Not only are Japan, Taiwan, and South Korea becomingmore dependent on China, but China also is becoming more dependent on these economies forimports and exports. At this level, the temperature of interaction is mixed. Taiwanese businesses have invested between $70billion and $100 billion in the PRC -- about half of all Taiwanese overseas investment. At the diplomatic and political level, relations are tepid -- not warm butnot cold either. (59) One example of such cooperation could be China's cooperation with Japan (and the United States,South Korea, and Russia) in the Six Party Talks on North Korea. The temperature of economic and financial relations has been hot as China has displaced theUnited States as South Korea's major trading partner, and South Korean businesses have movedlabor-intensive production processes to Chinese factories. Within the four strata of interaction (military,diplomatic, economic, and human), economic relations between China and the other states are thewarmest; human interaction is both warm and cool; diplomatic relations range from warm to cold,and military relations generally are cold or absolutely frigid. While the economic, political, and military relations in northeast Asia occurlargely on separate tracks, the sheer magnitude of the economic flows is affecting relations at otherstrata of interaction. For the United States, a question is how to promote and protectU.S. This colored, for example,efforts to reconstruct post-World War II Japan, to intervene in the Korean conflict, to providesupport to the Republic of China on Taiwan, to escalate the Vietnam War, to sometimes wink attrade barriers in Japan and South Korea in exchange for their support of the U.S. military, and topromote closer trade ties with Japan and South Korea rather than have them rely on China, theirtraditional trading partner. The policy choices with respect to northeast Asia include whether to: 
continue current policies of promoting market economies, enablingglobalization, and encouraging democracy while projecting sufficient military power to keep thepeace in the region; 
seek to contain China along the same lines of the containment of the formerSoviet Union;
actively counterbalance the rising economic influence of China and the tradingnetworks it is building by pursuing free trade agreements and closer investment relations with Japan,South Korea, and Taiwan and by strengthening free trade process under the Asia Pacific EconomicCooperation (APEC) forum; 
bring China's external trade more into balance, ensure that China adheres toits World Trade Organization commitments, reduce the foreign exchange resources available toChina's central government, and slow the "bandwagon effect" by which Japanese, South Korean, andTaiwanese businesses are establishing factories in China with the intention of selling a part of theoutput in the U.S. market;
facilitate the globalization of China in order to strengthen forces of change,create centers of power outside of Beijing, and increase representation in Beijing by business andinternational interests; and
take into greater account the impact that the rise of China is having on thepolicies of Japan, South Korea, and Taiwan. Certainly, China's economic rise has provided the resources for it to build a modernizing andmore powerful Chinese military. The United States,likewise, is increasingly dependent on the Chinese market as a manufacturing platform, an exportmarket, and as a buyer of U.S. debt securities. In addition to ceding space in its decision making process to industrial interests, the currentCCP leadership is coming into power with experience in the transformation of society that comesfrom development and modernization after opening to the outside world. For these people, the country's dependence on international investment and trade for theeconomic growth needed to maintain the party's legitimacy has become an important considerationin policy making -- including security policy. Third Country Policies. The net result of this mutualdependency is that all parties now have much to lose by any crisis -- be it military or financial -- thatwould disrupt economic and financial flows in the region. All four governments, therefore, seek stability ininternational relations.
The economic rise of China and the growing network of trade and investment relations innortheast Asia are causing major changes in human, economic, political, and military interactionamong countries in the region. This is affecting U.S. relations with China, China's relations with itsneighbors, the calculus for war across the Taiwan Straits, and the basic interests and policies ofChina, Japan, Taiwan, and South Korea. These, in turn, affect U.S. strategy in Asia. China, forexample, has embarked on a "smile strategy" in which it is attempting to coopt the interests ofneighboring countries through trade and investment while putting forth a less threatening militaryface (to everyone but Taiwan). Under the rubric of the Six-Party Talks, the United States, China,Japan, Russia, and South Korea are cooperating to resolve the North Korean nuclear crisis. Taiwanese businesses have invested an estimated $70 to $100 billion in factories in coastal China. China relies on foreign invested enterprises for about half its imports and exports. For Taiwan,Japan, and South Korea, China has displaced the United States as their major trading partner.
China interacts with Taiwan, Japan, and South Korea on four levels: human relations,economic and financial interaction, diplomatic and political intercourse, and military relations. Thetemperature of relations at each level ranges from cold to hot depending on the type of interactionand country or state being considered. At the human level the temperatures are mixed, at theeconomic level hot, at the diplomatic level cold for Taiwan to warm for South Korea, and at themilitary level, temperatures of interaction are cold.
The implications of China's globalization and rise as a major economic power can be seenin its impact both on Beijing and on policy deliberations in Taipei, Tokyo, and Seoul. The ChineseCommunist leadership not only is having to cede space in its decision making process to industrialinterests but the leaders themselves are coming into power with experience in the transformation ofsociety that comes from development and modernization after opening to the outside world. Chinanow depends on international investment and trade for the economic growth needed to maintain theparty's legitimacy. For China's trading partners, dependency on the Chinese market means thatBeijing is looming larger in all aspects of policy making. While this is not likely to challenge U.S.security ties with Japan, South Korea, and Taiwan, it raises several policy issues. One is how to dealwith a modernizing and more powerful Chinese military financed by the growing Chinese economy. Another is how to explicitly incorporate into U.S. policy the greater weight that Beijing is beinggiven in policy deliberations in Tokyo and Seoul. A further policy issue is whether to take explicitmeasures to offset the rising economic clout of China and attempts by Beijing to create East Asianinstitutions with China at the center and the United States pushed to the periphery. A positive resultof the mutual trade and financial dependency that has developed in northeast Asia is that all partiesnow have much to lose by an international military crisis that would interrupt economic and financialflows in the region. All four governments, therefore, seek stability in international relations. Thisreport will be updated as circumstances warrant.