Economic integration in East Asia and Asean – the long view

by Gerardo P. Sicat, The Philippine Star, Feb 13, 2019

Current disruptions that happen as a consequence of the US-China trade war or Brexit (or, the possible exit of Britain from the European Union) will not deter the economic integration that is happening within East Asia and ASEAN.

In the last five decades, the economic success of some countries in East Asia and in ASEAN has helped to bring about greater economic integration among the countries in the region.

Those decades were also characterized by economic disruptions in the world’s economy and trade.

Regional economic integration. Economic integration means that the countries become more economically dependent upon one another. Such dependence is evident in the changing location of production of goods – both of manufactured and primary goods within the region and the expansion of trade among them.

Of course, at the heart of it, such events result only if they follow the movement of raw materials, labor and capital among the countries involved. These take place as foreign and domestic investments in the countries of the region evolve.

Thus, some manufacturing industries that had in previous decades propelled China’s economic transformation are today experiencing the transfer of locations to other East Asian and ASEAN countries.

“Evidence.” The component of trade as a percent of total world output (GDP) has increased over time. The magnitude of the structural change is more marked in the East Asia and in ASEAN region.

In the 1960s, the proportion of goods exported to the rest of the world amounted only to 10 percent of world output, or GDP. In today’s world (2010s), exports as a percent of world output is around 25 percent of GDP.

According to WTO data, in 2015, East Asian countries (China, Hong Kong and Taiwan; Japan and South Korea) and ASEAN (Singapore, Thailand, Malaysia, Vietnam, Indonesia and the Philippines, among the members) accounted for 32.6 percent of total world exports that equaled $16,482 billion. (Imports in fact was slightly higher in proportion to total world imports, 34.7 percent, during the same period.)

It is to be noted that most of these countries have very high exports as a proportion of their output (or GDP). The big countries have a smaller ratio of exports to output. This might be so because their domestic markets tend to be large and there is a greater level of internal trade even as they engage in international trade heavily.

“Development over time.” The first stage of this development was the growth of Japan after the 1950s and the subsequent economic liberalization and rapid opening to trade and export expansions into the markets of Western developed nations of what came to be the Asian economic tigers (South Korea, Taiwan, Hong Kong and Singapore) during the 1960s to the 1970s. Then followed the rise of China.

All throughout, this brought about the rapid growth and agglomeration of industrial centers among these groups of countries, spreading the benefits of economic growth across different countries and regional localities.

Such change in structure has happened due to the gradual breakdown of trade barriers. The multilateral trade negotiations that happened from the 1960s to the 1990s brought down tariff barriers among countries over this long period. Of course, the final step in that process was the creation of the WTO (World Trade Organization) by the 1990s.

A parallel development in the multilateral reduction of tariffs was the growth of regional trading blocs. Within Southeast Asia, for instance, the ASEAN became more economically engaged at high political level by 1976 when the Bali Summit of ASEAN leaders directed their economic ministers to set up the machinery for economic negotiations.

A major breakthrough in this relationship was that, almost simultaneous with the birth of the WTO, the leaders decided to form the ASEAN Free Trade Area (AFTA) in 1993, promising the further dismantling of tariff and other trade barriers. A further maturing step out of that decision was to agree to set up an ASEAN Economic Community.

The enlargement of the ASEAN intra-economic agreements became a an impetus for the major block of countries – the neighboring countries within East Asian and Pacific countries to seek more trade and investment access to ASEAN.

This was undertaken through three routes: through bilateral agreements with some ASEAN countries; through efforts to effect trade agreements with ASEAN as a group; and through a major enlargement of the boundaries of multilateral cooperation among the countries and the ASEAN.

In this way, Japan, South Korea, and China (the principal trading countries in East Asia) have succeeded in undertaking specific trade agreements with ASEAN itself and in addition toward making inroads in strengthening their bilateral economic relations through foreign direct investment flows into the countries of ASEAN.

Also, in a broader regional context through the Asia Pacific region, a broadening of economic relations resulted. The APEC (Asia Pacific Economic Cooperation) developed to become a regular conference for easing trade and other economic relations among all the countries affected, involving regular meetings of the highest political leadership of the countries that participated.

All these institutional mechanisms have propelled greater integration among the countries through converging economic actions. Agreements among the countries expanded opportunities for trading and resource flows. True, it is possible that such converging actions may be postponed.

But economic necessity and the propelling needs of countries in transition and growth are reminders that raw materials, labor, finance, and direct investments will eventually move. Agreements of course eventually enable further actions.

“More regional integration without the US.” In this context, we can view the trade wars initiated under the Trump administration as glitches that only threaten to slow down the pattern of change.

The same is true with the reverberations of Brexit within the European Union.

For instance, tariff hikes between the US and China have recently risen. So far , the disruptive effect represents a small fraction of world trade – around two percent of world trade, still a negligible component.

In the current disposition, the US and China are doing serious bilateral talks to avert the further rise of tariff wars because they could cause serious damage to both parties.

In such a mood, the pressure for agreement is strong.