March 2007
This March 19 AEI conference consisted of back-to-back sessions in which presenters and panelists analyzed trade and investment trends in East Asia and discussed the evolution of East Asian economic institutions, including the Asia-Pacific Economic Cooperation (APEC), the ASEAN+3 process, and the East Asian Summit. These discussions were based upon two chapters from the forthcoming book The Eagle and the Dragon: The United States, China and the Rise of East Asian Regionalism (AEI Press, 2007) by Claude Barfield and Andrei Zlate.
The first session focused on whether East Asia is becoming a regional trading bloc, and the implications of recent trends in trade and investment--particularly the rise of the production-sharing model in which the production process is segmented among different nations. The second session analyzed and assessed the likelihood of the creation of region-wide institutions to deal with economic and political issues among member states. A central issue discussed was the future of competing visions for East Asian regionalism: the expansive, trans-Pacific vision embodied in APEC, or the more exclusive intra-East Asian vision embodied in the ASEAN+3 process.
Session I: East Asian Trade and Investment Trends
Andrei Zlate
Boston College
Trade regionalization--the regional concentration of trade flows exclusively due to market forces--has been taking place in East Asia, particularly during the last ten years. Beginning in the late 1990s, intra-regional trade has increased substantially, though the intra-regional share of imports has grown faster than that of exports. Although economic growth can sometimes account for increases in regional trade, East Asian intra-regional trade has grown faster than trade with partners outside the region, confirming regionalization. There are several factors behind these trends. First, intra-regional vertical foreign direct investment (FDI), the trade-enhancing kind of FDI associated with supply chain networks organized to minimize costs, has been a driving force in regionalization. Second, the emergence of new technology and the production network system has allowed both greater specialization and more East Asian countries to join the regional production networks, in which different parts of goods are assembled in different countries. Furthermore, a triangular pattern of trade has emerged in East Asia in which China imports intermediate goods from other East Asian countries and assembles them into final goods for export to the rest of the world, acting as a platform for final processing and re-exportation. The fact that China’s trade surplus with the United States mirrors its trade deficit with the rest of East Asia underscores this pattern.
J. Michael Finger
Former lead economist, World Bank
Zlate contends that there are two main causes of regionalization: first, market forces such as geographic proximity and trade complementarity, and second, policy initiatives like regional trade agreements. Because the data in his presentation presents the results of regionalization, however, it is impossible to infer the exact influence of market forces compared with that of policy initiatives.
Michael J. Ferrantino
International Trade Commission
Over the past three decades, China's exports have become more technologically sophisticated, but this does not necessarily reflect a commensurate increase in the country's own technological advancement. Most of these high-tech exports are assembled in China from parts made in other countries. While the parts themselves--chips and adaptors for example--are highly sophisticated, having workers put them together by hand may not be.
This production paradigm is largely the result of China's economic policies, including incentives for FDI, special economic zones, and duty exemptions for imports that will be used in exports. Consequently, while these policies have encouraged growth in certain industries, they have also led to various inefficiencies. For example, it is estimated that 40 percent of Chinese FDI originates in China; many Chinese investors send their funds outside the country and then send them back in as FDI to take advantage of the economic incentives. Major economic disparities have arisen between coastal regions, where these economic zones exist, and the country's interior. Furthermore, China's role as an assembly platform could change as China reduces these economic incentives for foreign firms, for example by recent changes in corporate taxation.
Session II: East Asian Economic Institutions
Claude Barfield
AEI
During the past two decades, there have been two forms of regionalism at work in East Asia. From the late 1980s through 1997 or 1998, trans-Pacific regionalism, driven by APEC, was the dominant force, and following the Asian financial crisis, regionalism became strongly intra-East Asian in nature. The Clinton administration encouraged APEC early on to secure greater market access for U.S. exports, as many were concerned that the United States was losing its economic edge to Japan. The two central principles of APEC were concerted unilateralism, under which the individual countries moved towards the goal of free trade at their own pace, and "open regionalism," though there was no consensus on what this latter principle actually entailed.
The Asian financial crisis of 1997-98 was largely responsible for changing the character of Asian regionalism, mainly because of the perceived callousness with which Western institutions like the IMF, which was perceived as closely tied to the United States, responded to the crisis. In addition, around the time of the crisis, the Clinton administration proposed voluntary reciprocal liberalization of nine economic sectors. Yet because the Asian countries were not open to reciprocal arrangements, the initiative failed, and this further weakened the U.S. position in the region. Since that time, Asian regionalism has centered more around the ASEAN+3 process and the East Asian Summit, and the United States has all but abandoned APEC as a trade-liberalizing organization, replacing trade goals with security objectives.
Taking this history into account, the United States had several options for promoting trade liberalization in the region. If the U.S.-South Korean free trade agreement (FTA) succeeds, there could be a domino effect in the region. For instance, Japan might begin FTA talks with Korea or the United States, and this could signal a trend towards the involvement of larger countries in FTAs. Another option would be to pursue liberalization through APEC, but on the basis of a "coalition of the willing." Other options could include harmonization of the region’s current FTAs and standardized rules of origin. The United States might benefit by having Japan or Singapore head up its initiatives, given the region’s lingering resentment towards America. Finally, in order to succeed in the region, the United States should try to work constructively with ASEAN.
Amy Searight
George Washington University
It is too early to tell whether the recent proliferation of FTAs in East Asia will be positive or negative, because they have yet to come into full force and do not yet cover substantial amounts of trade. Moreover, flows between larger countries such as Japan, Korea, China, and the United States are not covered by FTAs.
Once implemented, most FTAs will cover 90 percent of goods traded between the countries--the World Trade Organization (WTO) standard. Countries that negotiate FTAs are often willing to go beyond WTO commitments in areas such as trade in services, protection of investment, and mutual recognition clauses that lower technical barriers to trade. But many of these FTAs exclude sensitive sectors from liberalization, and the rules of origin included in FTAs are intended to protect certain domestic industries. Furthermore, once interests achieve their objectives through bilateral and regional agreements, they tend to limit their involvement at the WTO, thereby weakening pro-liberalization coalitions at multilateral negotiations.
While Barfield presents two competing visions of regionalism--trans-Pacific versus intra-East Asian--one could actually recognize a tripartite division, with the three positions being advocated by different countries. China’s vision is for regionalism to revolve around ASEAN+3, with trade agreements placing greater priority on political cooperation than economic integration. Japan would prefer a high-standard, rule-based trading regime for the region, under which its regional production networks could thrive. The United States, concerned with being excluded from the region, continues to support the multilateral trading system but also engages in bilateral agreements to further its interests.
Mireya Solis
American University
East Asian regionalism has gone from having an Asia-Pacific/voluntarist character (embodied in APEC), to an East Asia/legalistic emphasis, as reflected in the proliferation of FTAs. To understand regional integration in East Asia today, it is necessary to examine the interplay of legalism and voluntarism. For example, in Japan’s FTAs with developing countries, the novel provisions are nonbinding. Likewise, while China has signed FTAs, they are more about building trust between countries; the legal text of the agreements is brief and the parties rarely make use of the dispute settlement system. As Miles Kahler once noted, legalism is an instrumental strategy that can be activated or deactivated depending on the country’s interests, and this is precisely the dynamic at work in East Asia today.
In analyzing intra-Asian regionalism, it is necessary to examine the influence and ramifications of cross-regionalism. Cross-regional trade agreements are quite common, which highlights the barriers to regional integration in East Asia. Sometimes it is easier for a country to negotiate FTAs with which they have no historical animus or security concern. The existence of cross-regional agreements also underscores how reliant East Asian countries are on markets outside the region. Furthermore, the makeup of cross-regional agreements can influence intra-Asian FTAs.
In discussions of regionalism, there must be a clearer distinction between finance and trade. Whereas trade agreements have taken on a bilateral character, integration of Asian financial systems has taken place on more of a regional basis. Furthermore, while Asian countries have been open to negotiating trade agreements with partners from outside East Asia, agreements pertaining to finance have largely been intra-regional. Another difference is that while FTAs are likely to erode policy autonomy, financial agreements have little effect on a government's discretion in domestic financial affairs. Moreover, the Asian financial crisis might have altered the conventional sequencing of integration by placing financial affairs on the policy agenda early.
Ernest Preeg
Manufacturers Alliance
In analyzing Asian regionalism, it is important to include India. In 2004, India and Singapore signed a comprehensive FTA, and India and ASEAN are currently conducting FTA negotiations. The direction of Asian regionalism also hinges upon China. There is growing concern in Asia about the rise of China, and this prospect could make FTAs with the United States a more desirable course of action for many Asian countries. Finally, there will be no APEC free trade area without a U.S.-Chinese FTA, and this will not happen in the near future. The United States is too concerned with China’s currency manipulation, intellectual property rights, and the trade deficit, and China wants to minimize U.S. influence in the region.
AEI intern Manuel Pretel Wilson and research assistant Daniel Geary prepared this summary.
