Abstract
A widely held consensus view claims that East Asia has been shifting recently from a market-led to an institution-based form of regional economic integration, primarily as a result of the 1997–1998 financial crisis. Next to post-crisis financial cooperation schemes under the ASEAN+3, the surge of Regional Trade Agreements (RTAs) involving East Asian countries is thought by some to further substantiate this claim. The objective of the paper is to question the validity of this claim. By examining the current state of play of economic cooperation, in the financial and monetary areas as well as in the trade sphere, the paper highlights the limitations of the formal regional integration movement in East Asia to date, as well as the vastly different dynamics underlying the financial and trade developments. It also explores the changing nature of intra-regional trade and investment linkages and concludes that this new form of interdependence may be instrumental in changing the trade-offs of formal regional economic schemes.
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Notes
Until recently, the only formal body of integration was the Association of Southeast Asian Nations (ASEAN), which had been established in 1967, primarily for political reasons, and which remained relatively inactive in the economic field until 1992 when the ASEAN Free Trade Agreement was signed.
De facto and market-led economic integration as well as economic regionalization are used interchangeably in the remainder of the paper; similarly, economic regionalism, de jure, and institution-based economic integration are taken to be synonymous.
This proposal was in line with former moves by the Japanese government in favor of the creation of a regional institution to strengthen Asia’s monetary stability (Kikuchi 2002).
The major official criticism related to the possible lack of consistency with IMF conditionality.
See Amyx (2002) for a detailed account of the discussions of the AMF.
The debates about the linkage to IMF programs reflect the vastly diverging preferences of regional actors (with China and Korea in favor of a close linkage and Malaysia very much opposed to it).
This obligation does not mean that the negotiation with the IMF has to be finalized when the funds are disbursed, but it must have started.
This total does not include the funds provided within the New Miyazawa Initiative or the ASA.
The threshold was initially set at 10%, but was doubled at the ADB annual meeting of the Board of Governors in May 2005.
The Manila framework was established in November 1997 in order to strengthen regional cooperation and to promote financial stability in the region. It was dissolved in November 2004.
The ABF1 was set up in 2003 to invest in a basket of dollar-denominated bonds, and the ABF2 was launched in 2004 to invest in bonds denominated in local currencies.
A number of countries in the region have officially adopted a flexible exchange rate since the financial crisis.
In the fall of 2006, a number of signs suggested that this was perhaps beginning to change.
Financial cooperation is based on the provision of financial support in case of trouble, the availability of a pool of funds together with the mechanisms and rules under which support can be made available. Financial cooperation also often involves monitoring of financial markets. Monetary cooperation is often supported by crisis management facilities (commitments to provide financial support to defend currencies at their agreed-on value).
However, this argument should not be overestimated: the ERM also started with rather limited swap provisions that were only extended through the Basel-Nyborg agreement in 1987.
Agreed upon by the initial six members of ASEAN in 1992, the ASEAN Free Trade Area (AFTA) aims to reduce intra-regional tariffs and non-tariff barriers. Tariff reduction is formulated in a Common Effective Preferential Tariff (CEPT) scheme that is based on a negative list approach including four lists of goods.
By September 2005, 98.9% of the products in the CEPT Inclusion List of ASEAN-6 (Brunei, Indonesia, Singapore, The Philippines, Thailand, and Malaysia) had been brought down to the 0–5% tariff range, with 64.2% facing no tariff at all.
By way of illustration, 11.2% of Thailand’s imports from AFTA and 4.1% of Malaysia’s exports to AFTA made use of CEPT tariff rates (JETRO 2004).
See, for instance, Munakata (2004). There is disagreement on this point, however. See the debate between Tsugami and Lincoln, RIETI policy debate, 2003.
These include meat, fish, dairy products, fruits, and fresh vegetables.
China’s entry into WTO clearly makes this strategy less costly.
These agreements have been concluded in parallel to China’s accession to the WTO. As a result, China is behaving exactly like the US, with multilateral and regional strategies being followed at the same time.
China’s activism can be said to partly account for the shift in Japan’s stance away from multilateralism and in favor of regional trade arrangements. Yet other factors also certainly played a role, in particular the surge of RTAs in other parts of the world (America and Europe), as well as persistent difficulties faced by the multilateral trading system as exemplified by the failure to launch a new round of multilateral trade negotiations in Seattle in 1999. According to Ogita (2002), Japan gradually shifted toward regionalism as of 1999, but the first FTAs were not signed before 2002.
These FTAs are “WTO plus” in that they cover strong commitments in goods, services, investment, public procurement, and more, all underpinned by dispute settlement provisions.
To be fair, the limited initiatives launched by ASEAN, such as the ASEAN Industrial Joint Ventures program and the Brand to Brand Complementation (BBC) scheme, may have contributed to some extent to the development of intra-regional trade linkages in the automotive sector, for instance, but this cannot account for the magnitude of the observed intra-regional interdependence.
Hong Kong, Korea, Singapore, and Taiwan.
The bulk of ASEAN countries’ trade is conducted with Asian countries, but usually outside ASEAN. The intraregional trade ratio for ASEAN increased from 16% in 1980 to 16.9% in 1990, 21.2% in 1995, and close to 31% in 2005. However, intra-ASEAN trade as a proportion of total trade of member countries is likely to be vastly overestimated as a result of Singapore’s entrepôt role, trade in petroleum products, and bilateral trade between Singapore and Malaysia.
A number of pull factors also played a role, in particular a stable macroeconomic environment and the increased liberalization of ASEAN economies.
The loss of preferential access to major developed markets for the NIEs is an additional factor increasing the available supply of FDI (OECD 1999).
For detailed empirical evidence, see Kimura et al. (2005).
Of course, the degree of regionalization may vary across sectors, with some products, such as electronics and IT products, more suitable than others to fragmentation of the production process.
This is also reflected in the upward trend of trade intensity indices among the East Asian economies (Ando and Kimura 2003).
Moreover, as stressed by Yang (2003), there seems to be a long-term shift in the sourcing of China’s imports from industrial countries to developing countries.
As a result, China runs a trade surplus with East Asia in consumption goods and a deficit in intermediate goods (Gaulier et al. 2005).
On the export side, so-called processing trade accounts for the bulk of China’s trade. In the electronics and IT industry processing trade has accounted for approximately 90% of China’s total exports since 1995.
Over the period 1990–2000, the share of East Asia as a destination for Chinese exports has decreased (from 67 to 45.2%), while its share as a source of imports has risen (from 55.4 to 62%). In 2003, China surpassed Japan as the major export destination for East Asian countries: China imported $168 billion from this region and Japan only $152 billion.
The fragmentation of the production process has led to a redistribution of industrial activities within the region: the high value-added stages of production (both upstream — development of prototypes, conception, etc. — and downstream — brand and services) remain in the most advanced economies, while low value-added stages (assembling) are relocated in China.
East Asian intra-industry trade is comparable to intra-industry trade between the US and Mexico. With the enlargement to EU25, however, the pattern of intra-industry trade is likely to evolve, with a rise in the fragmentation of the production process. As Arndt (2001) aptly put it, ‘the major gains from entry will not come from freer trade along established patterns but from the reorganization of production and the consequent integration of those economies into the production networks of the EU.”
This analysis is shared by Baldwin (2006).
As argued by some analysts, such as Jusuf Wanandi, the only reason why Asian countries keep the APEC process alive is to avoid antagonizing the US, yet the momentum for deeper regional cooperation has definitely shifted toward exclusively Asian groupings, be they ASEAN+3 or sub-groupings within this area.
Which may be interpreted as the result of the rising Sino-Japan rivalry.
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Nicolas, F. The political economy of regional integration in East Asia. Econ Change Restruct 41, 345–367 (2008). https://doi.org/10.1007/s10644-008-9053-5
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DOI: https://doi.org/10.1007/s10644-008-9053-5
Keywords
- Regional economic integration
- FTAs
- Fragmentation
- Financial co-operation
- International monetary arrangements
- Foreign exchange policy
- East Asia