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The United States and Japan at 50: Keynote Address

Author: Richard N. Haass, President, Council on Foreign Relations
October 8, 2010
Council on Foreign Relations


This event was part of the workshop, The United States and Japan at 50: Resilience and Renewal, cosponsored by Council on Foreign Relations (CFR) and the Asahi-Shimbun. This event was also made possible by the generosity of the following corporate sponsors of CFR's Japan program: Canon USA, Mitsui & Company, Mitsubishi Heavy Industries America, Mitsubishi International Corporation, Sony Corporation of America, and Toyota Motor North America.

RICHARD N. HAASS: Ohayo gozaimasu. Good morning. Boker tov, for those of you who speak Hebrew. And welcome to our symposium here at the Council on Foreign Relations on the United States-Japan alliance at what I find the increasingly young age of 50. Twenty years ago, if we'd had an alliance at the age of 50, I would have been more impressed. But now, it looks awfully new.

My name is Richard Haass, and I am president of the Council on Foreign Relations. And we are excited to be doing this today, and excited to have so much talent and knowledge and experience in the room. It's a particular pleasure to partner with the Asahi Shimbun, and we are grateful for all they have done to make this possible in bringing such a distinguished group of panelists from Japan.

And I would be remiss if I did not single out for thanks my friend of more decades than I can count now, Yoichi Funabashi, who's editor in chief of the Asahi Shimbun, who -- working together with Sheila Smith, the council's senior fellow for Asian studies, to really bring this together. So Yoichi, arigato. See, you've taught me well over the years.

Let me just say one or two things about the council for a minute, the Council on Foreign Relations, on Asia. We have about 75 fellows either of one sort or another here, people working in what we call the Council Studies Program or think tank. Some are here for one year. Probably about half of them or slightly more than half are full-time. Some are part-time because they also have additional affiliations.

But just about 30 of them have a focus on Asia. Some are -- in particular are focused -- have the focus on East and Northeast Asia, including Japan, others South Asia. But it's a -- it's a statement or a reflection of just what a(n) intellectual priority it is for us. And -- but I think what we in turn are doing are reflecting the importance and the growing importance of Asia in the world.

We've also started a blog called "Asia Unbound" on our website, which has regular updates drawing from many of our Asia fellows. We're about to have one of our task forces, one of our commissions report on the challenges of Afghanistan and Pakistan just in advance of the Obama administration's third policy review, a policy toward that subject. We're also working on other issues of importance to Asia, including U.S. trade policy, cyber security, proliferation, you name it.

You have the program in front of you. I won't waste your time by detailing it. But again, it's an extraordinary array of speakers and again experience on both panels. And then at the end of the day, upon the beginning in the train , we're going to save the best for last, because Yoichi will give the closing address at this afternoon's lunch. So essentially we're going to improve as the day goes on.

Just to be clear, today's program is on the record, or as they say when the policemen come to take you away, "Anything you say can and will be used against you."

I have one favor to ask. If any of you have your cell phones on, if you would please either shut them off, or if that is organically impossible, that if it would lead to an emotional and mental crisis, at least put it on silent, otherwise it will interfere with the sound system, particularly if it -- if it rings.

Sheila, is there any other housekeeping I -- okay. And again, I -- maybe I'll just say one other thing. I want to welcome you all to this facility. The council has been -- the council is headquartered in New York. We've had this building in Washington now for just over 18 months, for about a year and a half.

And in case you didn't notice, it has the -- it got a rating of LEED's gold. The LEED System in the United States is a rating system -- independent -- that evaluates buildings for what they are made of and how they operate and so forth in terms of environmental sensitivity. And the fact that we got a gold rating puts this in a tiny percentage of 1 percent of all the buildings in the United States, and what it does is represents our commitment, as an organization, to this set of issues.

And I really do hope those of you who have traveled here get a chance to walk around the building. It's quite an extraordinary building and it's an interesting building. It's both historical and modern. And again, we are -- we are proud of it and all that we can do here.

What I'm going to do now is take 15 or 20 minutes -- and I promise not longer; even though we're in Washington, I promise not to filibuster -- to talk a little bit about some foreign policy issues. Then as I understand it, Funabashi-san and I are going to have something of a conversation and then we're going to open it up.

I'm going to focus, as you might expect, on American foreign policy, in part because the two panels that come after will focus so deeply on Japan and U.S.-Japanese relations at the -- at the mid-century mark. I will, though, say a few things about that relationship myself, and also say a few things about the United States and Japan individually. But again, I won't go on for long, as you will see.

Let me turn first to the -- to economic issues. And I do so with some trepidation, as we have people like Sebastian Mallaby and others in the room who understand these issues far better than I do. But let me just sort of say that is the preoccupation, not just in this city, but any other city you might find yourself visiting on this trip in this country.

And the reasons that it is the preoccupation in this country are not hard to explain. We have extremely sluggish growth, down in the 1-to-2-percent range. And while there's some debate amongst economists, as there always is, I would say the prevailing view, not quite the consensus, but I would say the dominate view of most of the economists and financial people I interact with is they expect that something -- that growth on this order is likely to persist for some time, that sluggish growth is likely to become more the rule than the exception for some time to come in the United States.

With this is also persistent unemployment. Unemployment is hovering around the 10 percent range in terms of official measures. Unofficial measures of unemployment are at least 50 percent higher than that. And again, most of the economists and financial people I talk to expect that unemployment at a fairly high level -- and this is to say the least, a fairly high level -- is likely to persist for some time.

And then to add to this set of challenges or problems is an American deficit just north of, what, $1.3 trillion or so each year, which is adding to the debt that the United States has amassed in particular over the last decade or so.

So these problems of sluggish growth, persistent unemployment and mounting debt are for the foreseeable future, to use the phrase that increasingly is used in Washington and New York these days, has become something of the new normal.

And the real question, I would say, both as an American citizen but also who are observing the United States, to be blunt, is whether American politics are up to the challenge of dealing with these issues. And I would simply say that is the single largest question facing my country. And it's about, again, whether our elected representatives are willing and able to tackle these problems.

And most of the people I speak to -- speak to would suggest that the solutions are not so difficult to conceive of. Again, there's disagreement, but reasonable men and women can sit down and come up with potential solutions. The problem is gaining political support for them and implementing them. And that's where the odds get very long indeed.

So I really do think there's a fundamental set of political challenges facing this country. We'll know more about them in the aftermath of December 1, when the deficit commission reports early next year when the new Congress takes its seat, in the aftermath of the elections that are coming up a month from now. So we're going to have some very interesting, if you will, market tests of American politics.

I would simply say the stakes are enormous, and the stakes are difficult to exaggerate, given the significance of the U.S. economy, still somewhere, what, between a fifth and a quarter of the world's GDP, but also because the consequences of what I've just mentioned -- mounting debt, sluggish growth, persistent unemployment -- will not be limited to the economic realm. But it's inevitable that these phenomena, if they are allowed to go on, will have strategic consequences. And they will affect the ability of the United States to operate in the world. They will affect the level of resources available for the United States. They will affect American vulnerabilities to events in the world.

So again, it's -- I find it hard to exaggerate the stakes.

For the most part, though, foreign policy is getting less attention in this country at a time the economics are getting such focus. The one area of partial exception might be the greater Middle East. And by that I mean if one were to look at Afghanistan, Pakistan, if one were to look at Iraq, if one were to look at Iran, the Israeli-Palestinian negotiations, that seems to be the one realm of foreign policy that is still receiving the lion's share of the attention. It's not surprising; it's the part of the world where the problems are the most acute. There's nothing new in that. It has been so for decades. It may continue to be so for decades. And it's a part of the world where many of the challenges of globalization are most acute -- the spread of nuclear materials, particularly in the case, say, of Iran, the terrorism threat and so forth. But the greater Middle East is the part of the world that is getting the bulk of the foreign policy attention.

In Asia, I would say the one set of issues that's getting the most attention from an American point of view, particularly from a popular point of view as opposed to elite, is China, and particularly in the economic realm. And again, the fact that it's economic related should not come as a surprise, given the intensity of concern in this country about our economic predicament.

The most recent development has been in the currency realm, increasing interest in the Congress about alleged Chinese manipulation of its currency, and people are beginning to look at what sort of remedies or penalties the United States could introduce. From where I sit, in the "for what it's worth" category, I think it's true that the Chinese are artificially maintaining the level of its currency.

That said, I could question two things. If China were to do what many of the critics in this country want it to do, I would doubt that the consequences for the American economy or for trade would be nearly as great as they would suggest. I think they dramatically exaggerate the consequences of adjustment to the level of the Chinese currency. They exaggerate the consequences for the United States.

And secondly, I also have questions about the tactics of going about things this way, particularly given the full dimensions of the U.S.-China -- not just economic relationship, but the full dimensions of the U.S.-Chinese relationship across the board. So -- and I think it's part of actually what's emerging. If you look at today's newspapers, there're all sorts of stories about the growing concern in the world over currency relationships.

We've actually gotten through the last two years in fairly good shape in terms of there being less of a protectionist surge than many would have expected after the financial crisis and the slowing of growth and all the like. And the question is whether our luck is beginning to run out and whether the next great challenge to global management is -- could well be in the realm of currencies. It's a(n) issue of real concern here to us intellectually. We've got, again, a trade task force that we've just started up, and people like Ted Alt (ph) and Sebastian Mallaby and others are working on this.

But if the question is how we manage these issues so it doesn't become a growing -- not simply a currency problem but spill over into being, then, a -- an economic problem and a strategic problem I think has risen to the top of the international agenda.

It's ironic. I was thinking about it this morning, that the -- a lot of the criticism of China, which, again, I think is somewhat exaggerated here, is reminiscent of where the United States and Japan were several decades ago. And in that sense, some of the American political and congressional reaction to China today is, again, quite reminiscent of where the United States and Japan were several decades back. And I'm not quite sure what to make of that, but I put it out there.

As for the United States-Japan relationship -- and Japan, I would say, is getting some focus on the part of elites in and out of government, and it -- but basically -- but not much more. It's not a -- not -- neither a good thing nor a bad thing; it's simply a thing. It's simply a -- in that sense, it's typical of a lot of American foreign policy now, which is not getting a lot of attention.

What I would say about the relationship, though, is I find it somewhat dismaying that -- how much of this relationship in the last, what, 18 months has been devoted to what I would call parochial questions, and particularly, there are all sorts of issues involved with American troop presence in Okinawa. Given the full range of regional and global challenges before our two countries, the idea that so much time and effort would be devoted to the disposition of U.S. forces to questions of host nation support and how many forces are on how many streets in Okinawa I find stunningly parochial and a -- and essentially in the interest of neither country.

And my purpose this morning is not to attribute blame for this, or responsibility. I expect you'll talk about that later in the day. But I would simply say it is in neither country's interest that this issue be allowed to absorb as much attention from policymakers as it has. There are simply too many important things that affect the futures of the United States and Japan for policymakers to spend significant time on this issue. So one way or another, it ought to be dealt with, resolved or put aside. It cannot be allowed to dominate the bilateral relationship to the extent it has.

There's any number of regional questions. Obviously, North Korea, which is in the midst of a potentially unstable succession. There is the question of China's rise and greater assertiveness and how the United States and Japan need to react to it. There's also the question of regional architecture. Asia has more institutions and arrangements than I can count, but most of these are in the economic realm, and all -- and there's also shifting memberships. Asia still, to -- from my point of view, has not settled on or come on -- come upon a regional architecture that is inclusive and deals with political-military challenges.

So there's any number of things that the United States and Japan ought to be focusing on -- far more, again, than the number of troops and where they happen to sit in Okinawa. And then second of all, the United States and Japan need to be focusing on global arrangements. In this year of history, the dominant challenges to the international system and international order do not come from any single country. That's one of the distinctions between the 21st century and the 20th century. The principal challenges to international order come from global challenges: from the spread of nuclear materials, from terrorism, from breakdowns in an -- in an open world financial and economic system, from disease, from drugs, from climate change, from energy shortages and so forth.

These are the defining issues of this era. And these are the issues, along with regional issues, that ought to absorb the bulk of the attention of U.S. and Japanese policymakers and ought to fill up the bulk of our bilateral agenda. And again, what's so concerning to me, again, is that it is not. But another way to think about it, and I think I talked about this the last time I was in Japan, the real challenge is to modernize what has been a U.S.-Japanese alliance and transforming it into a U.S.-Japanese partnership.

Alliances are often defined by what they are against, and they have specific definitions. And while that continues to be important, again the challenge for the United States-Japanese relationship is to transform it into a relationship that is for things, where the United States and Japan increasingly are able to cooperate, not on -- not simply on narrow issues of self-defense, but on broader issues of regional and global order.

I also think there're questions in this for Japan itself, whether Japan is willing and able to be a global partner of the United States. I was quite critical of my own country in looking at its economic challenges, but everything I said could pretty much also be said about Japan. Japan has now gone through several decades of sluggishness, to be generous, and the real question is whether Japan can and will put into place the policies that will allow it to have economic revival. If not, it will obviously have consequences for Japan's long-term capacity to be a regional and global power.

Second of all, again, different from the United States in the details but not fundamentally different, is whether Japan will be able to overcome its political dysfunctionality. Japan is clearly in a situation where it's had instability at the top level. There're real questions about developments within the parties as well as between them. So again, will Japan be able to -- will Japan's politics, if you will, be able to overcome what has been, I believe, a pattern of dysfunctionality?

And then related to all of us was, will Japan be able to -- Japanese leaders, working with the society, be able to create a national consensus that would allow Japan to play a major regional and global role? Japan still is constrained by many of the -- by the consequences, or residue, if you will, of history. And the question is, will the leadership and will the intellectuals, including people in this room, be able to develop a consensus where Japan will be willing as well as able to carry out a sustained global and international role commensurate with its potential?

And I would simply say that Japan has not been able to, or has not been willing to. Japan in that sense has been something of an underperformer, regionally and globally. And in many ways, you know, what -- beyond what I said before, what ails the U.S.-Japan relationship, in addition to this strategic parochialism that both sides are guilty of, I believe, is this question about Japan's readiness to play a larger role. And that will very much influence how the United States sees Japan, whether it sees it as a true global partner willing and able to work with us in dealing with the full roster of challenges in the world or not.

So this is a matter, yes, for strategic consultations. It's not a matter for negotiation so much as consultations. But I also think it's a real matter for the Japanese themselves of what, essentially, they are prepared to bring to this relationship. So, long before the diplomats, if you will, get in the room to discuss what we can do together, I think perhaps in some ways the more interesting conversation is amongst the Japanese themselves about what it is they are willing to do about their economy and about their politics and about their national security.

I think, depending upon how this turns out, the U.S.-Japanese relationship moving forward after half a century can take on a new vitality and a new relevance and we can find all sorts of new things to partner together on to the mutual benefit of both countries. Or if we can't, there won't be a crisis in the relationship, but the real danger is there will be a withering of the relationship; that essentially the United States, to the extent we can, will continue to go off and do things regionally and globally but with other sets of partners.

And I think both countries will be the poorer for it. We will simply be less effective and less successful if the United States does not have an intimate relationship with Japan over the next 50 years. But it's going to have to be a different sort of relationship over the next 50 years. It can't simply be the continuation of a traditional alliance. What we have to figure out is how we transform the U.S.-Japan relationship into a true partnership.

With that, let me again welcome everybody. Let me thank you for your interest in these subjects. And let me invite my good friend, Yoichi, to join me up here.

YOICHI FUNABASHI: Good morning. Well, thank you very much for coming to this seminar. First, I'd like to express my deep gratitude for the Council Foreign Relations, particularly its president, Richard Haass. He is dean of the foreign policy establishment in the United States. And he has inspired many public intellectuals, foreign policy experts throughout the world. Richard and I initiated this Council on Foreign Relations-Asahi Shimbun public seminar on the U.S.-Japan relations three years ago. This is the third time. Last year, he said -- he and his team came to Japan last October. And I remember very clearly what he warned to us, to a new DPJ government: Don't raise this F word. Don't talk about this F word, Futenma.

HAASS: You'd better clarify that. (Laughter.)

FUNABASHI: Unfortunately, he was completely right, looking back over last year or so. The DPJ government should not let the Futenma issue to stand in the way of reaching out, exploiting the much bigger potentials of forging -- forming a new partnership that he described.

I also like to express my deep gratitude for Dr. Sheila Smith. She has been very much heavily involved in helping us launching this whole project. Without her intellectual input and a push for this whole seminar, it would not have materialized. Also, I'm very much grateful for the panelists of both sides. Particularly, I would like to express my gratitude for the two Japanese panelists, who come all the way -- have come all the way from Tokyo, Professor Soeya of Keio University and Chairman Mikitani of Rakuten. He's joining us soon. So I -- once again, I really appreciate you coming.

Listening to Richard Haass's first initial remarks, I have -- certainly, I would like to open the floor to you soon, but let me first ask a couple of questions to you, Richard. I through and through am a reporter, so I just would like to -- (laughs) -- ask questions first.

As you said, perhaps this currency issue is, particularly renminbi issue, is not only just currency problems; it's now, I think, emerging as a more strategic, new issue. And we have been hearing this G-2 thing for some time. But now we have been told that Timothy Geithner is now -- has made up his mind, or seems to make up his mind, that quiet way of convincing the Chinese monetary authorities to appreciate renminbi incrementally. That way simply does not work. Instead, he seems to pursue a sort of a mounting of common pressure on a multilateral basis to give us much clearer message, a signal, to Beijing.

Do you think that this is -- can be interpreted as a beginning of the end of this emerging G-2, or G-2 perception?

HAASS: Well, let me give you two sets of answers: one is about the tactics of dealing with China, and the other is about the G-2 idea. First of all, I think it's wrong to say that the approach on the currency hasn't worked. The currency has appreciated, what, approximately 20 percent give or take over the last several years? And I think it probably would've appreciated more had it not been for the Euro crisis. And as one pundit put it, it'll probably appreciate several months after the United States and others stop shouting at the Chinese to let their currency rise. And I think in the long-run it's very much in China's interest to allow the currency to appreciate, to have domestic demand; they themselves can play a larger role in China's economic future.

So I'm not sure, if you will, the quiet approach hasn't worked. Second of all, I think there's -- also, what we -- (laughs) -- what we've learned is sometimes, possibly, possibly, the backdrop of this pressure could help, but I'm not sure singling out China helps. I would think you'd have far better chances of seeing progress if we're a global approach. It would give the Chinese more political space, and indeed, it's necessary. The problem is not simply a single currency. That's part of the problem, but there are other currencies, and so we've got, I think, to, if you will, universalize, and it's one of the -- it's one of the gaps in the international system.

It's nothing new. Ever since the contemporary international economic order was established in the aftermath of World War II, there have been structural challenges of chronic surplus countries of what -- a lack of international mechanisms to bring about currency revalue and devaluations in a -- in an orderly way. I remember as a graduate student at Oxford writing papers about this, so there's not a lot that's new under the sun.

More broadly, I think the whole G-2 idea is exaggerated. In a -- in a -- in a global world, in a world that -- which -- if I'm right, global challengers are the defining challenges, I don't think a G-2 is a -- is a sufficient mechanism. Yes, the U.S.-Chinese bilateral relationship is terribly important, but the idea that somehow there can be a G-2 as a directoire, as the de Gaulle would've put it, for the contemporary world I think is simply strategically too narrow. I actually do think we need something broader.

Well, I'll tell you one other thing. If I'm wrong in all that and we do need a G-2, we're in trouble, because the gap between the United States and China is enormous on many issues. And I don't believe Chinese foreign policy has yet reached a point where -- I don't think it's close to reaching a point where China is prepared to play -- to take on and assume a large, international role where it would place a priority on doing things for the international order rather than a priority on doing things that help propose Chinese economic growth and maintain Chinese political stability. China still -- hasn't reached a point in its own emergence, or evolution, where it is prepared yet to become a pillar of the international order. So I think the whole concept of a G-2 is probably not only flawed, but also premature.

FUNABASHI: Thank you. A second question. We have been seeing this much more self-assertive China, some might call it a more aggressive China, in many fields, particularly in terms of their stance on maritime issues, where they -- not just South China Sea; Yellow Sea, now Each China Sea.

HAASS: Sure.

FUNABASHI: And some, perhaps, see the first sign of China's diplomacy, which has been -- perform pretty well in the past 30 years. Now looks more in disarray. If it's a -- to -- some -- too early. It's a bit -- it's not well orchestrated, at best. How do you explain this? Do you think that's -- it has something to do with more domestic politics, or -- rather than their long-term strategic reorientation, or -- I'm very much interested in your view.

HAASS: It's a big question. I ask the same question to myself in my travels in the region. I've just come back from India. I'm going to Southeast Asia in a week. I've had a lot of meetings with officials and leaders from Asia in the last couple of weeks when they came to New York, to the U.N. And this has been a central question. So I think the question's out there more than the answer.

Let me put it this way. It would be surprising if there were not a domestic component of this. Every country's foreign policy, to some extent, is the result or consequence of a domestic -- of its domestic, economic, and political situation. So I would think that, yes, this is -- this is inevitably tied to politics. That said, it's hard to say with confidence much more than that. Does this have something to do -- in the run-up to 2012 and the next major change in Chinese leadership? Possibly.

Another analysis -- and it's one that I'm thinking a lot about -- and it's worrisome -- would be is this a signal or a harbinger of things to come in the sense that nationalism will play a slightly larger role in -- as an explanation and as a motivation of Chinese behavior? The leadership in China has largely drawn political support from its economic performance, and the question -- yeah, and I -- and I simply say it's inconceivable that double digit growth will -- is a permanent feature. It will tail off for lots of reasons.

And to what extent, then, will leaders in China look to nationalist type calls and satisfaction as a way of maintaining popular support? That, to me, is quite worrisome, and I would argue, you know, and hope that that would not be the case. But it's possible that one is seeing some signs of nationalism. It's also inevitable simply because of China's success. China has been a remarkable success now for several decades. It really is one of the great stories of modern times in terms of poverty reduction, modernization, and the rest. And inevitably, that kind of success will lead t some of the behaviors you're talking about, at a minimum, assertiveness, at times heavy-handed action.

So I think it's part of a much larger debate, though, for China. And I actually think it's beginning to go on, based upon my last few visits there, is this debate about what is China's relationship with the region and the world? What is Chinese national security strategy? How will China define success for itself over the next 10 or 20 years? What does China want? What does it need? What role does it want to play regionally and globally? How does it want to shape the international order? How does it want to integrate with the existing international order? How much does it want to challenge the international order? I think those are first-order questions for China, and it's -- these are first-order questions for any emerging power. And I simply don't think we know the answers to those. I don't think the Chinese know the answers to those, and I would expect there'll be some fairly rich debates. And what makes it more complicated is the nature of Chinese decision making.

But I think we're in the early days of that debate, because so much of Chinese thinking and politics and energy for the last several decades have been focused on this question of domestic modernization and economic growth, and now that China -- not that it's completed that process, but now that it's achieved a certain level of success, I believe we're probably now in the early days of -- of growing -- and what will be an intensifying Chinese debate about what China does with its greater economic power.

FUNABASHI: Thank you.

HAASS: Can I say one other thing? That is a challenge for the United States and Japan and others.

I used the word challenge rather than threat. I believe that one of the things the United States and China -- and Japan have to think about is how they impart -- you know, work with China and manage this process regionally and globally. It's in everyone's interests, including China's, I would argue, that China gets integrated with the international order, either the existing one or one that is collectively modified. I don't think it's reasonable to simply tell China you've got to integrate with the -- with the -- an order we define on our terms. We have to work with them on defining a regional and global order that takes into account their legitimate interests and that we're prepared to live with.

Well, that is a challenge, among others, for the United States and Japan. We want to discourage China from doing these things unilaterally, but we also don't want China to see international -- the regional and global order as a -- as a threat or incompatible with Chinese interests. And this is classic diplomacy. This is what diplomacy is about. So I think it's not -- there's nothing inevitable in any of this that this fails, but this is a challenge for Chinese political management and diplomacy, same for the United States, same for Japan and other countries.

FUNABASHI: Thank you. My last question. All politics are local.

HAASS: That was said by a famous Japanese politician, if I remember correctly. (Laughter.)

FUNABASHI: I think everywhere that's the case. But all international politics looks increasingly local. I'm wondering how you see the situation in the United States, you know, whether it's a tea party challenge, or, you know, some now talking about that, you know, launching a third-party political party realignment or political realignment, you know, and its implication for the United States' standing in the world and U.S. foreign policy itself.

HAASS: Well, again, a lot of us are asking those same questions and struggling with them. I'd come back to something I mentioned before, which the -- is the centrality of the economic issues and tremendous unhappiness, understandably, throughout this country with our economic predicament with the lack of growth, declining standards of living. What is it, one out of every three homeowners now faces a situation where the value of their home is less than the cost of the mortgage? So the economic challenges are enormous, and as you would expect, any time you have widespread economic challenges of this scale, you have tremendous frustration, fear, unhappiness.

On top of that, I do think over the last -- because of policy decisions made over the last two years, there's a historic debate that's going on here about the role of government vis-a-vis the private sector, or to put it another way, what is the right balance, or where should the pendulum be in terms of economic management in this country? And if one looks at what a lot of people in the so-called tea party are saying, it -- a lot of it is about the size and role of government. And this is in part a reaction to the stimulus, and part a reaction to the bailouts, and part a reaction to health-care reform.

But over the last two years, the role of government in this society and this economy has increased. Now, we could argue whether it's -- that was wise or not, necessary or not, how lasting it's going to be. But you're seeing a fundamental debate in this country about the size and role of governments, and it's taking place, again, against the backdrop of this tremendous economic difficulty. So this is leading to protest movements, and there are real questions about how much the traditional political apparatus will be able to address these issues. I have profound doubts. So it's not surprising, then, that it leads to challenge, and that for -- whether it's the tea party movement, or it's other potential third-party movements, I think you're going to see these coming up.

And then what American history suggests -- several possibilities. If they look -- I mean, one possibility, which is the exception, is they could endure, and they could become permanent as a third party or whatever. One of two things, though, tends to happen more often. Either they go away, or they're partially absorbed. Their agenda is in part absorbed, or co-opted, to use another word, by one of the major parties. And I don't think we know the answers to those questions, so I could imagine all three scenarios. I can imagine some of these trends burn out. I can imagine that one or the other major political parties absorbs or co-opts some of the ideas and some of the energy of these -- of these new challenges.

Or, if they fail to, and these problems don't go away, I can imagine that we could ultimately lead to something of a realignment where you could have a -- an enduring third-party phenomena in American politics. I mean, the current party system -- two parties, Republican, Democrat, and all that -- it's not in the Constitution. It's a phenomenon of history, if you will. There's nothing in it that's immutable. History can continue to happen. But I don't think we know the answers to that, and a lot will depend upon, I would think, again, the context. How bad is things, quite honestly, how bad are things, and second of all, how the Democrats and how the Republicans in particular react to what happens a month from now.

We're clearly going to have a situation -- Republicans are going to gain seats in both the Senate and the House. Exactly how many and -- nobody knows. We're going to have very divided government. The relationship between Democrats and Republicans, again, regardless of who has the control of either chamber of our Congress, is going to be far more evenly poised, and you're going -- each party, then, is going to have to ask itself, what are the lessons to be learned from what just happened? And I don't know. I don't -- not only do I not know exactly what's going to happen, I certainly don't know what lessons each is going to learn. And depending upon that, then I think that will have real consequences for how -- for what happens. Again, do they try to co-opt, absorb the energies of the tea party and others? Do they move farther to the left, or farther to the right? Does that create space for third parties and the rest?

I actually think, though, the next six months are going to be extraordinarily interesting and important because of the mid-term elections, the Deficit Commission report, and how the two parties react to this combination of the mid-terms and the Deficit Commission. So I think we're going to know a lot more about American politics six months from now.

FUNABASHI: Thank you very much. Thank you for your illuminating so many points. Now floor is open.

QUESTIONER: I won't try to face my back to everyone in the room, but in the interests of making this a provocative session, I want to take issue with your thesis --

HAASS: Good.

QUESTIONER: -- that suggests that maybe it's 10 months off in its timing, that this is -- I'm roughly saying that this is the year of bad Chinese behavior, and so therefore, this is not the year to be talking about transformation of the alliance. It's a partnership, but sort of suggests a focus away from the security and the stuff we've been doing before, to, rather, this should be the time for revitalization of the alliance. I think one can make a case that the alliance is -- some aspects -- challenged, or even pitiful, when the alliance gets defined by the minor issues -- Futenma, host nation support -- instead of meeting with regional security threats. That's, you know, something that needs to be fixed.

But at a time when China has almost systematically taken on every major power region in Asia, whether you travel to India, Southeast Asia, Australia, not to mention Japan and Korea, it's a very different view of China than, you know, it was January 1st of this year. So I think, you know, I would transform the pitch a bit to -- partnership has come to suggest things like climate change and energy cooperation, peacekeeping and humanitarian affairs, and all that stuff. And it's all important, but at a time when traditional security issues may be back, I think we really need to focus on what I think is the core issue in U.S.-Japan relations, which is security.

HAASS: That's interesting. I don't disagree with you, and maybe it's a question of nomenclature. And I specifically said that managing, you know, and dealing with China's rise or emergence, I believe, is exactly the sort of thing the United States and Japan ought to be talking about. So, again, whether that's partnership or alliance, again, is to me more of a nomenclature thing. I wouldn't think it's predominantly military at this point. I think it's still predominantly diplomatic. But I'm not fighting your basic point, that it's in everyone's interests that China -- that China's rise be done in a way that I believe is consistent within the continuing prosperity and stability of Asia.

Let me say one other thing about it. Asia's a remarkable story. History would've suggested that you couldn't have this much dynamism in a place and not have it spill over to some extent. And I actually think that Asia over, what, the last three decades, give or take four decades, is a -- it's a remarkable and slightly a historical phenomena. And the challenge is to keep it that way. And that -- again, intimate U.S.-Japanese cooperation, consultation. I'd just be a little bit careful of the idea of already making it sound like a -- an alliance against China, and that's my concern. I don't think that's the right way to categorize it, or if it ever comes to that, then I think it's a failure of U.S., Japanese, and Chinese diplomacy. And that -- you know, that's one way the 21st century could pan out. I don't think it's inevitable. I actually don't think it's likely. It's possible, but I don't think -- it's certainly not inevitable, and I don't think it's likely.

That's why I'm a little bit -- I wouldn't go quite as far as you in terms of saying that it ought to be an alliance approach, but I do think it's one of the things our two countries ought to talk seriously about bilaterally, in part so we can concert and coordinate our approaches vis-a-vis China and vis-a-vis, among other things, defining an Asian architecture.

FUNABASHI: Are you arguing that it is time now for us to really pursue -- to develop that alliance against China, given that -- this emerging new threat?

QUESTIONER: The answer is in a sense, yes, but certainly not declaring it so. Richard could not be more right that the worst possible thing we could do is, you know, stand up one day and announce an alliance against China and cast the dice, but I think we have to be very careful of thinking that, you know, if we merely have so rhetorical statements, we're going to push back China and they're going to behave better. I've been, you know, observing comments, like China was rocked back on its heels by what Secretary Clinton said at Hanoi. But if you look at how they responded in New York for the ASEAN Summit, they sort of won. So, I mean, the notion that if you just get together and we all make statements and say China has to behave better, China will behave better, I don't think works.

So I think it's a series of things. It's the United States' defense budget, our forward positioning, and certainly recovering our economy, right --

HAASS: Sure.

QUESTIONER: -- as the key to defense, but it's also showing that the alliances are vibrant, that we're doing things, that it's not a question of self-destructing of our helicopter landing field, or the amount of host nation support. It's really about dealing with the security issues. It's Japanese defense spending, modernization. It's Japan's relations with its neighbors, how it's getting along with Korea, how it's getting along with India, Australia. I think it's these bigger issues, not as a declared anti-China alliance, but with a focus on security. And I tend to think much more about the word deterrence these days, less about shaping.

FUNABASHI: Thank you.

QUESTIONER: Thanks very much. Back here in the peanut gallery. Cast our mind back 10 years ago. I remember something called the Armitage Report that -- you know, when Funabashi-san -- you and I wrote about it. We wrote about it in terms of soft, perhaps, containment by refurbishing American alliances around the entire perimeter of China, and the discussion then was in many ways similar to what the gentleman just talked about now. So I've just -- remind us of all that. This is -- we've been, in a sense, talking about how to deal with a rising China forever, and probably will for the rest of my lifetime.

My question. You mentioned the name South Korea. My question is, Obama has several times this year -- Secretary Clinton even -- has been fairly careful to talk about the Japan alliance as a linchpin, not the linchpin, and it isn't just rhetoric. There's been a broadening of strategic thinking by the leadership here in Washington about who is, in a sense, reliable, who can be depended on to be really tough and to make really tough decisions. So I'm wondering if we perhaps need to discuss what he consequences are of this -- of this continued sense here in the leadership level that Japan, for unfortunate reasons that we're all aware of, is not reliable in terms of taking really firm decisions, and that we have to broaden and include now the Koreans especially in some of the types of conversations that used to be really just U.S.-Japan.

Thank you.

HAASS: Let me say two things in response. One about China, just to -- at the risk of banging that nail one too many times in the conversation. Policy towards China is always, I think, kind of what I would call -- the goal is integration, and the question is how you bring it about. And there's always been two sides to it. There's been an incentive side, if you will. We want to entice China in certain ways, incentivize them, and then there's been a hedging side, and that -- a bit of push-back, and you want the Chinese to essentially understand that certain types of behaviors would be resisted, other types of behaviors would be rewarded.

I don't see a big change in that. I think what we're seeing is -- again, is a slightly more assertive China, and we may have to adjust the mix to some extent of how we bring about -- how we manage, if you will, or work with China's rise. But I think there -- there's always been a -- the dimension of it's got to be done from a position of strength, which has something to do with what the United States can do, our alliance with Japan, our relations with others. But also, there's got to be a rationale for China also to enter -- I don't think we -- I think we have to be very careful about feeding the nationalism in China in the sense that the regional and international system is erected to prevent China from being a full participant. I think that has the risk of being self-fulfilling.

And, you know, like everything else in life, it's a question of balance and getting the details right, but -- so I agree with you. There's nothing fundamentally new about the -- these twin dimensions have always been there. I think what's different is China's changed because of what's happened over the last 10 years, and obviously, we and the Japanese have changed. So, you know, the details of the policy, obviously, have to be recalibrated, but I think the basic idea of a mix -- and I think it would be wrong to go -- to come out on one side or the other at this point. I think we've got to keep, if you will, the duality of the policy.

The second question about Japan -- I've never gotten into the business of ranking of our friends or allies. It's not a contest. I mean, in some cases, Australia is one of the -- arguably the most important in certain areas, or Japan, or Korea, or anyone else. My only message about Japan is however important Japan is, I think it could more important. And I think what holds it back is the Japanese economy. Talked about the dysfunctionality of Japanese politics, the constraint that -- the Japanese perception of its own role, what essentially is Japanese politics, the role it will allow Japan to play regionally and globally.

I remember years ago writing an -- a book that the goal ought to be to have Japan become a more normal country, and as a result, it could then become a fuller and more complete partner for the United States, and that's a question of Japanese capacities, which, again, goes back to the military and the economy. It's a -- it's a question of Japanese will, which is a function of its politics. And I still think that the -- Japan is an underachiever, if you will, regionally and globally. So coming back to the gentleman's point, that will have a -- if that continues to be the case, that will have an effect on our relationship.

You know, several of us have worked at the White House in previous administrations, and one of the ways you measure -- it's shallow, but -- maybe shallow -- or to go on being shallow here, which is a crisis happens, and the president often turns to the national security advisor, national security staff, and says, well, who should I call? What are the -- what are my -- counterpart -- who are my counterparts around the world that I would call in order to begin to put together a response to this latest challenge? And I would simply say in many cases, the Japanese prime minister is not on that short list of calls. And the question you would have to ask yourself would be what would it take for the Japanese prime minister to be on that short list of calls, if one wanted that to be the case?

And that -- I realize it's shallow, but that's -- and, again, that comes back to questions of capacities and willingness to have them used in -- or it's -- let me say one other thing. I apologize for going on too -- so long. When I was working for -- think it was Bush 41, and I remember a leading Japanese official coming in, a senior official saying we don't want to simply practice checkbook diplomacy. We don't simply want to underwrite American actions in the Middle East. We want to be a full participant. And I say great. And then the real question is, is Japan in a position to follow up on that, to really be a full participant? And I think the answer is not yet, again, a function less of capacity than politics.

So there -- a lot of this, then -- it's still, I think, for Japan to define a role for itself in the region and the world, and then to build domestic support for it.

FUNABASHI: Thank you.

QUESTIONER: My question is directed to Funabashi-san. Could you do concisely a little bit what Richard did about the U.S.? In Japan now, how is Japan's world view being shaped by its domestic economy, by its changing domestic politics, by the changing external environment? What are the forces that are shaping the way Japan looks at the world and the U.S.?

FUNABASHI: Thank you for raising a very, very critical question. I think that people focus on domestic politics, particular -- domestic economy, I should say, much more than foreign policy. Foreign policy actually was not even a blip on the radar in that DPJ chairmanship election in early last month. Although people have been very much fed up with that, how clumsily that DPJ government has performed in foreign policy making -- yet I think at the end of the day I think it has been the economy, growth, jobs, which matters most. And I think that's the people's priority number one concern.

It certainly, I think, has contributed to lowering the expectation of Japan's international role, which people -- traditionally has been more hope, and has, I think, wished to see Japan playing much larger role. But having said that, I think that the most recent Senkaku shock could change the whole equation. I think it perhaps can be a rude awakening to the Japanese public, how vulnerable Japan still is and will remain to be so if Japan has allowed that -- its economy to slip away, to continue to slip away, while China is now about to take over Japan as the number two economy in the world. And we'd certainly give China, a Chinese -- a lot of confidence, even a hubris to the point -- with that -- China feels entitled and tempted to use the economy card to put pressure on Japan to get diplomatic concessions from Japan.

So people is really now nervous, and it has not translated into policy agenda yet, but I think that's a DPJ government -- if they will keep mishandling their foreign policy issues, I think this could disenchant the public, I think, greatly. So I think that foreign policy will be -- come to be much more urgent, critical issues in the coming months.

HAASS: Think we have time -- I got the eye from Sheila, so I think we have time for one more question, Mr. Moderator.

FUNABASHI: Yes, please.

QUESTIONER: Both of you say jobs and the economy are the most important issues. What are your thoughts in each country about how we go about creating jobs? I mean, it's one thing to say it's an issue, and then hope miraculously something happens. I mean, people have to have plans for how you do it, and there may need to be some real restructuring to make that happen. So I'd be interested in your ideas from both of you.

HAASS: It's slightly beyond the purview of this meeting, but I would simply say a couple things on our side, and then I would very quickly get out of the way to the real economists in this room. But historically, the generator of jobs in this country has been the private sector, not the government. The government's there to create the context for the private sector to flourish. So what if -- I -- what I would then argue is to think very hard about creating conditions in which, among other things, American corporations would start investing the capital that they've accumulated, and I think that means certain provisions on taxes, so they would start building plants at home rather than overseas, would be one thing.

I would think also we would want to have a incomparably more robust trade policy. I think we are denying ourselves one of the principle generators of jobs in this country by not having concluded the three free trade agreements that have been languishing in the Congress. I think we ought to make completing a Doha Round agreement one of the priorities for American foreign policy and for the world over the -- over the next year. I would think also that we would want to begin a process of gradual reduction in our deficit and in our debt in order to give some confidence to markets, so, among other things, we're not forced at some point to raise interest rates, which could make a bad situation -- orders of magnitude worse. I think we've got to look over the long-run at our K through 12 schooling and so forth, because we have many situations where jobs are available, but we don't have workers, in some cases, to fill them.

This is -- I mean, there's no single -- or solution to this, and, you know, even the word solution's a big word. We need to have all sorts of provisions for lifelong learning, because the kind of education you get when you're young is not going to be enough to see you through over the next 50 years. So there's, you know -- there's short, medium, and long-term things that need to be done. It's conceivable you could have a small bit of a -- you know, some emphasis on infrastructure development in the -- in the short-run as part of it. But I think any area of spending has got to be packaged or enveloped into something much larger over medium and long-term deficit reduction.

But I would simply say I would hope in this entire debate the growth agenda doesn't get lost, and that's where I think things like trade limits to certain types of regulation limits, to certain forms of corporate and individual taxation -- those -- that we should not lose sight of a growth agenda here, because, again, that's where the jobs are going to come from.

FUNABASHI: Yeah, I -- perhaps I echo what Richard said. That's also -- very much applied to Japan's case. First, I think the Japanese private sector has not been encouraged. I think that the -- it's very much -- increasingly a business unfriendly atmosphere to the private sector in Japan. Overregulation, I think, is a major, I think, impediment to releasing and unleashing that potential, particularly in the health sector, health industry sector, education sector, service sector. It has been heavily regulated, and neither LDP nor DPJ has been genuinely enthusiastic with reporting this, particularly in the wake of that follow up with Koizumi and Koizumi politics. Anti-Koizumi slogans and politics have started to prevail.

So that's, I think, major reasons. Another reason that -- perhaps that same thing, but Japan has become -- to be extremely unfriendly to the foreign investment into Japan. I think that has -- Japan has had to pay high price for that. Certainly, you know, on top of that, more fundamentally, demographics is really now putting really constraints on Japan's growth prospect. FDA and EPA I think can change this to some extent, and I hope that DPJ government will really make a strenuous effort to -- for the EPA, FDA with South Korea. They have initially forged that FTA with India. That's a really right step, in my view. Hopefully, that they also will forge -- they will agree on TPP, a trans-Pacific partnership, and that -- extremely important, in my view.

So perhaps a testing ground for DPJ will be whether they will deliver their promise of lowering that -- the corporate income tax, which can promise in his campaign and also in party's platform -- if they will fail, I don't think that we'll have such a bright future on the growth prospect in Japan.

HAASS: Please, I just want to mention one thing listening to Yoichi, which is immigration reform in this country, to make it easier for people of special skills and education to enter this country and remain in this country, is a tremendously important dimension of, I think, a long-term growth strategy for this country, and it's an area -- we've done a lot of work here at the Council on Foreign Relations. And I just think that, again, it's -- it reinforces the argument. There's no one thing, but there is an entire panoply of thing that needs to be done, and immigration is one of the -- one of the components of any successful growth strategy, which will, among other things, create jobs in this country.

SHEILA SMITH: Thank you both very much. Thank you, Richard, and thank you, Yoichi, for getting us started in the conversation for today. We have been urged today -- an important warning -- not to be parochial, not to look too much into the -- into the weeds in terms of our domestic politics on both sides -- (inaudible). I'd like you to join me in thanking both of our guests this morning for getting us started. Thank you very much.

HAASS: Thank you. (Applause.)

SMITH: (Inaudible) -- speakers from the first panel to join me on the stage. In the meantime, if you haven't had a cup of coffee yet, there's coffee outside. We have about five minutes to get ourselves organized for the second.

FUNABASHI: Richard, once again, thank you very much.

HAASS: Thanks, my friend. That was good.







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