Current Status of Economic Integration in Asia
While acknowledging the need to seek a new form of integration that goes beyond trade liberalization, Asia experts held out differing views as to whether China, the potent power, poses threat or renders chances to the East Asian region and its integration.
During a session held under the theme of "Current Status of Economic Integration in Asia," participants said that the region should deepen its integration to ensure peace and prosperity, and to make East Asian economies less vulnerable to external shocks, particularly turbulence in the U.S. economy.
Importance of integration
Yu Yonding, director of Institute of World Economics and Politics, said that distrust still persists among East Asian countries which greatly suffered during the war, and economic cooperation and eventual integration is the "best and perhaps the only solution."
At the same time, he said, the regional integration is an answer to the U.S. domination in the global economy, which many Asian countries believe to have caused a series of economic maladies upon themselves.
"Certainly, East Asian countries should reduce their over-dependence on the U.S. economy to diversify risks," Yu said. "The current patterns of the trade and capital flows are unsustainable." Jomo K. Sundaram, professor at University of Malaya, agreed, saying that the slowdown of the U.S. economy last year dealt a significant blow to Southeast Asia, unprecedented recession in Singapore and an effective recession in Malaysia.
"Addressing theses problems in a way which is equitable to all participating economies in the region is the major challenge of East Asian economic integration," he said.
In particular, he calls for formulating a region-wide emergency financial mechanism to act counter-cyclically both at the regional and national levels, stressing the need to restore the "capacity for development finance" that the World Bank used to provide but has abandoned.
"There is particularly a need to make available emergency financing facilities and to undermine the monopoly that the IMF has enjoyed in the past," he said. "Regional arrangements cannot compensate for global arrangements. But they can play an important role in the absence of more adequate global financial reforms."
Wu Rong-I, president of the Taiwan Institute of Economic Research, said Taiwan, which had its share of setbacks in the Asian financial crisis in 1997and 1998, does support the creation of a region-wide financial stabilization mechanism and that it is eager to negotiate FTAs.
Trade liberalization and more
Concerning ways to integrate regional economy, Kyoji Fukao, faculty fellow at RIETI and Hitotsubashi University professor, said inward foreign direct investment, such as those with the United States and Europe, and export-oriented, efficiency-seeking inward foreign direct investment play a key role in the development of the regional economy.
Given such circumstances, he said, East Asian economies should make their market more open, remove regulations on FDI and provide greater protection for intellectual property rights.
Meanwhile, quite a few participants stressed that East Asian economic integration should go beyond trade liberalization and included elements of cooperation, or catch-up factors, to narrow income and other gaps within the region.
Pointing to the emerging signs of institution-led integration in East Asia, Shujiro Urata, faculty fellow at RIETI and Waseda University professor, said the element of economic cooperation or assistance is very much needed in the region, where countries of diverse income levels co-exist.
Izumi Aizu, principal of Asia Network Research, called for greater focus on other aspects of integration other than economy.
Although economic integration is a very important part, there has been too much focus on the economic elements, he argued, saying that social factors deserve factors deserve more attentions.
Yunjong Wang, senior research fellow at Korea Institute for International Economic Policy, called for developing measures to converge income levels and industrial structure.
"In terms of intra-regional trade volume... this region may be comparable to the European Union and other trading blocs. But in terms of intra-industry trade, I think we are not comparable to the European Union," he said. "In this regard, I think convergence of the industrial structure is very, very important... Without that, this trade integration cannot lead to other types of integration such as monetary and financial integration."
Hasung Jang, professor of Finance and director of Asian Institute of Corporate Governance, Korea University, said more focus should be placed on the micro-level convergence of systems, regulations and other meanings of institutional arrangements.
Without that, he said, the region cannot further proceed on its integration simply by creating organizational frameworks such as a free trade zone and an emergency financial mechanism.
Meanwhile, some positive signs for integration seem to be emerging.
Meng Jianjun, faculty fellow at RIETI and Tsinghua University professor, said significant human flows are already taking place in East Asia, citing senior Japanese high-skilled workers moving to China and other parts of Asia and the growing number of intra-regional travelers, both of which he said are based on a "personal decision rather than the result of some planned process."
"This is probably going to be a natural process which is almost irreversible," he said. "We are now entering a new phase of integration in Asia which goes beyond economic issues."
Expectation and skepticism on FTAs
Chia Siow Yue, director of Institute of Southeast Asian Studies, acknowledged the tendency of the integration literature to focus on trade aspects. But she added the type of economic integration East Asia envisions does go beyond.
For instance, she said, Japan-Singapore economic partnership agreement aims to achieve "WTO plus," focusing on various non-WTO aspects such as the development of science and technology, human resources development, the development of small and midsize enterprises and so on.
In reference to Chia's remarks, Urata said that such "new-age, economic partnership-type" FTA arrangements, or "WTO-plus" institutions, can provide infrastructure to promote not only intra-regional but also inter-regional trade. And this, he said, will eventually lead to economic development in the region as well as in the world.
Naoko Munakata, senior fellow at RIETI and visiting fellow at the Brookings Institution's Center for Northeast Asian Policy Studies, said that FTAs and other regional initiatives should not be thought of only from the perspective of whether to increase interdependence or not.
Rather, she said, such regional exercise is one of the alternatives to solve unique problems within the region that a global institution cannot provide.
"The low interdependence among Asia is actually exacerbating the cyclical fluctuation caused by the U.S. market cyclical changes... (and) it is true that the Asian countries should increase their interdependence," she said. "But at the same time, regional institutions or free trade arrangements or other arrangements are not necessarily the direct solution to increase interdependence."
Meanwhile, as probable passages to the regional integration, Chang Jae Lee, director of Northeast Asia Research and Information Center, Korea Institute for International Economic Policy, cited the utilization of the ASEAN-plus-three framework or through the mergers of emerging FTAs.
While urging Japan, China and South Korea － that together comprise one fifth of the global economy and 90 percent of the East Asian economy － to play a leading role, he also said that East Asia, given the underdeveloped level of its economic integration, should take "multi-layered approach" to accelerate the process.
China and its impact
The question of China, whether it is a threat or not, often came up as a major contentious point as participants debated on the regional integration.
C. H. Kwan, senior fellow at RIETI, said the economic strength of China has been widely exaggerated, most conspicuously in Japan.
Japan' s China syndrome reflects Japan' s loss of confidence rather than the changing reality between the two countries and called for more objective views on China's economic power, he said.
"When you talk about competitiveness, you tend to put the blame on other countries for anything that goes wrong domestically, and invite protectionist pressure," he said. "I am a bit concerned that this is what is now happening in Japan, both politicians and businesspeople would like to look at China as a scapegoat."
Likewise, Justin Yifu Lin, professor and founding director of Peking University's China Centre for Economic Research, also downplayed the negative impact that China's growth brings on Southeast Asia. "For people who look at China as a threat, sometimes they think that China is competing with Southeast Asian countries in exporting," he said. "But the fact is that China actually imports more from Southeast Asia than exports to Southeast Asia in the past 15 years... Growth in China creates more opportunity for Southeast Asia than a threat to Southeast Asia."
Hu Angang, director of Chinese Academy of Sciences' Center for China Study and professor at Tsinghua University, said that China is contributing to economic growth in the Asia and Pacific as well as to regional trade.
Meanwhile, Zhang Yunling, Professor and director of Institute of Asia-Pacific Studies and of APEC Policy Research Center at Chinese Academy of Social Science, noted that Southeast Asia has been losing competitiveness not because of competitions from China but as a result of the changing structure of markets on the demand side.
Fear of China is totally unnecessary, Yu said, calling for attention to the formation of a new pattern of division of labor, which he said has a significant impact on the regional economic integration, as seen in a regional production network.
"Following the collapse of the flying-geese formation, a new pattern of regional division of labor has taken shape... as a result of the global strategy of multinationals adapted to the new age of the IT revolution," he said. "In contrast to the traditional pattern of vertical inter-industrial division of labor, the new pattern is characterized by intra-industrial and intra-product division of labor."
Chia, however, said that Southeast Asia does feel threatened with its labor-intensive manufacturing sector "really competing head-on" with their counterparts in China.
"There is no doubt that tourism in Southeast Asia is booming now because of Chinese tourists and there is no doubts (that it benefits in) many other aspects," she said. "But is it a case therefore of Southeast Asia giving up its labor-intensive industries and becoming the raw materials supplier of China again?"
Edward S. Steinfeld, associate professor at Massachusetts Institute of Technology, said that China will eventually become a threat if not now and that this may impede economic integration.
"There is one image that comes out of the discussion of China not being a threat because it is simply a producer of low value-added products. In a sense, Chinese firms are viewed as bottom feeders, just taking the activities that nobody else wants," he said. "But I would say that will not last, and the Chinese government and certainly Chinese enterprises are not willing to stay in that position. They have every ambition of moving beyond that position."
The heart of the matter is the "differential rate" with which countries in the region move through developmental process into higher-end manufacturing and then from manufacturing into services, he said.
"Conflicts will come up as China moves up and other are somewhat slow to move out of the activities that China is moving into," Steinfeld said. "I would argue that economic integration will not solve that conflict... but I would predict that those differential rates of domestic institutional change do hold out the threat of impeding economic integration, rather than being resolved by economic integration."
-The RIETI editorial department is responsible for this article