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Focus
Regional integration in Africa
The price is not right yet
ACP countries need reforms
Mercosul dilemmas
ASEAN + 3
ECOWAS’ unfinished agenda
01/2007
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ASEAN + 3
The Association of Southeast Asian Nations (ASEAN) wants to form a free trade area with China, Japan and South Korea. Intra-regional trade has already gained momentum. Properly designed, an “East Asian Economic Community” would contribute to making Asia the world economy’s centre of gravity.
[ By Jaleel Ahmad ]
The map of the world economy is dotted with a large number of regional and bilateral trade arrangements, numbering close to two hundred, and covering over 50 per cent of world trade. But in Asia, the largest of the continents with three-fourth of the world’s population, there is only one fledgling regional trading scheme, namely, ASEAN’s Free Trade Agreement (AFTA). However, there has been a spate of bilateral trade agreements between East Asian countries and between individual East Asian countries and countries outside the region. This fragmentation has prompted a number of proposals, both official and academic, for designing a more comprehensive intra-regional trade regime.
The most ambitious of these is the ASEAN proposal, made in Tokyo in 2004, to create an East Asian Economic Community, including the 10 members of ASEAN and the three economic giants, Japan, China and South Korea. The putative community is intended to be an exercise in “open regionalism”, allowing other countries ( most notably Australia and New Zealand) to join later. Similar ideas have been discussed for some time in academia under the term “ASEAN + 3”. The aspiration is to advance mutual trade and foreign investment in East Asia, but also to tackle other issues, such as marine transportation and mutual security.
The East Asian Community, excluding Australia and New Zealand, would have a population of over two billion, roughly a third of the world’s population, and a combined GDP of a little over $ 7 trillion at market prices, roughly one-fifth of the world’s GDP. In sheer size, it would rival the EU and the North American Free Trade Area.
Progress made
Traditionally, Asian countries have focused on increasing their exports to the West. This strategy, however, has lost allure as East Asia itself is gradually becoming a rich and vibrant region. The near-collapse of the WTO’s Doha Round has lent new urgency to regional integration. East Asia now must take the initiative to design a trade regime of its own. Even if Doha were revived, it would hardly address the concerns of the East Asian countries, which have always been submerged in the lop-sided agenda set by the richer WTO members. The failure of the APEC and the IMF to come to grips with the 1997 Asian financial crisis and prevent cross-border contagion has reinforced the notion that Asian problems require an Asian perspective.
As a precursor to expanding trade in goods and services, East Asia has already established monetary cooperation in the “Chiang Mai” initiative of 2000. This is a network of bilateral currency “swap” arrangements, designed to protect recipient countries from having to implement IMF austerity programmes.
The success of some East Asian countries in Western markets gives only a partial picture of the region’s trade prowess. Even more remarkable is the extent to which East Asian countries are making their presence felt in each other’s markets. Some 50 % of East Asian merchandise exports stay in the region.
The current intra-East Asian trade almost amounts to 60 per cent of the total, roughly matching the current figure of 70 % for the EU. The recent surge in mutual trade is due almost exclusively to the above-average growth in “intra-industry trade” (Ng and Yeats, 2003). This sort of trade has a self-propelling character, fostered by spontaneous market forces without any overt policy initiatives, such as tariff preferences. In this respect, East Asia’s record is perhaps even more impressive than that of the EU, where tariff discrimination has been the hallmark of integration for the past fifty years. The intensity of intra-industry trade is an auspicious circumstance for the viability of a preferential trade area. But trade is only one aspect of integration. Other factors matter too, such as foreign direct investment (FDI). Moreover, as an economic union promotes industrial location decisions based on regional rather than national considerations, FDI would increasingly become regional in character.
But perhaps the most important reason to move rapidly toward an East Asian Union is paradoxically the proliferation of bilateral trade arrangements in the East Asian region. The haphazard growth of bilateral agreements (Hufbauer and Wong, 2005) shows that by 2005 East Asian countries, excluding China, had ratified 14 bilateral agreements and were negotiating another 30 with Asian and non-Asian partners. Bilateral trade agreements are thus threatening East Asia’s cohesion as an economic entity. Bilateral arrangements lead to a jumble of “rules of origin”, which are essentially protective in nature, and discourage trade in intermediate products. The rules of origin differ from one bilateral agreement to another. The net effect may well be to make the region more trade restrictive. As such rules proliferate, they tend to entrench vested interests in individual countries. Furthermore, the existing and proposed bilateral trade arrangements in East Asia are an attempt by the world’s hegemonic powers to retain a powerful regional foothold for their exclusive benefit. An East Asian economic union holds the promise of cleaning the kitchen sink of superfluous bilateral arrangements.
Like the EU
The ASEAN proclamation provides few details of the proposed East Asian Community, only stating that its model would be the European Union. Nonetheless, that model does not fit entirely. Apart from vast disparities in per capita incomes and economic structures, it is clearly unrealistic to visualise a trading community in East Asia where member countries would hand over a significant part of economic decisions – and with it sovereignty in general – to some supra-national body. A simpler framework would, at least initially, be preferable, with the union only extending to matters of trade and investment.
The framers of the Community obviously face staggering political difficulties, such as Chinese-Japanese hostility, to name only one. On the other hand, as the EU has shown, the dead weight of history may itself be a motivating force to strengthen economic ties, which may in time engender political cohesion.
If properly designed, the East Asian Community could become a model of a genuinely open trading system, tackling income inequalities and other deprivations that afflict the region. It would also contribute to making East Asia the center of gravity of the world economy, a trend already underway. The Asian Economic Community would, however, not be an insular rival to other regions, but rather an engaged partner. It is certainly not a zero-sum proposition, as hastily assumed in some quarters.
Prof. Dr. Jaleel Ahmad
teaches economics at Concordia University in Montreal, Canada.
ahmj@alcor.concordia.ca
References:
Hufbauer, Gary Clyde and Yee Wong, 2005:
Prospects for regional free trade in Asia, Working Paper No. WP 05-12, Institute for International Economics, Washington, D.C.
Ng, Francis and Alexander Yeats, 2003:
Major trade trends in Asia: What are their implications for regional cooperation and growth?, Working Paper No. 3084, The World Bank, Washington, D.C.
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