Trade Strategy in East Asia

From Regionalization to Regionalism

Fithra Faisal Hastiadi

• Editore: Palgrave Macmillan
• Anno: 2016
• ISBN:
  9781137569677
• Argomento: Business
• Categoria: International Business

The study of regionalism is essential as it has become a vital trend with profound regional and global impacts. Japan, Korea and China are regarded as the key actors for such action in East Asia. While regionalization has created building blocks for economic integration, the act of exclusion from regionalism will only lead to marginalization. Therefore, it is important to learn how to make it work.This book analyzes the effect of China, Japan and Korea's trade strategy on ASEAN countries. As closer economic ties between countries in the area have expanded significantly in the last decade, economic regionalization in East Asia has proceeded in a much more dynamic fashion than regionalist projects. Hastiadi argues that regionalism in the form of Regional Trade Agreements (RTAs) is better than the present regionalization as it promotes sustainability in the future.

1

Introduction: Making East Asian Regionalism Work

1.1 Background

For years, regionalism has become a trend in East Asia. East Asian countries have been focusing on ways to expand intra-regional trade that include: the establishment of regional trade agreements (RTAs) in the form of free trade agreements (FTAs) and economic partnership agreements (EPAs). The United Nations classifies East Asia as the entirety of the People’s Republic of China (PRC; including all special administrative regions (SARs) and autonomous regions), Republic of China (commonly known as “Taiwan”), Japan, North Korea, South Korea, and Mongolia. However, this book defines East Asia as ASEAN + 3 countries, referring to the work of Stubbs (2002).

The study of regionalism is vital as the trend has created a profound regional and global significance (Harvey and Lee, 2002). Japan, Korea, and China are regarded as the key actors for such action in East Asia. Regionalism acts as a powerful mantra: “either you are with us or against us.” Being excluded from regionalism will only lead to marginalization. Therefore, knowing how to make regionalism work is key. And, because it is that important, we need to know the basic assumptions about regionalism. The author has identified the following as the reasons for regionalism:

The increasing reliance of economies on each other: Because each country cannot fulfill all their needs, trade then emerges as a means of fulfilling needs in a country. Each country has specific resources, which differentiates it from others. Even though a country may have abundant resources, it cannot meet all of the needs and demand within the country, therefore a country needs to rely on other countries.

The opportunities to be able to buy and sell in the region: In a world overrun with voluntary export restraints, administered protections, and a strong tendency toward the formation of trading blocs, the difference between discriminatory and nondiscriminatory liberalization may be blurred. Thus, East Asian integration may be the key to achieving regional trade liberalization. This trade liberalization would promote international specialization and increase regional output. Moreover, it is also regarded as an efficient way to use and allocate regional resources, thus facilitating the working of the international market system and price signals to ensure efficient allocation of resources, international competition, and the associated benefits for all parties.

Free flow of capital and labor: The free movement of labor is one of the possible outcomes from regionalism. Therefore, a more effective labor structure would be created.

Regionalism will go beyond trade: Regional integration can go far beyond trade liberalization. In East Asia, intra-regional labor mobility, foreign direct investment, and financial-capital flows will play an increasingly important role in the coming years. To the extent that harmonization of policies across countries can help facilitate such movements, regional integration can offer unique gains.

Harmony: Regional integration can help reduce political tensions and promote political harmony amongst former enemies.

Moreover, Kawai and Wignaraja (2008) describe three fundamental factors that brought FTAs to East Asia: (i) the rising trend of market-driven economic integration; (ii) the progress of European and North American economic integration; and (iii) the Asian financial crisis:

First, the most fundamental factor behind the emergence of recent initiatives for FTAs is the progress of regional economic links and interdependence. Market-driven economic integration eventually requires policy measures to support and further it – that is, harmonization of policies, rules, and standards governing trade and FDI [foreign direct investment]. Policymakers in East Asia are increasingly of the view that FTAs, if designed with a wide scope, can support expanding trade and FDI activities through further elimination of cross-border impediments, facilitation of trade and FDI, and harmonization of various rules, standards, and procedures. In this way, FTAs can be regarded as part of a supporting policy framework for the deepening production networks and supply chains formed by global multinational corporations and emerging East Asian firms. Second, economic regionalism in Europe and North America – including the successful launch of an economic and monetary union by euro area countries and the expansion of the European Union (EU) to its eastern neighbors, as well as the success of NAFTA and its incipient move to the Free Trade Area of the Americas (FTAA) in North, Central, and South America – has motivated the East Asian economies to pursue regional trade arrangements. Governments in East Asia fear that the two giant blocs – the EU and the US – might dominate the rule-setting in the global trading system while marginalizing the role and weight of Asia in global competition and multilateral negotiations. They have increasingly realized the importance of stepping up their own process of integration and uniting themselves to strengthen bargaining power in the global arena, and raise the region’s voice in, and for, global trade issues. In addition, facing the slow progress of the WTO/Doha negotiation process and the perceived loss of steam in the APEC process, FTAs can be considered as an insurance policy against the periodic difficulties with multilateral trade liberalization. Third, the Asian financial crisis of 1997/1998 has taught the important lesson that East Asia needs to strengthen economic cooperation in order to sustain economic growth and stability. The global initiative to strengthen the international economic system in this regard has been unsatisfactory, while the national efforts to strengthen individual economic fundamentals take time to bear fruit. Hence, the general sentiment in Asia has been that the region must establish its own “self-help” mechanism for economic management. The financial crisis nurtured the sense of a “region” with a common set of challenges.

Being acknowledged as the East Asian economic front runners, Japan, China, and Korea are assumed to have more responsibility for the economic welfare in the East Asian region. It is very obvious that East Asian regionalism (EAR) cannot be put into practice without these countries’ strong support. China-Japan-Korea (CJK) are key to the success of EAR, as they account for about 17% of both world GDP and trade. Unfortunately, the lack of institutional arrangements among China, Japan, and Korea has stalled the overall welfare benefit for the East Asian communities. The present driving force of the CJK relationship is the market, which is not enough. Therefore, the more institutionalized approach is needed to join these market activities so that CJK can sustain the economic growth in the long run. The main focus of the institutionalization of trade is to make these countries grow together so that positive externalities will be felt throughout the East Asian region.

Tracing back the relations since the post-World War II era, economic ties between Japan, Korea, and China have evolved gradually. The evolution of trade activities emerged from China, which has had a substantial transformation of its trade structures. In the early 1990s, primary commodities accounted for more than one-third of China’s total exports to Japan and Korea. In the new millennium, primary commodities are still the leading Chinese export to Japan and Korea, followed by the fast-growing machinery and transport category (Chan and Chin Kuo, 2005). From this point of view, trade within the North East Asian region is deemed to have substantial movement as a result of the shift of trade towards a more industrialized structure. The emergence of China as a regional manufacturing center is a dominant factor that contributes to this trade shift.

It is clear that trade activity within the North East Asian region is very intense, which acts as the major contributing factor for economic growth in the region. The vast amount of trade has very likely been steered by the amount of foreign direct investments (FDIs) flows among them, with Japan as the leader (Watanabe, 2008). In other words, the economic transformation in China and Korea that geared up trade was enhanced by Japan’s role in making investments in those countries. Thus, trade within the North East Asian region has had substantial movement as a result of the shift of trade towards a more industrialized structure. The present driving force of the China-Japan-Korea relationship is the market, which is not enough by itself. A top-down regionalism needs to be in place to work with market forces. The main focus of the regionalism is to make these countries grow together so that positive externalities can spread throughout the East Asian region. In the long run, it is expected that CJK will lead regionalism in East Asia.

Regionally speaking, East Asia has been nurtured by a market-driven expansion of trade and FDI. Kawai (2007) describes the data of a heavily expanded region’s trade and FDI over the past two decades:

East Asia’s exports, rose accordingly from 14% of world total exports in 1980 to 27% in 2006, while its imports expanded from 15% to 24% during 1980–2006.2 FDI inflows into East Asia (including Japan) more than tripled from 5% of world total FDI inflows in 1980 to 16% in 2005, while East Asian FDI outflows increased from 5% to 11% of world total outflows over the same period. East Asia’s global expansion of trade and FDI has been accompanied by rising intra-regional concentration of trade and FDI activities.

In this book, EAR is defined by the joint region of CJK and the Association of Southeast Asian Nations ASEAN (ASEAN plus three [China, Japan, and Korea]), which refers to the World Bank 1993 publication, “The East Asian Miracle” that defines East Asia as the North East Asian and emerging Southeast Asian economies. Due to data limitation, ASEAN4 (Malaysia, Thailand, Indonesia, Philippines) will serve as a proxy for ASEAN countries. In the last decade, the share of intra-regional trade of ASEAN+3 is almost 60% and is still increasing. The coalition of ASEAN and CJK has become more strategic in recent years. Firms have openly responded to the challenges of globalization by starting a process of product integration across national boundaries. Production stages are often conducted in more than one country rather than producing it in a single country. This trend is still largely driven by the market rather than the FTAs, so it is fair to say that ASEAN+3 is experiencing regionalization (bottom-up process) but still not reaching true regionalism. In order to have long term sustainability, this market-driven process should be matched by institutionalization, that is, region-wide FTAs.

Having said this, a concrete structure of region-wide FTAs is needed both for short- and long-term goals. As a starter, a single East Asia-wide FTA needs to be put into action. Numerous estimations¹ have openly described the potential benefits from an ASEAN+3 FTA. But it is important to note that this action would face major challenges, as Kawai (2005) argues:

Establishing a single East Asia-wide FTA, however, is no easy task once there is a proliferation of many different FTAs/EPAs [economic partnership agreements] in the region. Each FTA/EPA may have different external tariffs, exclusion lists and rules of origin ... . To make the task easier, each FTA/EPA should have transparent, simple rules with regard to external tariffs, exclusion lists, rules of origin, and harmonization of standards, procedures and regulations. Convergence towards identical rules and common tariff rates, rules and standards is highly desirable.

The challenges cited by Kawai can be classified as technical challenges; should they be solved, non-technical challenges will still need to be addressed. Among those non-technical challenges, some have proven to be major obstacles. Foremost is the history among China, Japan, and Korea, which is marred by clashes. Secondly, ideological differences and political polarization, remnants from the Cold War, have continued to have a major impact on the relationships among the countries in East Asia. Although such ideological concentration is becoming less significant, the absence of a common political bond among the countries in East Asia could be a major problem when faced with a common enemy, such as a global economic crisis. This book defines political bond as regionalism/institutionalism.

Regionalism plays some important roles: guiding directions, providing a vision, and setting up the guiding principle in organizing and creating a regional community. These overall roles have led to the important question of what kind of regional organizations should be formed, and how they should be formed and operated:

Should Asia follow the EU model to transfer national sovereignty to a regional organization so as to develop a great unity of East Asia? Or should East Asia develop its own model of regionalism that defends national sovereignty, and adopt the more informal, weakly organized dialogue forum, incrementalism, consensus-building, and ASEANization approaches? (He, 2004)

The 2007 ASEAN+3 Singapore meeting was a giant leap towards a better bond among the East Asian countries. One of the points in the chairman’s statement was outlining the next steps for member countries. The understanding is that ASEAN+3 members will operate under a broad scope of economy, security, politics, and social cooperation (Yoshida 2002). Since ASEAN has already become a mature institution, they will be in the driver’s seat to eliminate the non-technical problems facing East Asian Regionalism.

1.1.1 The political economy of trade liberalization

An East Asian–wide FTA is not the ideal form of regionalism. The ultimate goal will be the World Trade Organization (WTO), which is a totem of multilateralism. Departures from multilateralism create the so-called “spaghetti bowl effect.” The term was originally introduced by Jagdish Bhagwati in his works with Ann Krueger, The Dangerous Drift to Preferential Trade Agreements, AEI Press, 1995. He then made it more pronounced through his later papers (e.g. Jagdish Bhagwati, David Greenaway, and Arvind Panagariya, “Trading Preferentially: Theory and Policy”; The Economic Journal 108: 1128–1148; Jagdish Bhagwati, “Testimony, Subcommittee on Domestic and International Monetary Policy,” Trade and Technology; April 1, 2003; U.S. House of Representatives). Bhagwati stressed that FTAs created the scheme of the production network, which is not consistent with the principle of economic efficiency. He then named the result as the spaghetti bowl phenomenon: crisscrossing lines likened to strands of spaghetti tangled in a bowl. The spaghetti bowl phenomenon as referred to by Bhagwati is an inevitable result of FTAs that reduce or eliminate tariffs on imports from specific countries and cannot be circumvented simply by changing the format of FTAs (Kotera, 2006). In other words, the spaghetti bowl phenomenon acts as a stumbling block for ...

Indice dei contenuti

• Cover
• Title
• 1  Introduction: Making East Asian Regionalism Work
• 2  East Asian Regionalism: The Role of Northeast Asian Nations
• 3  The Impact of CJK’s Vertical Intra-industry Trade on ASEAN4’s GDP Per Capita
• 4  The Determinants of CJK’s Vertical Intra-industry Trade to ASEAN4 countries
• 5  China-Japan-Korea (CJK)’s FTA Strategy toward ASEAN Countries
• 6  The Determinants of East Asian Regionalism
• 7  Conclusion
• Appendix
• Notes
• References
• Index