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Asian integration: Prospects and challenges

The Manila Bulletin Online May 22, 2005 Opinion/Editorial


TWO Sundays ago, in my inaugural column, I spoke of an emergent "PAX ASIA-PACIFICA," a conglomeration of increasingly integrated Asia-Pacific nations encompassing the whole of both continental and archipelagic Asia — including the Philippines — and stretching as far as the western coast of continental North America, and Australia and New Zealand. A "United States of Asia," akin to a "United States of Europe" or European Union (EU), if there is in fact one to be realized in the not-too-distant future, will be dependent on accelerating such unification or integration – geopolitically and more importantly, at this time, economically – at the same dealing with its inherent obstacles. Such a coming together of Asia is manifested by the emergence of both the ten nations of the Association of Southeast Asian Nations (ASEAN) and of China – as a free trade area whose combined populations will soon reach nearly two billion people, almost a third of the world’s population.


Integration is not a novel idea. Long before "globalization" became a byword, political and business leaders already recognized the value of "strength in numbers." And countries sought – in one way or another – to align themselves strategically with other countries, the better to attain their economic and/or political objectives. In Asia, however, countries have tended historically to shun foreign contacts. Japan, China, and Korea – were prime examples of this tendency. During imperialism’s heyday, Japan and China had to be forcibly opened up to foreign trade.

In our time, of course, political, economic, and security groupings are organized no longer by force but by shared interests. Integration nowadays is a compact based on the weighing of costs and benefits. And the main stimulants of regional integration is the development of a global financial market, the establishment of worldwide supply chain networks, and the revolution in information and communications technology (ICT).

Europe and the Americas were the first to form regional blocs. In Asia, political, religious, cultural, geographic, and social diversities prevented integration from taking off so easily. Everywhere, of course, it took visionary leaders to look beyond the inherent differences among countries – and to focus instead on their commonalities.

ASEAN in the beginning

The establishment of ASEAN – the Association of Southeast Asian Nations – illustrates this point. In forming ASEAN in August 1967, Southeast Asian statesmen literally took a leap of faith. At the time the five original members of ASEAN agreed to get together, Indonesia was in a virtual state of war with both Singapore and Malaysia as a result of konfrontasi. Meanwhile, Manila and Kuala Lumpur were estranged over Sabah. In fact, Jakarta and Kuala Lumpur did not even have formal diplomatic relations when they signed ASEAN’s Charter in Bangkok, on August 8, 1967. While ASEAN’s initial motive was principally political, it responded in due time to its need for economic integration – by approving in principle in 1992, the ASEAN Free Trade Area (AFTA).

Now, more than a decade later, the integration of East Asia is slowly becoming a reality. Step-by-step agreements have been arranged that provide neighborly assistance to East Asian countries in distress. For example, we now have the "Chiang Mai Initiative." This makes possible bilateral currency swaps meant to provide countries caught in a financial crisis with additional liquidity to stave off another 1997-type turmoil. Nowadays, bilateral trade pacts not only eliminate trade barriers. Often enough, they also encourage broader areas of cooperation. For instance, the Japan-Singapore Economic Partnership Agreement (EPA) encompasses not only trade and investment but also technical cooperation, information and communications technology, energy, science and technology, human resource development, employment and labor management relations, small and medium enterprises, broadcasting, and tourism. Trade facilitation – through the harmonization of standards, national treatment, and capacity-building – has become the by-word in bilateral and regional economic arrangements. Bilateral agreements are becoming a practical way of overcoming the delays and difficulties besetting multilateral consensus under the World Trade Organization (WTO). Of course, economists still agree that multilateral liberalization is the ideal approach to global trade that mutually benefits the rich and poor countries.

In the hubs-and-spokes model of preferential trading agreements, ASEAN has become the core of East Asian integration. Even Asia’s most powerful economies clearly see the potentials of integration with ASEAN. For one, ASEAN member-states have moved significantly to lower intra-regional tariffs. Already the six earlier ASEAN member-countries have reduced 99% of the products in their Common Effective Preferential Tariff (CEPT) inclusion list to within the 0-5% tariff range. The newer members – Vietnam, Cambodia, Laos and Myanmar – have carried out almost 80% their CEPT commitments. Since the two major economies in the East Asian Economic Grouping – Japan and China – are also political rivals, ASEAN is likely to become the centerpiece of East Asia’s emerging preferential trade agreements. ASEAN plus China is firmly in place, with ASEAN plus Japan, then ASEAN plus Korea, and possibly ASEAN plus India standing in the wings. But if it is to play this key role, ASEAN must quickly become more competitive, more unified, and more closely integrated than it is now. Integration is an area where ASEAN has far from reached its full potentials. Indeed, various studies indicate that ASEAN is losing its competitive edge. And the bulk of the blame lies in ASEAN’s inability to integrate fully within its AFTA framework.

In a 2004 study, McKinsey’s Quarterly pointed out emphatically that ASEAN could no longer compete with China and India in labor costs. To regain its competitiveness, the consultancy firm recommended that Southeast Asia economies raise workers’ productivity and cut costs across the supply chain in order to attract Foreign Direct Investments (FDI), boost demand, and increase regional exports. The McKinsey study pointed out that ASEAN must also find a way to reduce tariffs and non-tariff barriers that raise the costs of doing business across the region. In addition, ASEAN consumer prices – which, in theory, should converge towards a standard floor level in an integrated free trade area – have continued to be highly divergent with an average variation of 31% across our sub-region. McKinsey’s says ASEAN is paying the price of fragmentation, since the costs of transacting business in Southeast Asia contrast poorly with China’s relatively better-integrated economy. As a result, ASEAN firms cannot fully take advantage of the economies of scale their internal market of nearly half a billion people theoretically gives them. In October 2003, the ASEAN countries agreed to create a Common Market by 2020. The member-states committed themselves to accelerating the pace of integration in eleven priority sectors. They also drew up a "road map" to guide them toward their vision of an ASEAN Economic Community.

China As the Catalyst For Asian Integration

Undoubtedly, China’s fast-growing economic, military, and political power is helping drive Asia toward regional integration. The Asian states all seek to mitigate business competition from China, while benefiting from its illimitable market. The framework for comprehensive economic cooperation that ASEAN and China signed in November 2001 immediately expanded two-way trade. In 2003, China’s exports to ASEAN increased by 31.2%, while its imports grew by 51.8%. The "ASEAN-10 plus China" free trade area is scheduled for completion by the year 2010. By that time, it will encompass a market of more than 1.7 billion people, a collective GDP of almost US$2 trillion, and intra-regional trade of US$1.2 trillion. ASEAN is also negotiating economic partnerships with Japan and Korea, India, and Australia-New Zealand. In this regard, we must always remind ourselves that, despite Japan’s economic slowdown in recent years, it remains as ASEAN’s top export market, its number one source of investment capital and most generous donor of official development assistance (ODA). Japan’s economy still is roughly eight times larger than ASEAN’s – and about five times larger than China’s.

What do these changes in China mean for the rest of us in Asia, especially Southeast Asia? East Asian economies that are complementary with China’s – like those of Hong Kong, Taiwan, and to a lesser degree, Singapore, South Korea, and Japan – are benefitting from China’s integration with the global economy. Given the downturn in ASEAN’s traditional markets, China has emerged as an engine of growth for Southeast Asia. If current trends continue, China will soon surpass America’s total trade with our sub-region. But, the ASEAN countries also face competitive challenges from China itself on many fronts.

The most immediate is competition in labor-intensive industry. China’s labor costs are the lowest in the whole of East Asia – outside of Indonesia’s. Already China has become the pre-eminent producer of labor-intensive manufactured goods in the world. A second front in ASEAN-China relations is the competition for capital. At the beginning of the 1990s, Southeast Asia was taking in 61% of all Foreign Direct Investment (FDI) flowing to developing economies in East Asia – while China was receiving only 18%. Ten years later, it is China that was gaining 61% of FDI, while ASEAN’s share had dropped to a mere 17%. In 2002, FDI going to China (which now makes up nearly four-fifths of all the FDI coming into East Asia) surpassed that going to the United States – traditionally the number one destination for migratory capital.

Competition between China and ASEAN for third-country markets has also become intense. The export structure of the more-developed ASEAN economies – just like China’s – is built around electronic products, but China is now both a more efficient and lower-cost producer of electronics. In 1990, China had only a 2% share of American electronics imports. By 2000, its share had reached 9.7% – topping those of Singapore, Malaysia, Thailand and the Philippines together. A fourth China-ASEAN arena is competition on the value-added chain. For China’s competitors, therefore, the only viable long-term strategy is to move up the technology ladder – keeping always ahead of China’s lower-cost manufacturing. But the ASEAN economies are finding this difficult – because China is large enough, and sophisticated enough – to be able by itself to enhance every link on the production chain. Since China has such a large domestic market, its corporations enjoy built-in economies of scale. Already, China’s larger corporations are moving up the value chain – into sectors where Chinese products could challenge even the western and Japanese manufacturers that now supply the capital goods for China’s light industries. If it is to compete with China – and with all other comers – ASEAN must raise worker productivity and cut costs across the board. And the only way it could do so is by integrating the Southeast Asian market more effectively than it is doing now – to gain economies of scale, force convergence toward regional best practices, reduce transaction costs, and create a unified market attractive to foreign investors.