Economic integration in the region has been driven mainly by market forces since before 1990s and strengthened by a number of institutional initiatives since then. With the US-led Trans-Pacific Partnership (TPP) in the background, ASEAN initiated the Regional Comprehensive Economic Partnership (RCEP) in 2012. RCEP now offers a major framework within which to integrate the region’s economies.
ASEAN has been a pioneer of regional FTAs in East Asia. By insisting on the principle of ‘ASEAN centrality’, the grouping has gradually upgraded its own association from a free trade arrangement to an economic community with more comprehensive economic liberalisation targets. At the same time, it has developed FTAs with other partners in East Asia based on the ‘ASEAN+1’ formula.
FTAs in East Asia have developed rapidly in terms of quantity, but most of them embody a low degree of liberalisation. Although traditional issues of tariff reduction, rules of origin, inspection and quarantine, and dispute settlement are covered, issues such as performance requirements for investment, intellectual property rights, competition policy, e-commerce and environmental policy are seldom incorporated. Sensitive issues like state-owned enterprise regulation, which had been a feature of the TPP agreement, are not a feature of the region’s FTAs.
Facing the challenge of the TPP, ASEAN decided to initiate the RCEP for all the ASEAN members and six other countries — China, South Korea, Japan, India, Australia and New Zealand. RCEP intends to create an open market with a higher degree of liberalisation than the five ‘ASEAN +1’ FTAs. The agreement aims to integrate East Asia’s complex FTA networks and remedy the ‘noodle bowl effect’ of FTA proliferation in the region. These complex FTA arrangements complicate rules of origin and include red tape and cross-border procedures that increase transaction costs, reduce enterprises’ operational efficiency and ignite trade protectionism, producing a negative impact on East Asian production networks.
Complex FTAs can disrupt cross-border production networks, which have been central to the region’s successful integration. Uncoordinated proliferation may lead to varying ‘phase-in’ timeframes for tariff concessions, as well as varying preferences across different FTAs. This can hamper the process of developing production networks across economies. The RCEP is designed to deal with this noodle bowl effect. As trade economist Richard Baldwin writes, these noodle bowls could be the ‘building blocks on the path to global free trade’, where the unwieldy political economy of FTAs ultimately recommends bigger, multilateral initiatives as a solution.
East Asia’s past economic success has been built upon an open and supportive global environment. The region’s growing global integration has contributed significantly to the growth of international trade, and its commitments to the World Trade Organization and other international institutions could further deepen its integration.
Although East Asia needs to be cautious about its export-oriented growth model, its interest in the global market will not fade, as its future will be closely associated with the global market environment. The world economy is currently threatened by anti-globalisation sentiments. East Asia needs to fight against trade protectionism including Trump’s ‘America First’ trade and industry strategy which directly harms regional production networks. The region must insist on unilateral liberalisation and regional integration to support free trade.
China has become more and more active in forging FTAs with partners in East Asia and other regions of the world. So far, China has signed 14 FTA agreements, which include 12 implemented agreements and cover 22 countries and regions. China has also taken a leading role in promoting the FTA for the Asia Pacific (FTAAP) under the APEC framework.
In a 2013 speech at Nazarbayev University, Kazakhstan, Chinese President Xi Jinping praised the role of the ancient Silk Road in building close economic, social and cultural links between China and the outside world and called on China and Kazakhstan to build a modern belt together. The proposal, later known as the Silk Road Economic Belt, is slated to build the transportation and economic corridors that connect China to Europe.
Speaking to the Indonesian parliament one month later, Xi put forward the idea of building the 21st century Maritime Silk Road, which intends to broaden trade and other economic connections between China and other maritime countries of Southeast Asia, South Asia, the Middle East, East Africa and the Mediterranean.
These two proposals, together known as the Belt and Road Initiative (BRI), form a package that links both land and maritime regions with comprehensive agendas ranging from infrastructure to industrial parks and port networks to cultural exchanges.
China considers the BRI as a new step to further integrate its economy with the global market by investing abroad. As BRI is oriented towards development cooperation, it enables China to look for new economic opportunities by developing infrastructure projects with countries across the region. While many of the labour-intensive manufacturing factories in China need to reallocate to low-cost places to maintain competitiveness, the developing countries in Asia and Africa have a great demand to develop their own manufacturing capacity by using their low-labour-cost advantages.
Differing from the traditional model of moving ‘dirty industries’ out, China will build new industries together with the local countries. This new kind of development cooperation differs from the traditional aid and market-based reallocation of outdated production capacities.
BRI is designed in the spirit of open regional cooperation and characterised by equality based on consultation, cooperation and sharing. According to an official document, it will be ‘open to all countries and international and regional organisations for engagement’.
Through the RCEP, BRI and other initiatives, East Asian countries will continue to push for integration and free trade. But reconstructing the trade system on a global level is unlikely to succeed without consensus and cooperation between China and the United States. The multilateral trading system remains the ideal trading platform on which to accommodate these two major economies. In this sense, the WTO is the most important economic connection between China and the United States. The most worrying challenge? The future of US trade policy under President Donald Trump.
Shen Minghui is Professor at the National Institute of International Strategy, Chinese Academy of Social Sciences (CASS).
This article summarises a paper prepared for the 2016 Pacific Trade and Development Conference in Australia.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Towards Asian integration‘.