Overview of Asian Regionalism

The core of Asian regionalism is East Asia, where economic cooperation started and first gained success. Huge amounts of literature have been devoted to understanding and emulating the economic success of East Asia. While obstacles remain in terms of human resource development, infrastructure, and governance, East Asia has undoubtedly taken an important role in the global economy. East Asia's share of world output had risen substantially over the past two decades, overtaking the US and capturing a large size of world exports, matching that of North America (Drysdale 2005).

The growth and deepening integration of the East Asian region has been shaped by three huge waves of trade and industrial transformation. The first wave occurred with the rise of Japan and its emergence as a major industrial power. The second wave was led by the newly industrializing economies (NIEs) of Northeast and Southeast Asia in the late 1970s and 1980s. The third wave was characterized by the rise of the PRC. These three major time periods restructured the economic architecture of East Asia, making it an economic powerhouse and cornering almost a quarter of world output (Drysdale 2005).

East Asia had grown more rapidly and steadily than any other region in the world. Intraregional trade in the Asia and Pacific region accounts for 54% of the region's total trade, surpassing intraregional trade among the nations of the North American Free Trade Agreement (NAFTA) and approaching the level of European Union (EU) (Table 3 [ PDF 20.2KB | 1 page ]).

Trade and investment has been East Asia's economic lifeblood for the past few decades and its source of growth. Investment inflows to the Asia and Pacific region have also surpassed NAFTA in recent years. Export and import in merchandise trade is among the highest in the world and has overtaken NAFTA in terms of trade volume and share in world total. The Asia and Pacific region had shown the highest growth rate in international trade for the period 2000–2006 and had consistently established itself as the second strongest economic bloc since 2000, next to the EU. The consolidation of the Asia and Pacific region's economies is a huge factor in further strengthening the region (Table 4 [ PDF 34.4KB | 1 page ] and Table 5 [ PDF 29.5KB | 1 page ]).

The industrial and trade transformation of East Asia over the last half-century has been driven by policy initiatives and market forces that opened up trade and investments in the East Asian countries. This created the opportunity to dynamically link the East Asian economies to the international production chain and also provided an environment conducive for sustained FDI flow.

The initial phase of liberalization took place in the 1980s and 1990s, as countries in East Asia began liberalizing trade and FDI policies and deregulating domestic economic activities. This liberalization was part of the commitment that had been made to the World Bank and International Monetary Fund (IMF) to create more comprehensive structural reform policies in exchange for economic assistance during the Asian financial crisis. Liberalization activities were also stimulated by the realization of the East Asian countries that liberalization and deregulation would promote economic growth.

Meanwhile, policies toward FDI liberalization started around the mid-1980s as countries began to realize that FDI inflows would promote economic growth. Some of the measures undertaken were the reduction of the number of sectors and industries on the negative list and relaxing the limits on foreign equity ownership. A number of economies also introduced tax holidays or tax breaks to encourage more FDI inflow (Urata 2008b).

As regionalization developed, liberalization of trade and FDI also further progressed in East Asia. In 1992, ASEAN member countries created the ASEAN Free Trade Area (AFTA), which was designed to enhance trade and FDI flow in the region. AFTA is considered to be the centerpiece of the ASEAN economic integration policy and provided the impetus to explore sub-regional cooperation.

Another regional framework that facilitated trade and FDI liberalization in East Asia is the Asia Pacific Economic Cooperation (APEC) forum. APEC provided the venue for East Asian countries to engage North America, South America, and Oceania in economic dialogue and to create a venue to discuss issues vital to economic development in the region. Though participation is voluntary, the Bogor goals¹ outline full liberalization of trade and FDI by 2010 for members with developed economies and by 2020 for member with developing economies—these goals have been well integrated in member countries' economic agendas. To date, APEC's member countries have made significant strides in liberalizing trade and FDI.

Several studies have been devoted to understanding the shape of East Asia's economic architecture (Kawai 2007, Urata 2008b, Soesastro 2006, Nanto 2008). Analysts agree that the development of the East Asian regionalism is propelled by three factors: 1) market-driven economic integration, 2) negotiated trade liberalization initiatives, and 3) the regional financial cooperation initiatives following the Asian financial crisis. The East Asia integration process started as market-led integration and progressed into an institution-led process as East Asia pursued bilateral and plurilateral free trade agreements (FTAs) and financial cooperation initiatives.

3.1 De Facto Economic Integration in East Asia

The market-driven forces of cross-border trade, FDI, and finance pushed the initial phase of economic integration in East Asia. The simultaneous expansion and reinforcement between trade and FDI, otherwise known as the trade-FDI nexus (Urata 2001, Kawai 2005), was largely determined by the establishment of regional production networks and supply chains by multinational corporations (MNCs). This phenomenon became known as “Factory Asia” (Soesastro 2006). By the end of 1990s, the intensity of regional trade in East Asia was already comparable to that of the EU and NAFTA. East Asia was also slowly veering away from its dependence on the US and European markets. This dependence is expected to further decline as demand for final products within East Asia continues to grow (Kawai 2007).

Meanwhile, rapid FDI inflows into East Asia are largely attributable to favorable economic environments and the abundant supply of high-quality, low-wage labor. FDI inflows to East Asia over the past decades have grown rapidly, even at a faster rate than the region's growth in trade.

Many of these FDI movements were intraregional, from Japan and the NIEs to ASEAN and the People's Republic of China (PRC), as well as from ASEAN and to the PRC. MNCs specializing in manufacturing played an important role in enhancing economic integration. The increasing number MNCs from Japan, and later on from the NIEs, were key factors in linking East Asia to the global production chain since they tend to divide their production process into several sub-processes and relocate them in different countries in accordance to their comparative advantages. Such business arrangements have promoted vertical intra-industry trade within East Asia for capital equipment, parts and components, intermediate inputs, semi-finished goods, and finished manufactured products (Kawai 2007).

The PRC plays a key role in the international product fragmentation and the regional production network in general. The PRC's dynamic role on intra-regional trade has changed the structure of East Asia, and to a large extent created a positive, competitive boost for ASEAN.

The PRC will likely exert more influence in the region in the future, as it poses to capture a substantial portion of FDI inflows and outflows and increases its intra-industry and intraregional trade. About half of the increase in East Asia's share in world trade has been accounted for by the PRC. The rise of the PRC has further expanded “Factory Asia” and established what is referred to as the new pattern of “triangular trade” involving increased Chinese imports from East Asia and Chinese exports to third markets (Soesastro 2006).

In addition to trade and investment integration, financial markets are also rapidly integrating as a result of the deregulation of domestic financial systems, the opening of financial services, and the progressive relaxation of capital and exchange controls. Commercial banks in developed countries have begun operating abroad and consequently portfolio investments have strengthened linkages among the region's financial markets. At the same time, commercial banks in emerging economies have also expanded operations with their neighbors. However, compared to trade and FDI integration, financial integration in East Asia has been less pronounced because—apart from Japan, Hong Kong, China, and Singapore—most East Asian economies still impose capital and exchange restrictions and other barriers, which impede free flows of financial capital. Moreover, many of these emerging East Asian economies still have underdeveloped financial systems that are unable to attract investors (Kawai 2007).

3.2 De Jure Integration: Proliferation of Free Trade Agreement in East Asia

East Asia is a dynamic participant in FTAs. As of February 2010, 80 FTAs were in effect, with an additional 44 currently being negotiated within ASEAN +3. A total of 26 FTAs have been signed with other countries (Rest of the World), with 5 more FTAs awaiting ratification, and 64 under negotiation, proposed, or under consultation (Table 6 [ PDF 44.8KB | 5 pages ]). There are a number of reasons behind the surge in FTA in East Asia. While the growth of FTAs in East Asia typically is seen as a response to the sluggish progress of WTO negotiations (FTAs are often swifter and more convenient because of the bilateral or multilateral setting), there are other reasons for rapid FTA uptake, such as keeping up with the expansion of FTAs in other parts of the world, promoting domestic structural reforms, avoiding financial crises, and responding to rivalry among East Asian economies over regional market access (Urata 2008b).

Currently, there are a number of RTAs under study in the region. Most notable are the East Asia Free Trade Agreement (EAFTA) and the Comprehensive Economic Partnership for East Asia (CEPEA). The former involves the ASEAN +3 countries (ASEAN plus PRC, Japan, and Republic of Korea [hereafter Korea]), with the latter involving the ASEAN +3 and Australia, New Zealand, and India. For either of the RTAs under study, there is some consensus that the more practical approach would be a consolidation of the existing ASEAN FTAs (ASEAN +1) rather than negotiating an entirely new agreement. Nonetheless, there would still be difficult problems that would need to be addressed when consolidating existing FTAs.

Lately, there is also an on-going trend to seek partnership outside of the Asian region, particularly with India, EU, US, and South America. Japan, Korea, and PRC had been actively engaged in bilateral agreements and had become dynamic FTA movers in the world.

A significant development in FTA undertakings in the region is the signing of the Trans-Pacific Economic Partnership Agreement or otherwise known as the P4. The P4 is a free trade agreement between the four Pacific governments of Brunei Darussalam, Chile, New Zealand, and Singapore which was signed on 3 June 2005 and came into force on 1 January 2006. The Trans-Pacific Agreement aims to create a free trade agreement that could serve as a model within the Asia-Pacific region. It is open to accession to any APEC economy or other state, subject to terms agreed among the parties. In September 2008, the US Trade Representative announced that the US will negotiate entry into the P4 agreement. Australia, Peru, and Viet Nam also announced that they want to be part of this FTA. There is also a strong support from Chile for Korea to join in this agreement. The P4 is seen as a possible pathway for the creation of a wider Free Trade Area in APEC (FTAAP), an issue which has been deliberated in APEC for some time.

Kawai (2007) characterizes these East Asian FTAs as either bilateral (between two countries) or plurilateral (agreement among three or more countries), outward-oriented (seeking partnership outside of the region), with WTO-Plus coverage of issues beyond trade and services liberalization, particularly trade facilitation, investment, government procurement, and competition, and consisting of multiple ROOs, as most FTAs in East Asia take on a combination of three types of ROO rather than applying a single rule.

Additionally, Kawai noted that East Asian FTAs have cooperation components that aim to address the asymmetry in economic size and development between partner countries. Japan's bilateral initiative, called the Economic Partnership Agreement (EPA), is referred to as a “new age FTA” and typically includes trade facilitation and cooperation. Likewise, the PRC's bilateral FTAs with individual ASEAN countries focus on economic and technical cooperation, with a more lenient schedule for tariff liberalization.

3.2.1 Recap on Asian Regionalism

There is ongoing debate about the merits of preferential trading arrangements. In East Asia, however, there seems to be a more cautious approach and a deliberate effort to stay within WTO principles and open regionalism. East Asian countries appear to be mindful of the need for RTAs as building blocs for regional multilateralism. RTA initiatives in East Asia tend to work within a regional cooperation framework in order to seek solutions, opportunities, and institutions to address issues beyond trade and investments, such as social and environmental issues in the region.

Asian regionalism is characterized by open, gradual, and flexible systems that are responsive to the region's varying economic, political, and cultural realities. It does not follow a single track or fixed deadline, but rather is multi-track and multi-speed in order to account for the economic and political diversity of the member economies. Asian regionalism also takes on a bottom up approach. This means encouraging the countries, bit by bit, to make the necessary conditions for economic cooperation, e.g. creating subgroups or working groups that will address common domestic issues that impede regional cooperation. While some analysts refer to this as shallow integration, these characteristics have been lauded as necessary and desirable features of the Asian regionalism model to provide the foundation for wider collaboration and deeper partnerships in the long run (ADB 2008).

Asian regionalism is the product of economic interaction and outward-oriented growth strategies, reinforced by the integration of both policy and technology. The Asian financial crisis in 1997 highlighted the deep connections among economies in the region. The crisis has been referred to as the watershed of regionalism in Asia and exemplified the interdependence of the countries in the region. It also showed the importance of creating sound institutions and good governance to sustain economic growth (ADB 2008).

3.3 Regional Financial Cooperation and Integration

Sustained regional growth and integration in trade and investment increase the need to strengthen the regional financial architecture. Indeed, several financial cooperation and integration initiatives have been undertaken in the region.

Even before the 1997 crisis, ASEAN finance ministers had already agreed to work together on three important issues: strengthening the supervisory and regulatory framework of the banking sector, liberalizing the financial services, and evaluating the utility of the ASEAN Swap Arrangement (ASA) (Soesastro 2006).

Following the crisis, interest in financial cooperation intensified. Efforts towards increased risk management made East Asia the first region to actively pursue measures to establish regional monetary and financial cooperation. The regional economies embarked on several initiatives to strengthen the regional financial architecture, consisting of regional economic surveillance, liquidity support facility, and the development of the Asian bond market (Kawai 2007).

Several regional surveillance measures were launched in East Asia following the financial crisis. The most prominent, to date, is the ASEAN +3 Economic Review and Policy Dialogue (ERPD) process, which was launched in May 2000. The ASEAN +3 ERPD aims to prevent another financial crisis by creating channels for information sharing, assessment of economic conditions and policies, and potential for collaboration on financial, monetary, and fiscal issues of common interest.

The Chiang Mai Initiative (CMI) is considered to be the centerpiece of the liquidity support facility in East Asia and aims to address short-term liquidity needs in the event of a financial crisis or contagion and to supplement the existing financial arrangements. The CMI has two elements: the ASA and the network of 16 bilateral swap arrangements (BSAs) among ASEAN +3 members. Programs to link the CMI with IMF programs are currently underway to supplement the region's limited capacity to produce and enforce adjustment programs in the event of a crisis.

The idea of creating a regional bond fund crystallized after the 1997 financial crisis as East Asia saw the need to develop local currency bond markets as a means to lessen the region's heavy dependence on banks. The basic idea was to create a channel to mobilize the region's vast pool of savings directly toward investment in the region's long-term financial stability without going through financial centers outside of the region. Among the initiatives undertaken at the regional level are the Asian Bond Fund (ABF) initiative and the Asian Bond Markets Initiative (ABMI). Both were under the auspices of Executives' Meeting of East Asia and Pacific Central Banks (EMEAP) and the finance ministers of ASEAN +3. Alongside these initiatives are the APEC finance ministers' process and the Asia-Cooperation Dialogue (ACD) process, both of which aim to support the Asian bond market development.

3.4 Cooperation Beyond the Region: Prospects for an East Asia-Latin America and Caribbean Economic Partnership

The Asia and Pacific region and Latin America are characterized by wide disparity economically, politically, and culturally. The Asia and Pacific region is densely populated, accounting for 61% of the global population. In stark contrast, Latin America's population is barely 9% of the total global population. Similarly, the Asia and Pacific region's share of world GDP is almost at 30%, surpassing NAFTA and almost as close to that of the EU. Latin America, however, constitutes a modest 5.7% of total world output. In terms of world merchandise trade the Asia and Pacific region is responsible for more than a quarter of the world's total at 28%, while Latin America's share is only 5%. In world services trade, Asia likewise commands almost a quarter of trade in services at 22%, while Latin America and the Caribbean's share remained small at 3% (Table 7 [ PDF 38.2KB | 1 page ], Table 8 [ PDF 39.4KB | 1 page ], Table 9 [ PDF 32.2KB | 1 page ], Table 10 [ PDF 21.9KB | 1 page ], Table 11 [ PDF 21.9KB | 1 page ]).

Despite its high economic growth rate, the Asia and Pacific region is characterized by wide income gaps, as it is home to the richest and poorest sectors of the world if North and South Asia are to be included. The Asia and Pacific region's GDP per capita is at US$2,600, which is much smaller than Latin America's US$3,600.

Until recently, economic relations between the Asia and Pacific region and Latin American and Caribbean countries were almost non-existent and the two regions did not have much opportunity for dialogue and cooperation. APEC has become the forum for this opportunity, facilitating information exchange between the two regions. At present, however, this has not resulted in anything eventful in terms of economic relations between the two countries, and no sustained cooperative efforts have really been achieved. Tariff barriers remain as an impediment to increasing trade between the two regions. While average tariff rates have significantly fallen over the past years in the two regions, the Latin America and Caribbean average tariff is significantly higher than the East Asia and Pacific average, especially for agricultural products (Table 12 [ PDF 19.8KB | 1 page ]).

The PRC's entry into the global economy added a new dynamism to the Asia and Pacific region and Latin America's relationship. The PRC plays an important role in increasing trade relations between the two regions. As of 2007, the PRC gained market share in 21 economies and had become one of the top five exporters to Argentina, Brazil, Chile, and Mexico. The PRC also dominated the import share of a large group of Latin American and Caribbean countries, ranking among the top five importers in all 23 of them (Table 13 [ PDF 44.8KB | 2 pages ]).

The US remains the Latin America and Caribbean region's top export destination, with 45% of the regions exports going to the United States. The EU and the Asia and Pacific region only captured 14% and 11% of the region's exports, respectively. Chile was the top exporter in 2007, with 39% of its exports headed to the Asia and Pacific region (Table 14 [ PDF 29.2KB | 1 page ]).

Even with the influences of the PRC and efficiency seeking firms coming from Japan and NIEs, economic partnerships still vary depending on which countries are interacting between the Latin America and the Caribbean and the Asia and Pacific region. For instance, the Southern Common Market (MERCOSUR), with the exception of Paraguay, has become an important export market for the Asia and Pacific region in the past years. The Andean Community's share increased in the mid-1990s but has since declined to an almost insignificant share, except for Peru. For Central American countries, Asia's share in the market is negligible at less than 4% of the total exports, except for Costa Rica, which sells 20% of its exports to the Asia and Pacific region. On the other hand, Chile and Brazil stood out as the biggest trade partners for the Asia and Pacific region in the Latin America and Caribbean, with 40% and 16% respectively of their total exports in 2007 going to the Asia and Pacific region. In stark contrast, Mexico only has 3% of its exports going to the Asia and Pacific region, with the bulk of its trade being conducted with the United States (UNECLAC 2008).

In terms of trade composition, the Asia and Pacific region's export basket consists mainly of manufactures, especially in the intermediate and high technology product categories. Almost half of all Asia and Pacific regional exports were captured by the region itself in 2006, while non-Asia and Pacific region countries were secondary export destinations. On the other hand, intraregional trade characterizes the Latin America and Caribbean region, with intermediate and medium technology manufactures as the main products traded. In contrast, inter-industrial commodities dominate trade between the two regions. Exports from Latin America and Caribbean to East Asia are mostly primary products, while the Asia and Pacific region exports high tech manufactures to the Latin American and Caribbean region (Table 15 [ PDF 29.2KB | 2 pages ]). Unless trade diversification is achieved, this could present an impediment to future bi-regional trade and investment (UNECLAC 2008).

Overall, the level of bi-regional trade between Latin America and the Asia and Pacific region is still low, according to the 2006 Grubel Lloyed Index (GLI)² scores. However, some increase in bi-regional trade can be seen in Mexico, Costa Rica, Argentina, and Brazil (See Table 16 [ PDF 30.5KB | 1 page ]). On the Asia and Pacific region's side, Singapore and Australia are moving into intra-industry trade with Latin America. The products traded range from high and medium technology goods to low technology products. High technology goods being traded involve electrical apparatuses, parts and accessories, microcircuits, automatic data processing machines, and quality control instruments. Medium technology goods being traded are products that are considered general machinery, while low technology products include textile, yarn, and iron and steel products (UNECLAC 2008).

On the whole, the data show that generally, trade and investment relations between East Asia and Latin America are still relatively underdeveloped, leaving room for more coordination and closer trade and investment linkages. There is a growing awareness in both regions of the need and importance to link up, as demonstrated by the growing number of FTAs that have been signed or are being negotiated between the two.

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