Business Times - Singapore - 03 Jun 2005
The rise and rise of Asian trade
A mammoth regional grouping involving Asean and other countries and groups is in the works
By K KESAVAPANY
ASIA is in the process of creating a huge regional grouping such as the Asean Plus Three, which includes Asean, plus China, Japan and Korea, and perhaps other wider groups as well.
How is this made possible? It is based on three key decisions: First, the rebuilding of Japan, under Premier Eisaku Sato of Japan, after the Korean War, which gave Japan its economic boost.
Second, from the decisions of Chinese leader Deng Xiaoping, in 1978, to liberalise first the agricultural sector of China, and later through his reforms via the Four Modernisations and the Open Door Policy, which led to the explosive growth of the 1980s and 1990s.
And third, to the brave decisions of Indian Prime Minister Narasimha Rao and his Finance Minister Manmohan Singh, who decided in 1991 to break the stagnation of Nehruvian socialism, and liberalise the economy.
Japan had contributed by helping first to industrialise the Four Asian Tigers, then the rest of Asean, after the 1985 Plaza Accord had made the yen too expensive to continue low-value production in high-cost Japan.
The combined synergy of the explosive energies in China, Japan, Asean and India has resulted in the evolution of various initiatives such as the East Asian Summit, all of which strengthens Asian regionalism. The East Asian Summit, which will be held in Kuala Lumpur in December, will have to make some important decisions on the East Asian FTA, such as the inclusion of India.
The significance of the East Asia FTA is that it serves as a means of solidifying existing market integration within an institutional framework. Within Asian regionalism, there is substantial scope for improving regional financial arrangements, as instruments for reducing uncertainty, developing cooperation and deepening economic integration.
The process of economic integration should include not just economic exchange but also needs the setting up of rules and institutions. Without political mechanisms to provide leadership, to aggregate interests and convert them into policy, even the most intense economic interests may not lead to permanent linkages.
Other initiatives which have helped to build up Asian regionalism include the Asean Free Trade Area (AFTA); the numerous Asean plus Partners FTAs; the financial linkages such as the Chiangmai Initiative (which includes bilateral currency swaps) and the Asian bond market.
Asians have much financial firepower nowadays. The Asian combined total of forex reserves is now US$2.5 trillion. It is this huge buying power that props up the US economy, by financing the twin US deficits, the budget and trade deficits.
Now Asians are also thinking that there should be further integration, by stimulating domestic demand, such as what Thai Prime Minister Thaksin Shinawatra has started doing, in order to lessen dependence on the US market. This will help develop sustainable intra-Asian trade flows, as well as ease tensions between the US and Asian countries over the US’ growing trade deficits.
When discussing Asia, the key country is still Japan. It is still the world’s second largest economy. Even today, after the crash of 1990 caused by the bubble economy, Japan is still extremely influential. Once the stagnation problems are dealt with, it will resume being a world economic power. But Japan has an image problem because of its poor economic management of problems such as asset price bubbles; corporate and public debts; weakness of its financial system; and divided and indecisive institutions.
At some point, Japan has to choose between balancing against China with the US, and bandwagoning with China. Japan is also concerned about an Asian bloc comprising China Asean-South Korea, which may exclude it. If this bloc is led by China, then there may be future problems for the US/Japan; China is a more ardent supporter of an exclusive East Asia grouping than Japan, because of the US factor and rivalry with Japan.
The potential giant of the 21st century is China. If China continues to embrace market reforms, regional isation would be unstoppable. China is thus key to the development of an Asian Trade Bloc, as its fast development serves as an engine, driving both economic growth as well as regional trade.
The rise of China as an economic power has affected and shifted global trade flows. China, for example, has accounted for 40 per cent of the growth in world oil demand since 2000. Another example: In January 2005, China-Japan trade reached US$96.6 billion, exceeding US-Japan trade for the first time. In 2002, China overtook the US as the largest recipient of FDI in the world. China’s exports grew by 35 per cent in 2003 and 2004, and are expected to grow by that magnitude in 2005.
In 2004, China surpassed Japan to become the third largest exporter after US and Germany. It is expected that China will be the largest exporter in 2008. No country has expanded its foreign trade as rapidly as China: by five times from 1980 to 2000.
The signing in November 2004 of the proposal to negotiate a China-Asean FTA was undoubtedly motivated by increasing trade volumes as well as political factors. Both sides wanted to engage the other.
Asians of course need to be sober about the realities underlying the dazzling statistics. We should not be carried away by euphoria, as there are still many huge domestic problems of poverty, under development, social inequalities, mass unemployment and health problems. Asia still needs decades of hard developmental work before the progress that has been achieved in Asia’s cities is spread to the backward rural areas.
To give one example of the need to be sober and restrained about the rise of China, a 2003 study by the Rand Corporation has identified eight major risks to China’s continued rapid economic growth over the next decade, as follows:
– fragility of the financial system and the SOEs;
– the economic impact of corruption;
– water scarcity and pollution;
– a possible shrinkage of FDI;
– the spread of AIDS and other epidemic diseases;
– rising unemployment, poverty and social unrest;
– energy shortages; and
– possible conflict with Taiwan.
What has been mentioned about China could of course apply to India, in different aspects.
The rise of East Asia
East Asia is now a major growth engine in the global economy. Over the last 30 years, real GNP has multiplied 12 times in the NIEs, 11 times in Japan, and six times in China as well as in Asean. By comparison, the US economy expanded 2.5 times and the world economy three times. In 1980-93, China’s GNP per capita increased at the rate of 8.2 per cent annually. In these years, Japan’s per capita GNP rose at the annual rate of 3.4 per cent and the US’s at 1.7 per cent.
Growing intra-Asian trade
Prior to the mid-1980s, foreign trade in East Asia was dominated by trans-Pacific trade centred on the US. Between 1986 and 1992, however, the share of Asian exports destined for other Asian countries rose from 32 per cent to 44 per cent, while those destined for the US dropped from 37 per cent to 24 per cent.
The strengthening of intra regional trade ties since the 1970s, far from constituting a move towards autarky, has simultaneously intensified both regional and global ties. Between 1978 and 1992, for example, US-China trade increased 30-fold from US$1.1 billion to US$33.1 billion while US trade deficits with the region also soared.
Asean’s trade with China also grew greatly, rising from US$925 million in 1977 to US$74 billion in 2002. Yet it is the growth of intra-regional trade that has been most striking. By 1990, intra-East Asian trade accounted for 4 per cent of world trade compared with just 0.5 per cent in Latin America, and East Asian trade and investment intensification has continued its rapid growth throughout the 1990s.
Rise of the Asian Bloc
With regionalisation well under way, three important trade blocs have thus emerged in the world. They are Western Europe, Asia and North America. Western Europe’s intra-bloc exports represented 30.9 per cent of the world total in 1995. Those in Asia and North America accounted for 13.5 and 5.7 per cent of the global aggregate, respectively, in the same year.
In other words, the intra-bloc exports of the group of three blocs constituted one half of the total global merchandise exports in 1995. In that year, on the other hand, inter-bloc exports from Asia to North America accounted for 6.3 per cent of the world total. The similar exports from Asia to Western Europe represented 4.4 per cent of the global total, while those in reverse came to a slightly lower 4.3 per cent.
They were the world’s top three in the ratio between inter-bloc exports and the global aggregate. Merchan dise exports of the rest of the world were a mere 12.7 per cent. This clearly indicates the dominance of the three blocs in international trade.
Intra-bloc exports of Western Europe, Asia and North America accounted for half of the world total in 2000. Asia, despite its financial crisis in 1997, remained strong in the export trade from 1995 to 2000. Judging from the fact that exports from Western Europe have been on the decrease while trade relations between North America and Asia are being further strengthened, the centre of international trade has shifted from the Atlantic region to the Pacific.
The US trade with Asia at US$685 billion a year has, for more than a decade, exceeded US trade with the EU at US$577 billion a year. Another striking statistic is that whereas between 1997 and 2003, world trade increased by a third, to reach $15.4 trillion, in the same period, intra-Asian trade increased by about 50 per cent to reach US$949 billion.
Singapore’s stance: ’Think Regional, Act Global’
Singapore has played a role in helping to strengthen Asian regionalism, via its activist and catalytic approach to regional FTAs.
Singapore has been a pioneer in the business of negotiating FTAs. At first, it was accused by neighbours of sabotaging the region, but later the other Asean states saw the logic and joined the stream of FTA negotiations. The Singapore approach to FTAs is to be consistent with WTO requirements and rules - we give first preference to global negotiations on free trade, such as the Doha Round, but we recognise the slow and difficult pace of the Doha Round and its complexity.
Singapore chose to go global, partly to compensate for the slowness of Asean progress towards AFTA, and partly to overcome the economic stagnation in the region after the Asian financial crisis. Hence we opted for complementary and faster bilateral FTAs.
Such bilateral FTAs also demonstrate that both parties have the political will to launch and complete such FTAs; these are strong political signals. They are effective ways to ensure continued access to trade blocs like NAFTA and EU.
Singapore also supports regional FTAs like Asean FTA and Asean Plus Three FTA, and Pacific FTA of the US, Singapore, NZ, Chile, etc. In our view, FTAs act as catalysts and set standards, like the US-Singapore FTA, which is considered the Gold Standard in FTAs. FTAs also act as building blocks for regionalism.
Whilst we await the launch of the East Asia FTA in 2020, which will not be easy, given the current tensions in Sino-Japanese relations, Singapore will be busy with bilateral FTAs. The only big ones missing are with the EU and with China, as the CECA with India is expected to be signed in June 2005. Meanwhile intra-Asian trade will keep rising, centred on China.
Whilst the Asian trade bloc has no formal structures or political framework underlying it and is based on the mighty economic machines, first of Japan then of China, the continuing growth of intra-Asian trade serves to justify the name of an East Asian regional bloc.
The author is Director of the Institute of Southeast Asian Studies. This article is adapted from a recent address by him to the partners of the consulting firm, McKinsey & Co.