Japan grapples with threat of new trade blocs in West. Will Tokyo team up with other Pacific economies?

Plans for powerful new trading blocs in Europe and North America have Tokyo worried. So too does the anticipated decline of American economic strength - and the shrinking appetite for Asian goods. Japan is reaching for a vigorous response.

Some here favor forming a rival Asian economic bloc, but they are in the minority.

Most favor the development of some form of Asian-Pacific economic organization that might include the United States, Canada, and other non-Asian nations. Some Japanese say that such a grouping could become ``a locomotive for the development of the world economy,'' as a recent government report put it.

Key government ministries have assembled study groups, drawing on private business and other experts, to come up with new ideas on how to create stronger economic links with nations in and out of the region.

In Japanese eyes, the integration of the nations of the European Community into a single market in 1992 and the US-Canada free-trade zone are potentially negative events. They worry that this could lead to markets that are far more difficult for foreign goods - including Japanese - to enter. (The US Senate was expected to approve the free-trade agreement with Canada yesterday and then send it on to President Reagan for his signature.)

As the US economy slows down, Japanese policymakers say, it will no longer easily absorb so many exports from Asian-Pacific nations. Countries like South Korea, Taiwan, Hong Kong, and Singapore - the so-called newly industrialized countries (NICs) - which now depend heavily on the US market, could suffer severe economic recession.

In contrast, Japanese economists depict the world's second-largest economic power as the center of an interlinked system of Asian economies that are booming. They point to increasing integration between Japan and the NICs - one economist describes it is a process of fusion, and dubs it ``Japanics.'' The emergent economies of Southeast Asia, led by Malaysia and Thailand, surround the core NICs and Japan, with China on the periphery.

Japan has even adopted the role of defender of its fellow Asian economies against what the government report calls ``impatient demands'' by the US and Europe to open their economies too rapidly. Prime Minister Noboru Takeshita represented such views at the Toronto summit of Western nations in June.

The vigorous Asian economies have tempted a minority group of Japanese to consider the formation of an Asian economic bloc as a counter to the European Community and North American developments. But, says Toshishige Namai, editor of the influential economic weekly Toyo Keizai, ``These are old-fashioned people.''

Indeed, such an approach raises painful memories of the past, in the minds of many Japanese and Asians.

A closed Asian trade bloc ``would be a revision of the disaster of the Greater East Asian Co-Prosperity Sphere,'' comments a senior official of the powerful Ministry of International Trade and Industry (MITI). The ``co-prosperity'' concept was promoted by imperial Japan as the umbrella for its Asian conquests under the thin guise of resisting Western ``imperialism.''

Asian leaders have frequently expressed discomfort at Japanese economic domination.

``We know that there are some legitimate fears held by Asian countries about that,'' says another MITI official.

``We definitely need a US presence when we talk about an Asian economic organization,'' he says.

Officials of MITI, which is at the center of discussions about a possible trade group, insist that they are absolutely opposed to any system that would undermine global free trade. An Asian-Pacific economic organization must be an open system, including the US, Canada, and other non-Asian nations, they say.

``We are at an early stage of discussion,'' says a MITI official involved in the ``Asia-Pacific Trade and Development Study Group.''

Various ideas are under discussion including:

The creation of a Asia-Pacific free-trade zone led by Japan.

The formation of a Japanese-US free-trade zone to counter Europe.

The establishment of an Asian-Pacific version of the Paris-based Organization for Economic Cooperation and Development (OECD), the group that coordinates economic policies among advanced nations.

``The thrust of these,'' the official says, ``is to build a more lasting relationship between the US and Japan,'' not just between Japan and Asia. A new structure could reduce bilateral US-Japanese trade tensions, dealing with problems as a package.

But an interim report issued by the MITI study group earlier this summer makes it clear that Japan plans to play a greater leadership role. ``Although the US is expected to play a major role in the Asia-Pacific region, its contribution will inevitably decline,'' the report concludes. ``Therefore Japan's contribution should be increased and the US's burden lightened.''

The report discusses four broad economic scenarios for the region and their implications for the world economy.

The first scenario, that the US economy continues to play the central role in the region's growth, is dismissed as ``unrealistic.'' The authors predict a slowdown following the presidential election as the twin deficits are reduced. Budget cuts will mean less foreign aid and it will ``become more difficult to depend on the US alone to support stability in the region.''

MITI's second scenario envisions Japan stepping in to ``absorb exports from the Asia-Pacific region, including the US.'' Japanese imports of Asian goods are currently increasing at more than a 50 percent rate, and MITI proposes to ``ensure this trend is built into the Japanese economy.'' Japan's new role as an importer, the report says, will help reduce the American trade deficit and ``provide the region with some insulation from the deflationary effect of a slowdown in the US economy.''

Japan can also play a role as a ``stabilizer'' by increasing foreign aid and helping to solve the problem of massive third-world debts.

The third approach calls for an expansion of trade and investment within the Asian region. The report suggests that other Asian nations follow Japan in expanding domestic demand, opening their markets to exports from outside the region, and expanding economic contacts between them. The recent phenomena of Korean and Taiwanese companies setting up factories in Southeast Asia is a promising sign of such intra-Asian links.

The result of this, the report says, would reduce trade imbalances and protectionist threats from abroad. The Asian-Pacific nations ``can show the world that it is mistake to see the economic development ... as a threat, for it is actually an opportunity.''

``If there continues to be a lack of vision and cooperation in the Asia-Pacific region,'' the fourth scenario warns, then the flood of exports will bring protectionist reaction and other pressures. The reports sees this leading to ``economic disorder'' that ``could throw the economy of the entire Asia-Pacific region into a deep depression.''

MITI hopes to realize the second and third scenarios by gradually creating forms of economic cooperation in the region. It cautions against pushing too fast with ``rigid'' structures thatare modeled on the European Community or the OECD. Such plans have already bruised the sensitivities of less-developed Asian nations which fear domination by their richer neighbors.

``Soft cooperation,'' MITI says, should come first in the form of research, conferences, meetings of officials which promote joint policies.

The US-Japanese free-trade-zone idea, along with a wider Asian-Pacific zone, is left for further study. But privately, informed sources say, the authors of this study are said to favor proceeding with a pact with the United States, which could then be expanded gradually to include the NICs and other nations.

In the coming months this debate is sure to intensify. More voices will join in as Japan slowly searches for consensus on what amounts to a major shift in its long-term economic strategy.

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