Are old wounds Asia’s fatal flaw?

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Asia’s march to greatness sometimes has an inevitable quality about it. The center of economic gravity is relentlessly shifting from West to East. China will overtake the U.S. as the world’s No.1 economy. India won’t be far behind. We’ve heard these types of predictions so many times that we’ve come to accept them as undeniable fact. Yes, Asia is rising, the West is struggling. But that doesn’t mean Asian nations won’t suffer their share of setbacks on their way up the world’s power rankings. Asian countries have already experienced their share of housing busts, financial crises, political upheavals and social unrest.

And then there’s what may prove to be the biggest threat to Asia’s future — the major nations of Asia don’t really like each other very much.

Asia’s leaders don’t acknowledge that fact very often. Usually, diplomatic powwows are lathered in professions of friendship and cooperation. A lot of that camaraderie is due to simple economic need. Asia’s leaders know full well that a big part of their nations’ future growth will come from within the region itself. Economically, the region is getting tied closer and closer together. According to the Asian Development Bank, intra-regional trade continues to rise and in 2009 reached more than 58% of total Asian trade. Complex supply networks have linked manufactures across borders, while the increasingly wealthy consumers in countries like China are ever-more important sources of customers for companies around the region. There’s persistent talk of “de-coupling” – the notion that intra-Asia trade and investment will become so substantial that Asia can drive its own growth irrespective of what might be happening in the U.S. and Europe. Asian leaders clearly want to encourage greater intra-Asia business. Japanese Prime Minister Naoto Kan sees an “Asian economic strategy” and crucial to Japan’s future; one of his predecessors, Yukio Hatoyama, even broached the idea of a single Asian currency, akin to Europe’s euro.

But the urge to merge has a limit. Lurking just beneath the surface in Asia is mutual distrust, fostered by both recent and historical events, which can potentially temper the economic cooperation necessary to Asia’s future.

In the realm of business itself, Asian countries see each other as economic competitors as much as economic opportunities. Many compete head to head in the same export industries (Japan and Korea), while the more advanced economies in the region (Japan, Korea, Taiwan) are facing new competition from up-and-coming emerging nations (China) that are rapidly advancing up the value chain.

Then there are a host of territorial disputes that flair up with regularity. India and China both lay claim to land now in India’s far east, while there are numerous disputed islands (and the fishing grounds and natural resources that come with them) spread across East Asia. Over the past two weeks, we’ve gotten a taste of how quickly these disagreements can heighten tensions between Asia’s major powers. China and Japan have been trading jabs ever since a Chinese fishing boat collided with two Japanese coast guard vessels in waters near islands claimed by both countries. An angered China suspended high-level diplomatic talks with Japan and hurled not-very-veiled threats at Tokyo. When Japan refused to free the fishing boat’s captain, Chinese Premier Wen Jiabao warned that “the Chinese side will take action, and the serious consequences will be borne by the Japanese side,” according to a statement on the website of China’s Foreign Ministry. (Japan eventually did just that, creating an uproar in Japan, with critics complaining the government had caved in to Chinese pressure.)

The growing power of China, and the often heavy-handed way Beijing uses it, is also becoming a source of rancor in the region. China’s rise has sparked a contest for influence in the region between Asia’s major powers. That’s especially the case between China and Japan, since the Chinese are usurping the alpha dog role traditionally played by Tokyo. China seems more than willing to employ its economic clout to get its way in political matters. Amid the China-Japan fishing boat spat, The Wall Street Journal reported that Chinese customs officials were imposing extra inspections on goods traded between the two countries, greatly slowing their progress. Since exports to China are a key growth driver of Japan’s weak economy, any threat to trade with China is potentially disastrous for the Japanese.

On top of all of these ongoing disputes and tensions are bitter feelings about past wrongs. China is still rankled by Japan’s destructive invasion during World War II, for which the Chinese believe Japan hasn’t sufficiently repented. Korea still burns over Japan’s brutal colonial rule (1910-1945), during which Tokyo forcibly used Korean women as sex slaves for Japanese soldiers. Some of the ill will has been festering for hundreds of years. Koreans talk about a 16th-century Japanese assault on Korea like it happened a year ago. The man credited with saving the peninsula, Admiral Yi, is honored by a statue in the heart of downtown Seoul. The long memories in Asia sometimes have short fuses. In 2005, anti-Japanese riots broke out throughout China in part because the Chinese believed a Japanese history textbook whitewashed over its WWII aggression.

There is already evidence of how such distrust is holding back economic ties. While Asian nations have been actively pursuing free-trade agreements (FTAs) with other countries in the region and around the world, none exist between East Asia’s three biggest and most important economies — China, Japan and Korea. And as economics continues to shift the power balance in the region, who knows what new conflicts might erupt? As a rising India seeks a greater political and economic role in the region, New Delhi could find itself in grappling with China for influence in Asia as well.

Which will win out – economic need or political distrust? Will Asia choose to set aside political differences to achieve a high degree of integration that brings great mutual economic benefits? Or will the old simmering tensions and new political contests degenerate into conflicts that scuttle potential economic gain? The answers might just shape Asia’s future.