Business Times, Singapore

Regional integration is a pipe dream

There’s a mismatch between many of the Asian initiatives and the facts on the ground

By Razeen Sally

18 November 2009

Those who favour a big push for regional integration in Asia now have their day in the sun. They say that the global economic crisis has accelerated the decline of America and the rise of China, India and other emerging powers. Power is shifting inexorably from the West to Asia.

In geopolitics, Japanese and South Korean questioning of security dependence on the United States has opened up new ground. In geoeconomics, the severe contraction of export demand in the West, coupled with a worrying medium-term global economic outlook, strengthens the argument that Asia should integrate to exploit regional sources of growth.

Japanese Prime Minister Yukio Hatoyama wants to push regional economic integration through an East Asian Community. Australian Prime Minister Kevin Rudd has proposed an Asia Pacific Community.

Where does Apec fit in? Can it be a powerful vehicle for regional integration? Hardly. Apec’s membership is diverse and unwieldy; its agenda has become impossibly broad and unfocused; its vaunted Open (that is, non-discriminatory) Regionalism is dead in the water; and these days it is driven by shallow conferencitis and summitry. It cannot be expected to make a major contribution to regional integration.

An Apec FTA initiative (FTAAP - Free Trade Area of the Asia-Pacific) was launched at the Apec Hanoi Summit in 2006. It has gone nowhere: Political and economic divisions in such a large, heterogeneous grouping are manifold and intractable.

The best Apec can hope for is to encourage ’best-practice’ trade-related policies through research, mutual surveillance and exchange of information - akin to what the Organisation for Economic Co-operation and Development (OECD) does for its members.

Looking beyond Apec, what kind of regional cooperation is desirable and achievable? I will confine my comments to regional-economic-integration initiatives.

There is already an alphabet soup of bilateral and plurilateral FTAs in the region. Asean plans to deepen its integration through the Asean Economic Community (AEC) and the Asean Charter.

There is talk of folding these arrangements into larger, integrated FTAs: A Northeast Asian FTA, comprising China, South Korea and Japan; an Asean Plus Three (APT) FTA; and an Asean Plus Six FTA that would subsume APT and India, Australia and New Zealand. Then there are East Asian initiatives on financial and monetary cooperation: The Chiang Mai Initiative on currency swaps; the Asian Bond Fund and the Asian Bond Market Initiative; an Asian Currency Unit; an Asian Financial Stability Dialogue; and an Asian Economic Secretariat.

But there is a mismatch between many of these initiatives and the facts on the ground. That is because the foundations of regional economic integration are weak.

Economic integration is most developed in East Asia. But a big chunk of intra-regional trade and foreign direct investment (FDI), centred on information and communication technology (ICT) products, is in the form of production-sharing arrangements for export to the West.

In other words, East Asian regional integration is tightly linked to global integration. Apart from that, East Asia has highly malintegrated markets in manufacturing, services and agriculture.

South Asia is the most malintegrated region in the world. Its intra-regional trade is barely above 10 per cent of its total trade; and intra-regional trade is about 5 per cent of regional gross domestic product. Finally, East and South Asia are much less open to finance than they are to trade and FDI. Asian countries are far more connected with global financial centres in the West than they are with each other.

How realistic are regional economic integration initiatives? To begin with, Asia’s noodle bowl of FTAs is ’trade light’. With few exceptions, FTAs have not changed national practice in a liberalising direction. That is also true of Asean. Its economic integration has been limited to tariff cuts, but it has a pathetic record in tackling non-tariff regulatory barriers - the real obstacles to cross-border commerce in Asean. It is open to doubt whether the AEC and the Asean Charter will change matters.

Political differences

The South Asian Free Trade Area (Safta) is much worse. It already excludes over half of intra-regional trade and restricts much of the rest through high non-tariff barriers and complex rules of origin. Trade between its two biggest countries, India and Pakistan, is minuscule.

What about region-wide FTA initiatives, especially APT and Asean Plus Six? For starters, inherent discrimination would compromise regional production networks linked to global supply chains in ICT, especially where non-trivial tariffs still exist, and restrict the expansion of global supply chains to other areas of manufacturing, services and agriculture. Moreover, huge economic gaps and political differences - notably nationalist rivalries between China, Japan and South Korea, and between India and Pakistan - will stymie Asian regional integration for some time to come.

Therefore, it is pie-in-the-sky to expect a strong, comprehensive FTA in Asia. Rather the result is likely to be a very low common denominator - another trade-light FTA that would add to an expanding noodle bowl.

Lastly, regional monetary and financial cooperation - so far confined to East Asia - is embryonic and very soft. It is Utopian to expect it to become much harder anytime soon. Realistically, it can only firm up gradually through modest steps such as increasing regional liquidity arrangements, improving regional economic-policy dialogue and extending initiatives to India.

Asian economic integration will only work bottom-up if policies and institutions improve in its individual members. There is no realistic alternative to renewed unilateral liberalisation of trade and FDI, with accompanying competitive emulation, to accelerate regional and global economic integration. That is the key to extending MNE (multinational enterprises) supply chains in the region, and to opening up regional markets for domestic producers and consumers.

Asian regional institutions such as Apec, Asean, Safta and APT can be useful at the margin. They can be chat forums, gradually improve mutual surveillance and transparency, promote trade facilitation and ’best-practice’ measures, and (at best) cement unilateral liberalisation and help to prevent its reversal in difficult times. But more ambitious regional initiatives are inadvisable, indeed unachievable. That holds for regional FTAs. Better, therefore, to be modest and realistic.

The author is director of the European Centre for International Political Economy in Brussels and on the faculty of the London School of Economics