China hub of the world's next bloc

Mabuchi Motor makes tiny electric motors that run fans in computers and power car windows. Fast Retailing makes clothes and sells them under the Uniqlo brand. Hyundai Motor makes cars, Hitachi makes electronic gadgets, and Samsung makes just about everything.

These Japanese and South Korean companies have one thing in common. Each is in China or plans to be. Mabuchi has no factories left in Japan; Hitachi intends to invest US$1 billion on the mainland before 2005. That will give China a quarter of the company's global production -- the largest for any Japanese company.

You can make your own list, and it will be more or less endless. South Korean Finance Minister Jeon Yun-churl had one of his own in mind when he proposed a strategic Northeast Asian alliance the other day: Korea, China, and Japan would make a handsome economic bloc.

This is a very big idea, and its implications are imposing.

As Jeon pointed out, the three nations account for 20 percent of global gross domestic product, making it the third-largest economic region behind North America and the EU.

Bilateral pacts, free-trade agreements, and regional tie-ups of one kind or another are flavor of the month. Everybody wants one with everyone else. South Korea and Japan are negotiating an FTA.

Jeon's idea goes beyond that. He's talking about a three-way alliance that could divide East Asia into a rising, powerful north and a less influential south in relative decline. The Pacific map, in effect, would be fundamentally altered.

Kiyohiko Fukushima, a distinguished Japanese economist formerly with the Nomura Research Institute, calls the ties already forged between Japan and China "a new type of economic power in the world."

"This linkage could well be the most important recent change in world economic history," he said.

This isn't altogether good news even for the three nations that would make up a Northeast Asian economic bloc, but there doesn't seem to be any stopping it. Korean-Chinese trade, frozen at near zero a little more than a decade ago, is approaching US$40 billion annually. Japan is already China's largest trading partner and third-biggest investor behind Taiwan and Hong Kong.

It won't be too long, Fukushima tells, us, before China becomes Japan's largest trading partner, too. "On the import side," he writes in the current edition of Asian Affairs, "it is already clear that by 2003 China will provide more goods to Japan than the US."

There are big gains in this for Japan, make no mistake. The mainland is a source of cheap labor for Japanese companies worried about running short of workers, it absorbs capital investment no longer sensibly made at home, and it sends back manufactured goods of acceptable quality. China's trade surplus with Japan in machinery is unique -- the only one in the world.

As China conforms to the market-opening rules of the WTO -- let's just assume for now it will -- Japan will reap benefits worth US$61 billion over the next few years, according to the World Bank. North America, by comparison, is expected to run a distant second.

Long term, though, the picture isn't so pretty. We may all assume Japan has a short-term battle against deflation on its hands, but consider its evolving economic relations with China and you recognize this as a long war. The Japanese are importing lower prices from the mainland on everything from clothing to high-tech and those whirring motors Mabuchi makes.

With its population aging and its economy undergoing fundamental change, Japan's economic merger with China stands to reinforce all the negative trends: low prices, low demand, low profitability, and so on. It begins, indeed, to sound like the hollowing-out syndrome talked about in Tokyo during the bubble of the late-1980s.