress.com/news/japan-china-sign-3bn-yenyuan-swap-deal-to-avert-futu

re-crises/41744/, 5 October 2009 13.45 27

Ibid.

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1997.

2.3.2. Struggle of Power Analysis in CMI case

It is surely pleasant to know that CMI through BSA has brought about the positive

impact toward relational climate between Japan and China. But as BSA is simply

implemented in a larger framework engaging even more countries including South Korea and

other ten member nations in ASEAN, it is then not enough to analyze the resulted effect of

CMI only from the perspective of both Japan and China. Thus evolving the former

explanation and correlating it with the basic question proposed, this section will further

analyze the comparison of involvements from each Japan and China toward other member

nations of APT which then indicate and perfectly portray Japan and China efforts in pursuing

and struggling for the considerable power in broader region of APT.

While South Korea involvements remain firm, Japan and China, since the

establishment of CMI, have been noted to undergo some spurs highlighting the competitive

spirit of both in evolving involvements with other member nations. The prominent indication

of these spurred involvements can be primarily viewed from the dynamics of their BSAs with

others. Here, the writer will present two statistical data comparing each China and Japan

involvements on BSA in 2004 and the recently renewed 2009.

Table 1. Progress of Chiang Mai Initiative (as of May 2004)28

BSA CURRENCIES CONCLUSION

DATES

SIZE

Japan-Korea $/Won (one way) 4 July 2000 $7 billion

Japan-Thailand $/Baht (one Way) 30 July 2001 $3 billion

Japan-Philippines $/Peso (one way) 27 August 2001 $3 billion

Japan-Malaysia $/Ringgit (one way) 5 October 2000 $3,5 billion

28

The model is accessed from http://www.g24.org/ychp0904.pdf

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Japan-PRC Yen/Renminbi (two

way)

28 March 2002 $3 billion

Japan-Indonesia $/Rupiah (one way) 17 February 2003 $3 billion

Korea-PRC Won/Renminbi (two

way)

24 June 2002 $2 billion

Korea-Thailand $/local (two way) 25 June 2002 $1 billion

Korea-Malaysia $/local (two way) 26 July 2002 $1 billion

Korea-Philippines $/local (two way) 9 August 2002 $1 billion

PRC-Thailand $/Baht (one way) 6 December 2000 $2 billion

PRC-Malaysia $/Ringgit (one way) 9 October 2002 $2 billion

PRC-Philippines $/Peso (one way) 20 August 2003 $1 billion

Japan-Singapore $/Sing $ (one way) 10 November 2003 $1 billion

PRC-Indonesia Renminbi/Rupiah

(one way)

30 December 2003 $1 billion

Korea-Indonesia $/local (two way) 3 December 2003 $1 billion

Table 2. Progress of BSAs up to 2009

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The interpretation of the data above is indeed interesting. As for the first data, the

involvement of Japan is obviously dominant. While China only involved in total 6 BSAs,

Japan then engaged in total 7 BSAs. Of all the total BSAs involved, China only conducted 4

one-way BSAs whereas Japan conducted 6 one way BSAs. The total funds allocated by Japan

even reached $ 20,5 billion, far greater than $ 6 billion of China. However then, the second

data greatly indicate how China endeavors to crucify Japan. The increased number of Japan

involvements and allocated funds seem massive. Until this April 2009, under the renewed

BSAs, China then actively involve in 4 one way BSAs while Japan only conducts 2 one way

BSAs with the decreased funds allocated. It‘s also interesting to quote an article written on

JoongAng Daily stating that China has jumped to equal status with Japan on the Asian

financial market; Japan is struggling to maintain its leadership; for more room between the

two biggest economies of Asia.29

Analyzing this condition, the distinct efforts of Japan to overbear the land of APT

particularly during 2004 is a clear sign to culminate its influence as respective nation and

29 Korea, China, Japan Reach a DiffIcult Truce on CMI, accessed from

http://joongangdaily.joins.com/article/view.asp?aid=2904791, 5 October 2009, 17.09

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gather larger power exceeding the ASEAN border. But on the intention of power

accumulation, Japan is not alone. The previous less active influence of China on BSAs

doesn‘t mean that China was unintentional. The intention was exist at the first place and still.

The only logic that can explain the ever China inactivity is none other than the already

explained theory ―struggle of power‖. Both China and Japan eventually perceive themselves

as one over another as the leading nation on CMI. AS China then gains some sizable

developments in economy lately, it makes it even more possible for China to beat Japan. The

fact that they both have excess will continuously resume this competition till this mastery of

power is then won by one nation in absolute terms.

2.4. South Korea Reaction Towards Power Struggle between Japan and China

A progress of economic relations between Japan and China make a serious impact

on the dynamics of political economy in East Asia. The development of economic relations

was conducted by Japan and China become a phenomenon considering the hostilities between

them due to historical factors in the past. It can keep in mind that Japan is country highly

developed Asian economies since the defeat in World War II, while China was transformed

into one of the world‘s economic giants are even able to rival the economic hegemony of the

United States today.

South Korea, as one of the East Asian countries with advanced economies today tend

to have its own response associated with the phenomenon of Japanese economic relations

with China current. South Korea also one of the member ASEAN+3, in which Japan and

China are also included in it. It can‘t be denied, that among all the ASEAN+3 members,

Japan, China, and South Korea are the countries that are economically more powerful and

relatively big economic power, will and should be the main players.30

Korea has now surpassed Japan in terms of foreign direct investment (FDI) into

China. It‘s also true in terms of the index investment into ASEAN.31

It shows that Japan was

relatively not the center of integration East Asia miracle today. As share, in terms of Korean

30

Accessed from http://homepage3.nifty.com/tkinoshita/research/pdf/2004/cei0624transcript.pdf , on October 1,

2009, 11.19 PM. 31

Ibid.

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GDP, exports to Japan are actually lower in 2003 than they were in 1993, ten years earlier.32

If any country is the center, the East Asian dynamic is more complicated situation than

before.

Nevertheless, the big change that happens in Korea after the crisis at 1997 and

subprime mortgage couldn‘t separate from Japan. Korean society now become rich, when

they come to Japan frequently, Korean student stayed at homes of Japanese families, and then

they came to Korea to realize what happened and what is happening in Japan. The great

phenomenon that happen in Korea was convince will emerge sooner or later between Japan

and China. But, it will take a much more time than in Korea.

Proposals for trade liberalization among varying sub regional configurations have

proliferated. Some 170 regional trading arrangements including bilateral areas have been

registered with the WTO. The Japan-Singapore Free Trade Area (FTA) was signed recently.

Others being studied or negotiated in the Asian and Pacific region are Korea–Japan FTA,

Korea– PRC FTA, PRC–ASEAN FTA, Korea–ASEAN FTA, and ASEAN+3 FTA.33

Viewing financial agreements as complements to trade initiatives, and conscious of their

vulnerability to financial crisis, Korea will perceive benefits to financial cooperation, both

with Japan or China.

In terms of ASEAN, ASEAN is sort of the ball that the Japanese and the Koreans

and the Chinese are fighting over, in the sense that not that they‘re going to dominate it, but

the Chinese and the Japanese talk about an FTA because they are worried that the other one

will get the FTA with ASEAN and shut them out.34 China emerges as an important trading

partner for the many countries, include the members of ASEAN. Burma, Laos, and Cambodia

assume a vassal status, and other ASEAN members find their autonomy circumscribed by

policies emanating from Beijing. Likewise, China entices South Korea into its sphere.35

South Korea typically seek to involve both Japan and China in regional

arrangements in order to avoid choosing between the two powerful regional actors. Korea are

32

Ibid. 33

Pradumna B, Rana, ―Monetary and Financial Cooperation in East Asia: The Chiang Mai Initiative and

Beyond”, accessed from http://www.adb.org/Documents/ERD/Working_Papers/wp006.pdf on October 1st 2009,

at 04.51 PM. 34

Pradumna B. Rana, loc.cit., p. 23. 35

Hugh de Santis, ―People‘s China and the Asian Future‖, in JFQ Forum, p. 45-46.

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wary of Japanese economic dominance but are increasingly concerned about the economic

―threat‖ from China, particularly in the wake of Chinese accession to the World Trade

Organization (WTO).36

In conclusion, Korea will not make an economic cooperation just for

one of two countries, but to save their interest, both in Japan and in China.

2.5. Analysis

The anarchical logic of the international system is unmistakably portrayed in the

East Asian region via the relationship between Japan and China. Both countries as rival

powers are struggling for influence in other countries. This is specifically described in the

case of Chiang Mai Initiative in which both countries participated by committing to BSA

between countries in Northeast and Southeast Asia. CMI that involves the establishment of a

regional pooling fund gives chances for each country to contribute certain amount of money

to the reserves. The amount of money that varies between each country reflects their

capability and also their interest towards the pool of fund; the bigger the contributions the

bigger interests are at stake. With the existence of prerequisite made by donor countries

towards the recipients, it implies that the donors have the advantage to insert certain value or

influence implicitly in the requirements.

Historically, after the Meiji Restoration, Japan has increased its domestic agential

state power and therefore become a dominant power in East Asia region. But eventually after

the locus of production shifts to other countries—in this case, China—Japan‗s economic

growth has become stagnated. It goes accordingly to what Gilpin has predicted in its model.

In the other hand, China as the adaptive rival state challenges the current distribution of

power, creating a new hegemonic war in East Asia.

Assuming that countries are actors who seek security and wealth through means

available, CMI becomes one of the tools to gain those interests and maintain the distribution

of power according to their benefit. The CMI in particular represents the distribution of

economic power-as stated in Gilpin‘s Model- that could restrain or even boost the ownership

of power. Acknowledging how the distribution of power can always alter any time when they

36

―Chapter 3: Chiang Mai Initiative‖, loc.cit. p. 30

18 | P a g e

could not adapt with the international political structure, Japan and China, shown by the

numbers of their contribution towards the pool, progressively maintain their domination of

fund contribution in the pool to ensure their influence inside the region. In conclusion, the

writers believe that in the case of CMI, Japan and China have demonstrated a struggle to

redistribute power in East Asia region as shown in Gilpin‘s Model.

19 | P a g e

CHAPTER 3

CONCLUSION

The Northeast Asia region has shown unique characteristic upon the dynamics of

state behavior. No matter how interlink their economy, the members of this region keeps a

high tension upon their relationship. This condition is exacerbated by historical trauma

between two major powers in Northeast Asia region, China and Japan.

On the other hand, in 2000, the members of East Asia region has agreed to build an

integrated pool of funds, namely Chiang Mai Initiative, which could easily be used whenever

the crisis strikes. This agreement that supposedly could benefit all member countries had not

shown to be successful in building a more harmonic region. The Northeast region remains as

the stage of power struggle for dominating states.

This CMI agreement turns out to be used by China and Japan as a tool to pursuit

their interests. On the other, South Korea chooses not to compete in the power struggle but

maintain its active contribution in the region.

This condition proves Gilpin‘s theory that prescribe the need of countries to be

adaptive towards the anarchical nature of international system in order to maintain the

distribution of power.

In conclusion, the writers believe that in the case of CMI, Japan and China have

demonstrated a struggle to redistribute power in East Asia region as shown in Gilpin‘s Model.

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