Since the fourth quarter of 2010, the global economy has faced serious uncertainty and a turbulent outlook.

Both the US and Europe have gloomy growth prospects due to a lack of credible medium-term plans for debt reduction in the US and the sovereign debt crisis in southern Europe.

Against the downside risk to growth in the West, Asia’s recovery and growth in the past three years has been exceptional. China and India recorded the highest growth rates in the world with 10.3 and 10.1 per cent in 2010, respectively, while Indonesia, Thailand, Malaysia, the Philippines and Vietnam (ASEAN-5) grew 6.9 per cent. Asia, with a solid global market and a large pool of foreign exchange reserves, has proven to be the shining light of the world economy.

Asia’s future prospects are likely to be affected by the West, yet ‘rising Asia’ also appears able to help save the sinking world economy. Even with weaker demand from the West, Asian growth in 2012 is expected to remain strong on the back of solid domestic demand. But for robust, sustainable and balanced world growth, Asia needs to shift from its conventional extra-regional export orientation to intra-regional demand as a way to help advanced economies recover and to ensure its growth sustainability.

How can Asian governments accomplish these twin objectives amid the current global turbulence? First, they must continue to shift to more domestic demand-based growth in the short and medium term and accelerate ongoing regional economic integration to allow freer intra-regional trade and more cross-border investment. This policy shift will result in two things: greater self-propelled growth and more imports from Western economies, especially the US, which would help correct chronic trade imbalances and raise the growth potential of America and Europe.

Second, Asian governments must minimise external financial contagion and expand intra-regional FTAs to spur sustainable economic growth.

How can they do this? One effective means would be to create a cross-border free trade regime in East Asia. At present, there is a relatively low degree of intra-regional trade share in East Asia. Intra-regional trade among ASEAN+3 countries has increased steadily since 1998, when the Asian financial crisis was subsiding, but slowed a little after 2005. In 2008, the East Asian intra-regional trade ratio, at about 37 per cent, was lower than that of the North American Free Trade Agreement (NAFTA), and far lower than the euro zone’s ratio, with 60 per cent. Considering that the euro zone and NAFTA are free trade blocs, it seems plausible that East Asia could find significant growth sources from its own regional domestic demand if it established an East Asia-wide FTA.

Given the ongoing hub-and-spoke issues around intra-regional FTAs, East Asia should adopt a strategy of ‘doing easy things first’. A good example of such an approach is the Chiang Mai Initiative, which is already under way. The Asian Bond Market Initiative could also be accelerated to provide a viable cross-border financing scheme to small and medium enterprises. In this regard, a cross-border regional cooperation mechanism among sub-regions and mega-cities such as the Pan-Yellow Sea Circle and Greater Mekong Sub-Region could be a starting point.

Northeast Asian integration has great potential to build a robust regional community of peace and prosperity. It is encouraging that China, Japan and Korea in May 2010 agreed to establish a secretariat office in Seoul to address trilateral regional issues. Apart from FTA talks in Northeast Asia, Asian governments in ASEAN+6 need to pay attention to many proposals in cultivating diverse ‘public goods’ such as cross-border oil and gas pipelines and railways to enhance connectivity. Dynamic benefits resulting from a cross-border, bottom-up approach could also be derived from establishing common standards for production technology, product regulations, distribution and after-sales services.

By accumulating success stories for open Asian regionalism, major Asia Pacific economies can work together toward an Asia Pacific Economic Community, which the APEC forum has long addressed. Though it may take time to nurture mutual trust and confidence, Asia should be eager to establish open regionalism which a variety of external stakeholders, including the US, India, Canada, Australia and New Zealand, can join. Asian open regionalism needs to be translated into an Asia Pacific Economic Community to ensure it will be a building block toward viable multilateralism, not a stumbling block.

At this critical juncture of the world economy, East Asian integration must be pursued to increase its own growth momentum internally. Asia must move aggressively to shift its focus to the region’s 3.5 billion consumers so that its intra-regional demand-led growth can contribute to balanced and sustainable global growth. The Greek debt crisis clearly showed that no country can overcome the emerging economic malaise without a strong manufacturing base. Consequently, Asian economies need to strengthen the already existing global ‘manufacturing house’ through intra-regional trading. But Asia is diverse and still not free from historical rivalries. For both its own growth and the good of the global economy, Asia needs visionary political leadership to put historical legacies behind and look toward a long-term vision for an Asia Pacific Economic Community.

Choong Yong Ahn is Distinguished Professor at the Graduate School of International Studies, Chung-Ang University, Seoul.

This is an abridged version of an article that originally appeared here in Global Asia.

1. The DPJ: Sacrificing the economy to ‘save’ agriculture
2. World economy not quite out of the woods yet
3. Economic integration: Will Asia go regional?

The slow resolution of the European debt crisis has evolved into a liquidity problem which threatens the global financial system.

And these long-drawn-out efforts to address the sovereign debt problems have heightened uncertainties about resolving the crisis and induced speculative activities, threatening the survival of many European banks. In an effort to contain financial disaster, central banks of the world’s major economies have taken a concerted emergency action to provide cheaper dollar funding to these troubled banks at the end of November 2011. Further, the President of the European Central Bank (ECB) recently pledged readiness to act more aggressively in averting a deeper financial crisis.

This serious threat of financial crisis is not new to the global economy. Triggered by different factors, the world has observed two similar crises within the last decade; the burst of the dotcom bubble in the early 2000s and the beginning phase of the global financial crisis through 2007 and 2008, which culminated in the bankruptcy of Lehman Brothers and the freezing up of global finance. In both cases, aggressive policy easing took place in the leading industrial economies, sending real interest rates to a very low level.

The current situation inEurope may still lead to a global economic slowdown if the debt problems are not resolved, propelling the global financial system into another deep crisis comparable to that of 2008. The policy reaction this time should not be much different from 2008. At the very least, the ECB and central banks should relieve pressure on banks and the financial sector by cutting interest rates further to ensure that affordable liquidity is available for the financial sector. As observed in both the burst of the dotcom bubble and the global financial crisis, such action would result in a low international interest rate environment.

Given the integrated global financial system, any such shock would have implications for small, open economies elsewhere. For emerging ASEAN economies (Indonesia, Malaysia, the Philippines and Thailand), the two episodes of internationally originated financial shocks in the past decade seem to have insignificant effects unless coupled with a global recession that pushed their domestic output down at the same time. To better understand the effects of adverse international financial shocks, however, it is useful to isolate these shocks and analyse their impact on the macroeconomic performance of these economies. This type of structural analysis typically suggests the shock’s effects on inflation and output tend to be largely similar and relatively small. An isolated negative shock in international interest rates would tip the ASEAN economies toward an environment with lower inflation and higher output volatility, albeit generally small in magnitude.

Although small, the impacts of purely international financial shocks on ASEAN economies tend to be long lasting, with implications for the management of future macroeconomic stability. It seems the larger the size of the international financial shock, the greater the consequences of maintaining future economic stability for ASEAN countries.

How should emerging ASEAN economies react to an isolated adverse international financial shock? Typically, to counter a drop in the international interest rates, a country may reduce its domestic interest rate. This discretionary policy action may counter the short-run inflation effects from the international financial shock, but would aggravate the short-run impact on the country’s output gap at the same time. Consequently, the country would end up facing greater volatility in its domestic output. In this way, the cure may worsen the illness. Discretionary monetary policy action may only be sensible when the global financial shock is accompanied by a global recession that also reduces domestic output at the same time. In this case, the cure will have the desired short-run impact of limiting the global shock’s effect on both domestic inflation and output.

Yet, confronted with the external shock’s long-lasting effects, the short-lived domestic interest rate shock will only work for containing short-run volatility implications and will leave domestic policy makers with a hanging problem of managing volatility in the medium to longer term. In this regard, efforts to manage the domestic economic implications of a single, large shock in the international financial system would entail not just a simple short-run policy response in emerging ASEAN countries, but more complicated adjustments to their overall economic structure.

To deal with the effect of an adverse international financial shock, individual authorities in emerging ASEAN economies should opt for policies which provide longer-term structural adjustment to their economy. To this end, emerging ASEAN authorities should support the current efforts to restructure the global financial system in order to reduce future risks of more volatility. In addition, the similar pattern of effects on emerging ASEAN countries highlights the need for enhanced policy coordination and cooperation among these countries to better deal with such disturbances.

Arief Ramayandi is an Economist at the Asian Development Bank. The views are solely of the author’s and do not necessarily reflect the views or policies of the Asian Development Bank.

1. ASEAN economies on the slide?
2. An Asian perspective on financial crises
3. An Asian response to international financial reforms

The US recently participated in the East Asia Summit (EAS) for the first time — a decision that has wider implications for US–ASEAN relations.

The decision to join the EAS is part of a recalibration of US foreign policy vis-à-vis ASEAN-led multilateral institutions. This shift in policy reflects a broader attempt by the US to re-engage with Southeast Asia — after years of perceived indifference — and is equally related to China’s growing influence in the Asia Pacific region.

The current US policy toward ASEAN also represents an attempt at complementing and deepening bilateral ties with Southeast Asian countries — especially Indonesia and Vietnam. The Obama administration wants to encourage the formation of a multilateral security architecture in Asia that will include the US and complement its bilateral defence and foreign policy commitments.

Unlike Obama, the Bush administration was seen as being largely uninterested in actively fostering East Asian cooperation, and the US was not invited to join the EAS when it was established in 2005. At the inaugural EAS summit in Kuala Lumpur, the latest ASEAN Plus institution was pitched as a predominantly Asian forum concerned with community building and regional issues. And before its formation, the Bush administration repeatedly indicated its preference for flexibility and mobility rather than formal and institutionalised arrangements.

But the Obama administration signalled a renewed interest in East Asian regionalism as driven by ASEAN. The US held summit meetings with ASEAN leaders during the APEC forum and the opening of the UN General Assembly in November 2009 and September 2010 respectively. The Obama administration also acceded to ASEAN’s Treaty of Amity and Cooperation by presidential decree in July 2009, opening the door for US membership of the EAS.

And in April 2010, the US’ possible inclusion in the EAS, along with Russia, was discussed at the 16th ASEAN Summit in Hanoi. Significantly, US Secretary of State Hillary Clinton made clear America’s willingness to join the EAS to her ASEAN counterparts. This message helped overcome a split within ASEAN between those who supported the expansion of the EAS, and those who proposed an ASEAN+8 meeting every two years to coincide with the APEC Leaders’ Meeting. The latter proposal was to address concerns about the difficulties involved in having the US president visit Asia more than once a year.

The ASEAN states all believed the US and Russia’s inclusion would enhance the value, weight and influence of the ASEAN Plus bloc. This reflects ASEAN’s desire to engage outside powers peacefully within a framework where it remains centrally engaged in the development of Asia’s regional architecture.

By joining the EAS, the US is seizing an opportunity to reverse the perceived American disengagement from the region, which has allowed China to play a larger role in East Asian regional platforms. In contrast to the Bush years, the Obama administration is demonstrating a clear interest in multilateral organisations, based on the premise that deepening key bilateral ties and engaging multilateral institutional structures go hand in hand.

From the Southeast Asian perspective, US participation in the EAS serves to balance China’s increasing assertiveness in regional affairs, and ASEAN capitals have welcomed signs of more active US participation in East Asian regionalism. An active US participation — combined with an accommodative Chinese involvement — may be the best possible scenario for ASEAN in the years to come.

But US participation in the EAS raises the important question of how the summit can complement existing cooperative arrangements and contribute to the emerging security architecture in East Asia. Specifically, there is a risk that the EAS and APEC could end up competing or even cancelling each other out, which would benefit the ASEAN+3 grouping — a forum involving China, Japan and South Korea — but which would exclude the US. The challenge for Southeast Asia will be to continue leading the EAS in such a way as to make it both acceptable to Beijing and relevant to Washington.

Dr Ralf Emmers is an Associate Professor and Head of the Centre for Multilateralism Studies at S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

An earlier version of this article was first published here on the S. Rajaratnam School of International Studies website.

1. How the US plays into the East Asia Summit for ASEAN
2. Chinese multilateralism: implications for Sino-US relations
3. The United States and the East Asia Summit: a new beginning?

This week President Obama will join seventeen other Asian leaders in Bali for the Sixth East Asia Summit (EAS).

With a tough economy at home and the decision of the Congressional ‘super-committee’ on the federal budget only days away, this is hardly a good time for a US president to be out of the country. Obama’s decision to participate in the EAS for the first time in Bali is therefore a powerful symbol of a shift in American policy towards Asia. It also says much about the evolving nature of regional cooperation.

US participation in the EAS is important for three reasons. First, the Sixth EAS will be the first time all of Asia’s great powers will be represented in the same summit-level regional grouping. While the annual Asia Pacific Economic Cooperation (APEC) Leaders Meetings brought together most heads of government, India was a notable absentee. Despite sporadically engaging security issues, APEC was also focused primarily on an economic and trade agenda. In contrast, the EAS as the Kuala Lumpur Declaration in 2005 put it is a forum for dialogue on ‘broad strategic, political, and economic issues of common interest and concern’. The expanded EAS also underscores that the ASEAN+8 configuration (also reflected in the ASEAN Defence Ministers’ Meeting-Plus process) has become a crucial pattern for regional cooperation.

Second, US participation in the EAS reflects a significant shift in American policy. During the 1980s and early 1990s, the US view was that Asian multilateralism was inimical to American interests and risked undermining its ‘hub and spokes’ alliance system. Assistant Secretary of State Richard Solomon famously described proposals for a security dialogue forum as a ‘solution in search of a problem’. This hostility softened during the Clinton administration as the US joined the ASEAN Regional Forum (ARF), but under the George W. Bush administration, engagement with Asian institutions was episodic at best. After the EAS was created in 2005, Bush officials dismissed the possibility of US participation, saying they would ‘hesitate to push for an invitation to an organisation when we don’t even know what it does’.

In contrast, the Obama administration has placed ASEAN-led institutions at the heart of its foreign policy in Asia. In her recent Foreign Policy (November 2011) article, Secretary of State Clinton said the US has ‘emphasized the importance of multilateral cooperation, for we believe that addressing complex transnational challenges of the sort now faced by Asia requires a set of institutions capable of mustering collective action’.

Third, heightened US interest comes at a time when China’s views of regional multilateralism have become noticeably less positive. Over the last decade and a half Beijing has embraced ASEAN-centred institutions as a key part of its regional ‘charm offensive’ and its engagement with Southeast Asia. But after the showdown over the South China Sea at the 2010 Hanoi ARF, China increasingly sees institutions as an irritation and a constraint on its power.

Yet questions remain about what US participation means for the East Asia Summit or broader regional architecture. Some Asian commentators fear Washington will try to force a new EAS agenda focused on geopolitics or that it will seek to do away with ASEAN’s central role. Others worry the EAS could become a forum dominated by the US–China rivalry. Both seem unlikely, at least for the time being.

In terms of its agenda, the EAS has historically had five priority areas for cooperation: finance, education, avian flu, disaster management, and climate change. The US will want to add to this agenda and introduce new issues — including maritime security, disaster and humanitarian response, and non-proliferation — but it seems likely to do so in a gradual and evolutionary fashion. Washington is sensitive to the fact that it is a new face at the table. Similarly, while the US sees the EAS as a useful way to counter China’s growing influence in the region, it is unlikely to seek a confrontation in Bali. Although the South China Sea will certainly come up, Washington has recently shown a preference for framing this as an issue about principles rather than singling out China for criticism.

There has also been speculation about whether the US and other non-ASEAN EAS members will seek to drop the soft institutional approach of ‘the ASEAN way’ and reduce ASEAN’s control over the EAS’s agenda and membership. There is no doubt that Washington would prefer to see less scripted interactions at the EAS, where leaders will be freer to raise and discuss issues. The US would also like to see regional groups develop stronger secretariats and become more formally institutionalised over time. But this notwithstanding, the talk out of Washington is about being respectful to ASEAN and proceeding carefully.

It might be tempting to assume that in shaping the expanded EAS the ‘ASEAN way’ has triumphed over the ‘White House way’. But these are early days and it remains to be seen whether US interest in the EAS is sustainable over time. The EAS is only a summit, not yet a fully-fledged institution. Washington may now be happy to engage with ASEAN and other EAS members to gradually shape the future agenda and priority issues, but the US preference for a ‘results-oriented agenda’ has not changed. American presidents do not like to fly across the Pacific for photo opportunities, rehearsed speeches, and aspirational statements. As was the case with its participation in the ARF, US frustration may grow in the future if the EAS doesn’t start to develop actionable goals and follow up its commitments.

A second issues concerns economics, trade, and finance. Washington has given clear priority to the Trans-Pacific Partnership (TPP) and APEC, especially in this year when it is serving as APEC chair. Officials argue that they do not see EAS as an appropriate policy space for discussing economic, trade, and finance issues. This attitude may soften once the US is no longer chair of APEC, but it also reflects a deeper, underlying tension, namely whether the most appropriate model for regional integration is on a trans-Pacific or East Asian basis.

Finally, the views of US leadership on the value of Asian multilateralism may also change. Even if President Obama is re-elected in November 2012, it seems likely that two of the key individuals who have shaped the new US policy towards regional institutions – Hilary Clinton and Assistant Secretary of State Kurt Campbell – will not carry on into a second term. Whether their successors will share their positive view of the value of East Asian institutions cannot be taken for granted.

David Capie is a Senior Lecturer in International Relations at the Victoria University of Wellington, NZ.

Amitav Acharya  is the UNESCO Chair in Transnational Challenges and Governance at American University, Washington, D.C. and Chair of its ASEAN Studies Centre

1. Will the United States join the East Asian Summit?
2. Will the US commit long term to the East Asia Summit?
3. The East Asia Summit: ASEAN’s forum for maintaining peace

The Sixth East Asia Summit (EAS) will convene on 19 November in Bali, with the US and Russia as full members.

Yet doubts remain over the Summit’s prospects as a high-impact forum, and its likely contributions to East Asia’s peace and prosperity.

Indeed, the institutional architecture of East Asia has come under intense scrutiny recently. At issue are the architecture’s incoherence and its apparent inefficacy in response to an increasingly complex, uncertain and challenging regional environment. What is required, as US Secretary of State Hillary Clinton noted in 2010, is an architecture that is relevant to East Asia’s ‘new landscape’.

What will this new architecture look like, and under what conditions might it succeed in delivering the peace and prosperity dividends desired by its stakeholders? At least three visions, or unofficial ‘schools’ of thought, are in contention in the region.

The first of these is the ‘Canberra School’. Related to former Australian leader Kevin Rudd’s Asia Pacific Community initiative, it promotes a ‘command’ or centralised brand of regionalism which argues the need, in Asia, for an overarching institution, fully empowered and equipped with a comprehensive agenda. Two Australian scholars have further prescribed that the architecture should be intelligently-designed and functionally-oriented. Regional architecture as such should be streamlined, its component institutions reformed and their roles and remits clarified, and underperforming institutions discarded. Asia ‘has too many organisations, yet they still cannot do all the things we require of them’, laments Allan Gyngell, a leading Australian strategist.

At a Sydney conference in 2009 to promote the Rudd initiative, participants proposed that the region be co-managed by a concert of powers comprising the Asia Pacific’s G20 members (the US, Australia, China, India, Indonesia, Japan, Russia and South Korea), but with no visible role for ASEAN. Following cool reactions from China and the US and strong objections from some ASEAN countries — as well as a number of Australian intellectuals — the Rudd initiative was revised. ASEAN was included, while the newly enlarged EAS was presented as the logical expression of Rudd’s idea of an apex institution.

The second model is the ‘Washington School’, which promotes a functional or results-based approach to regionalism. Its proponents appeal for effective and relevant regional institutions that could deliver the desired dividends. As Clinton recently noted: ‘It’s more important to have organisations that produce results, rather than simply producing new organisations’. Functionalists see neither the need for overarching institutions nor the discarding of inefficient institutions; the challenge is in ensuring they work. Nor do they reject an ad-hoc approach since they welcome functionally oriented coalitions of likeminded countries that collaborate on specific interests.

Crucially, functionalists acknowledge the need for a strong ASEAN as the core of a balanced and peaceful architecture. They seek to minimise the overlap of roles and responsibilities among component institutions, and, where possible, ensure a division of labour. In this regard, Washington’s prescription that the EAS focus on security concerns partly addresses disputes over whether ASEAN+3 or EAS is the more apposite vehicle for East Asian economic integration. Whether such functional distinctions can be successfully maintained remains to be seen.

A third perspective is offered by the ‘Singapore School’, whose vision of architecture is relatively ‘laissez-faire’ in orientation. It sees the existing architecture, despite its flaws, as fundamentally sound and still relevant to its stakeholders. Though its proponents accept that some reform is required, they do not see reform as urgent so long as regional structures and conventions do not constrain the pursuit of national interests. Nor are they averse to constructing more arrangements if needed. This was exemplified by Singapore’s proposal for an ‘ASEAN+8’ forum in place of an enlarged EAS out of concern that the US president may not commit to annual visits to East Asia. Ultimately, laissez-faire regionalists seek to preserve the default centrality of ASEAN in East Asian regionalism. In contrast to the Canberra School, they believe a concert of powers in Asia would be inimical to the interests of smaller Asian countries.

The three visions are primarily concerned with regional architecture broadly conceived. But the EAS looms large against that policy debate, not least because Canberra-School proponents see the expanded EAS as the overarching institution for which they have lobbied. Yet if privileging the EAS means sidelining other regional institutions, neither ASEAN nor countries that enjoy inordinate influence in the latter — China in ASEAN+3, for example — are likely to support such a move.

Nor is it certain that the EAS’ more powerful members would commit to a concert arrangement, or that the Summit would survive should an exclusive concert emerge from within it. If anything, many East Asians enjoy the strategic flexibility afforded by the region’s variable geometry, which increases their policy options and reduces the likelihood for zero-sum outcomes.

Nonetheless, the Washington School’s wish for a neat division of labour among the component institutions of regional architecture is similarly unlikely to be fully realised since, with the exception of the EAS and the ASEAN Defence Ministers’ Meeting+8, no two institutions in East Asia share the same membership. Hence, despite nominal differentiation by function, East Asian institutions are likely to include in their agendas concerns and issues beyond their respective institutional remits (as in the APEC trade forum’s interest in counter-terrorism).

The third option, the ‘if it ain’t broke, why fix it?’ outlook of the Singapore School, is untenable in the long term, because ASEAN understands its centrality in East Asian regionalism is no longer guaranteed and has embarked on a process of institutional reform in order to stay relevant.

The probable outcome for regional architecture in the foreseeable future will combine attributes promoted by the Washington and Singapore Schools. The EAS will likely become an integral piece of the region’s architecture, but not the region’s alpha institution. That said, all three schools will no doubt see in the Summit something for which they could claim credit.

Tan See Seng is Deputy Director and Head of Research at the Institute of Defence and Strategic Studies, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.  He previously headed the RSIS Centre for Multilateralism Studies.

This article first appeared here as RSIS Commentary No. 164/2011.

1. Competing Asian Communities: What the Australian and Japanese ideas mean for Asia’s regional architecture
2. The ASEAN Charter and remodeling regional architecture
3. Positioning Asian regional architecture internationally

When discussing Laos’ upcoming ASEAN membership with a senior government official in 1995, he insisted the reason his country wanted to join the regional organisation was because Vietnam had just done so.

The response revealed two things. First, Laos, like its neighbouring ASEAN aspirants at the time — Cambodia and Myanmar — did not want to be left behind, and wanted out of the economic wilderness by joining ‘the club’. Second, there was very little appreciation of what membership would entail, let alone what it could evolve into.

Arguably the greatest trade policy challenge still facing ASEAN’s newer members — Cambodia, Laos, Myanmar andVietnam (or CLMV) — is the plethora of non-tariff barriers restricting trade. For instance, the red tape associated with importing and exporting is probably a bigger disincentive than any tariff currently in place. Nevertheless, traditional trade instruments such as the tariff and policy relating to its management remain important and should not be ignored. The first challenge on this front was to implement the Common Effective Preferential Tariff (CEPT) scheme of the ASEAN Free Trade Area (AFTA). The new members kept to the timetable and reduced tariffs according to prescribed schedules for imports from other ASEAN member countries — but did little more. In this sense, they missed an opportunity grasped by the original ASEAN members: the new members did not choose to multilateralise the CEPT preferences, or offer lower tariffs to non-members in a non-discriminatory fashion. Singapore, Malaysia and Brunei Darussalam, for example, had fully multilateralised more than 80 per cent of tariff lines by 2002. For the remaining tariff lines, the margin of preference (MOP) was less than 10 per cent. Today, with the exception of a few sensitive, but admittedly heavily traded, items, all other tariff lines have MOPs of zero or close to it.

Because the preferential tariff reduction schedules have been ambitious and rapid, AFTA has accelerated the pace of multilateral trade liberalisation in the original ASEAN member countries. Instead of jeopardising multilateralism, it has hastened the speed at which these countries have moved toward their goal of free and open trade. In this way, AFTA’s greatest achievement may have less to do with what it prescribes or mandates and more to do with what it promotes indirectly through the long-standing commitment of these original members to the concept of open regionalism.

The opposite is true in the CLMV countries. CEPT rates have continued to fall in line with AFTA commitments, resulting in an increase in the countries’ respective MOPs since 2005. The MOP in 2007 was almost 15 per cent in Vietnam, and around 7–8 per cent in Cambodia and Laos. Thus, ASEAN’s newer members have chosen to operate a two-tier tariff system, with a different CEPT and most favoured nation (MFN) rate for each tariff line. Regionalism through ASEAN membership should have provided the CLMV economies with an opportunity to pursue multilateralism aggressively, thus allowing regionalism through AFTA to be a building block, rather than stumbling block, toward free and open trade. But these economies have so far failed to capitalise on the opportunity.

There are numerous other reasons why the CLMV countries should emulate their predecessors. It is almost certain, for example, the CLMV countries could not have anticipated the multitude of ASEAN+1 FTAs they would be dragged into after joining ASEAN. Unless the multilateralisation approach is employed, this is a disaster in the making. It is simply fantastic to expect these countries to effectively implement a system whereby six or more tariff rates can apply to each tariff line, depending on rules of origin that can also differ by source. This is underlined by the fact that the completion dates for the CLMVs vary across FTAs. In this environment of confusing but proliferating ASEAN+1 FTAs, advocacy of the multilateralisation approach has shifted from one which relies on the merits of avoiding trade diversion to one focused on necessity and practicality, recognising domestic administrative and bureaucratic-capacity constraints. These countries would be best-off consolidating all of these preferential and MFN rates around the prevailing lowest rate, which is likely the CEPT rate.

But these countries have a choice, and unlike their predecessors, they have chosen against the multilateralisation approach. The question is, why? One reason could relate to concerns over potential loss in government revenue. Unlike the original ASEAN members, the CLMV countries continue to derive a significant share of government revenue from trade taxes. Retaining a multiple-rate tariff regime is being pursued in an attempt to offset, or mitigate, the anticipated revenue losses associated with AFTA and other FTAs. But is this expectation valid? What are the likely revenue impacts of the multiple-rate system compared with the one-rate system?

If the multiple-rate system is going to be effective in practice, and offset revenue loss, then customs authorities will have to implement rules of origin to determine what rate should apply to each import. Doing this accurately is very difficult for any country, given globalisation and the fragmentation of production, but it will be close to impossible for the new ASEAN members, given limited capacity and resources. Additional tariff revenue will only be collected if FTA members are levied the higher preferential rate, when they exist, or if non-member country imports are levied the higher MFN rate. But if there is a significant difference between the two rates there will be a strong incentive for trade deflection. Additionally, creating a system whereby multiple tariff rates can apply to each tariff line increases the potential for rent-seeking behaviour, and a higher MFN rate compared with the many preferential rates would provide new opportunities for corruption.

In sum, the multiple-rate system is a second-rate system compared with the multilateralised single-rate system because it is more costly to administer, economically distortionary and therefore welfare-reducing, and unlikely to significantly affect government tariff-revenue collections. It would almost certainly lead to increased rent-seeking behaviour as well. The CLMV countries should follow the original ASEAN members and multilateralise their CEPT tariff preferences and the sooner the better. Looking into the future, both old and new members should also be doing the same with the ever-increasing number of ASEAN+1 agreements.

Jayant Menon is Lead Economist (Trade and Regional Cooperation) at the Asian Development Bank.

1. The Asian noodle bowl: is it serious for business?
2. Can the TPP Resolve the ‘Noodle Bowl’ Problem?
3. ASEAN members should stop having themselves on

The sixth East Asia Summit (EAS) will take place on 19 November in Bali, with its newest members — the US and Russia — breathing new life into the forum.

While the Summit’s original objective of serving as a forum for dialogue on broad strategic, political and economic issues remains important, the US and Russia’s inclusion has now opened an opportunity for greater geopolitical security dialogue. Earlier this year, President Susilo Bambang Yudhoyono commented that Indonesia planned to ‘narrow the agenda of the upcoming summit on security and political matters to allow heads of state to solve pressing problems within the region’, while he also proposed that APEC could tackle economic issues. The fact that international financial institutions are not invited to the EAS this year adds to the premise. There now seems to be three specific issues driving the dialogue between leaders: regional cooperation on disaster management, connectivity and maritime cooperation.

The EAS will be preceded by the 19th ASEAN Summit and related meetings, beginning on 13 November, where ASEAN leaders will endorse the Bali Concord III. This agreement, which envisions an ‘ASEAN Community in a Global Community of Nations’ by 2022, will be adopted as ASEAN’s new vision for the future. For its part, the EAS will consist of two two-hour sessions: a plenary session where leaders present speeches reviewing the current direction of the EAS and outlining their thoughts on its future direction, and a retreat session where leaders are given a ‘blank check’ to exchange views on regional and international issues. The Chairman’s statement from the Foreign Ministers’ Consultation in Bali on 22 July provides a background on the ‘old’ agenda of finance, energy, education, avian-flu prevention and disaster management.

During the summit, Indonesia will launch an unofficial commentary, or non-paper, on a ‘Practical Approach to Enhance Regional Cooperation on Disaster Rapid Response’, and Australia will also release one on ‘Disaster Management and Response in the EAS’. Indonesia’s Minister of Foreign Affairs, Marty Natalegawa, will also initiate a real-time information-sharing portal stationed at the ASEAN Coordinating Centre for Humanitarian Assistance on Disaster Management that will link to all EAS member states and international agencies like the UN. In this vein, the EAS will seek to address bureaucratic bottlenecks on disaster-relief efforts, including visa, customs and quarantine issues. But despite these initiatives, the challenge remains as to whether the region can be better equipped to withstand ‘megadisasters’ like Japan’s triple disaster earlier this year, the 2004 Indian Ocean tsunami or Myanmar’s Cyclone Nargis through such measures? With all EAS member states supporting these disaster-management initiatives, concrete deliverables are possible.

Connectivity is another area on which regional leaders are expected to focus. A successful implementation of the Master Plan on ASEAN Connectivity is in the interest of both ASEAN and non-ASEAN EAS member states. Regional (and also global) growth potential will not be optimised without it. Physical-connectivity discussions will potentially look beyond the scope of the Master Plan to include connectivity between ASEAN and non-ASEAN states. Maritime connectivity between ASEAN and Australia or New Zealand is one example of this. Negative effects on regional connectivity like transnational crime, terrorism and pollution will also be a part of this agenda. Meanwhile, institutional connectivity (including trade facilitation and trade financing) and people-to-people connectivity will remain internally discussed within ASEAN.

The last apparent area — maritime cooperation — is more subtle. It consists of diplomatically sensitive issues, including the South China Sea, and less-sensitive issues like piracy, people smuggling and transnational crime. In its simplest form, the EAS aims to transform conflicts into cooperation, tensions into peace, and threats into partnership. As a ‘benign’ organisation that ‘threatens none, but comforts all’, ASEAN is a key multilateral organisation. And the ASEAN-led EAS is important in bringing together China and the US, two countries whose relationship is often characterised by tension, let alone other regional players. This is not to say that ASEAN itself is free of conflict. But its stability as an institution for over 44 years and its visible maturing over this time is testimony that ASEAN serves as a regional power-broker and conciliator. Its maintenance of a ‘dynamic equilibrium’ in the region by avoiding the hegemony of any power also supports a successful and fluid regionalism, including the emergence of fora like the EAS.

ASEAN members should not miss an opportunity to contribute toward regional prosperity, peace and stability at this year’s EAS. And the EAS, in turn, must avoid becoming a simple ‘talk shop’ but develop into a key regional platform complying with common global rules, norms and principles, reinforced by deepening economic cooperation. A sense of community, solidarity and unity — ASEAN’s greatest offering — must not be lost; it must be promoted beyond the organisation. Asia is one of a handful of regions that remain economically prosperous, peaceful and socially stable, and every effort must be made to maintain it this way.

Maria Monica Wihardja is a Researcher at the Centre for Strategic and International Studies, Jakarta, and a Lecturer at the Department of Economics, University of Indonesia.

1. 2011 East Asia Summit: New members, challenges and opportunities
2. The East Asia Summit: ASEAN’s forum for maintaining peace
3. Will the US commit long term to the East Asia Summit?

After nearly a year of tensions over conflicting territorial claims, East Asian waters have calmed significantly.

At last month’s ASEAN meetings, China and the ASEAN nations agreed on guidelines for implementing the 2002 Declaration of Conduct to govern their activities in the South China Sea.

Vietnam and the Philippines also began to patch their frayed ties with China. In June, high-ranking Vietnamese and Chinese officials pledged to resolve their maritime conflicts by negotiation and carried out two days of ‘goodwill’ joint patrols in the Gulf of Tonkin. Last month, the Philippine Foreign Minister visited Beijing for talks to ease tensions.

The US — which saw a downturn in relations with China after Secretary of State Hillary Clinton declared a national interest in freedom of navigation and peaceful conflict resolution in the South China Sea — managed to renew military-to-military exchanges with China in May.

Yet, ASEAN should remain wary of strong undercurrents beneath the calming waters.

The one-page guidelines agreed to last month are unlikely to arrest the deepening security dilemma among key claimants. They reportedly referred only to the possible implementation of uncontroversial ‘joint cooperation activities’, they are characteristically non-binding, and they required Southeast Asian states to drop their long held assertion of ASEAN’s right to develop a common position on the issue vis-a-vis China.

China has neither backed down on, nor clarified the extent of, its expansive claims (the infamous ‘nine dotted lines’). There is still no agreement on the physical area to which the Declaration of Conduct will apply.

Meanwhile, the sabre-rattling continues. In June, both China and the US conducted naval exercises in the South China Sea — the US with the Philippines, Indonesia, Malaysia, Brunei, Thailand and Singapore. Labelled ‘routine’ exercises, more can be expected in the months ahead.

Various claimants are engaged in serious naval arms acquisitions. At a regional defence ministers’ dialogue in Singapore in June, the Vietnamese Defence Minister, General Phung Quang Thanh, publicly acknowledged that his country was buying six Kilo-class attack submarines along with Sukhoi fighter jets and surface-to-air missiles from Russia. A week after the guidelines were agreed to, Philippine President Benigno Aquino III asserted his government’s intention to beef up naval capabilities while taking delivery of its first Hamilton-class cutter from the US, which will become the Philippine Navy’s largest combat vessel.

But the more dangerous undercurrent comes off the heat of great power politics.

Despite thawing relations between the military top brass, there are worrying trends in US-China relations. After positive talks with his Chinese counterpart last month, the US military chief, Mike Mullen, still insisted that the US would continue air and naval reconnaissance activities near China’s coast.

The US foreign policy and defence establishment is increasingly assertive towards China. The Obama administration reacted strongly to Chinese actions in maritime disputes with both Japan and Southeast Asia last autumn. This June, then-Secretary of Defence Robert Gates announced Washington’s intention to sustain a superior military presence in the region, including stationing combat ships designed to patrol the shallower littoral waters of Southeast Asia.

Republican senator John McCain also declared publicly that the US must not be ‘pushed out’ of the Asia Pacific. Conservative observers like Walter Lohman of the Heritage Foundation counsel that ‘maintaining a positive relationship [with China] is not worth jeopardising America’s real interests at stake: freedom of the seas, commitment to treaty allies, and peace and security in the Pacific’.

Meanwhile, China’s military build-up continues apace, including the pursuit of aircraft carriers and a blue-water navy. Moreover, Chinese policymakers are upset by Obama administration officials’ remarks about America’s ‘return to Asia’, and some ASEAN states’ seeming headlong rush into an American embrace. Vice-Foreign Minister Cui Tiankai recently warned Southeast Asian states against ‘playing with fire’ in trying to involve Washington in the South China Sea disputes.

Washington’s clear interest in the maritime conflicts has forced Chinese foreign-policy strategists to view Southeast Asia through the lens of relations with the US. Such a China–ASEAN–US ‘triangle’ carries risks for ASEAN.

The US–China dispute in the South and East China Seas over acceptable military operations is likely to trigger conflict more serious than cable-cutting or structure-building by rival claimants in the Spratlys.

The 2001 collision of a US spy plane with a Chinese fighter, and the 2009 confrontation over the alleged intrusion by the US naval ship Impeccable into Chinese territorial waters, illustrate the dangers of what may sometimes be conflated under ‘freedom of navigation’ in the ‘high seas’ by American policymakers but are regarded as infringements of sovereign territorial waters and airspace by China.

This putative China–ASEAN–UStriangle is also a deeply unequal one. In June, the high level US–China strategic dialogue was expanded for the first time to include a dialogue specifically on the Asia Pacific region. While this was welcomed by Asian observers for dampening regional tensions, in future this bilateral channel might equally be used by these two great powers to limit certain Southeast Asian interests and agendas.

ASEAN needs to be wary of losing control over its sovereignty claims in the South China Sea, and of the territorial disputes with China being used by China and the US to send messages of resolve to each other.

Claimant states should also not rely on US pressure to persuade China to formalise and seek international legal arbitration for its territorial claims. Since the US did not ratify the United Nations Convention on the Law of the Sea, it has little credibility on this issue.

Thus, ASEAN needs once again to find a balance between facilitating the US in deterring potential Chinese aggression, peacefully resolving conflicts with China, and risking being sidelined by the great powers pursuing their larger global interests.

Evelyn Goh is Associate Professor of International Relations at Royal Holloway, University of London.

An earlier version of this article appeared in The Straits Times on 10 August 2011.

1. China’s Soft Power v America’s Smart Power
2. US, China role play for ASEAN
3. The limits of Chinese power in Southeast Asia

At the 23 July ASEAN Regional Forum (ARF) in Bali, China and ASEAN agreed on a set of guidelines to better implement their 2002 Declaration on the Conduct of Parties in the South China Sea (DOC). This set of guidelines promises to narrow the disputes over territorial sovereignty in the Sea.

This development at the ARF is considered a big step towards the peaceful resolution of the dispute. The adoption of the guidelines will help to reduce tensions and promote confidence-building among all claimants. More specifically, the guidelines will facilitate cooperation between China and ASEAN countries. This will serve the interest of all parties in a pragmatic manner.

China’s acceptance of the guidelines proposed by ASEAN marks a significant change of approach without fundamentally altering Beijing’s South China Sea policy.

To implement the DOC, China and ASEAN countries are pledging to carry out a series of cooperative projects pending the final settlement of the boundary dispute. While claimant countries are increasing their search for energy to fuel their domestic economic growth, the joint development of oil and gas will help to reduce the pressure and achieve mutual benefits.

In the meantime, China will also have a role to play by offering funding and technology to explore oil and gas in the deep sea. China can also take initiatives to cooperate in the areas of marine environmental protection, scientific research, navigation safety, search and rescue, as well as the combating of transnational crimes.

But as the guidelines still lack concrete measures, both ASEAN and China need to consider specifying the details when it comes to actual negotiation. This could include measures on information sharing, project coordination, burden sharing and crisis management.

By conducting cooperative activities and promoting confidence building, China demonstrates its desire to manage the dispute with ASEAN countries without the involvement of external powers. China’s Assistant Foreign Minister Liu Zhenmin also stated that the endorsement of the guidelines should signal to the world that ‘the future of the South China Sea is a predictable, manageable and optimistic one’.

This year US Secretary of State Hillary Clinton also hailed the process, describing it as ‘an important first step toward achieving a Code of Conduct’ — a contrast to last year’s thorny remarks at the ARF meeting in Vietnam. She recognised that progress ‘can be made through dialogue and multilateral diplomacy’.

The uninterrupted flow of shipping is critical to the survival and prosperity of East Asian countries. And, at the ARF, China showed concern over freedom of navigation in the South China Sea, with Chinese officials proposing to host a workshop on the topic. China is heavily reliant on maritime economic trade and more than 80 per cent of its oil import passes through the South China Sea every year.

It is clear from China’s agreement to adopt the guidelines on the DOC that Beijing values its relationship with ASEAN. The substantial trade and economic ties between China and ASEAN should be considered one of the constructive factors with which to guide the overall relationship. With the full implementation of the China-ASEAN free trade agreement (CAFTA), the value of bilateral trade in the first six months of this year has reached US$171 billion — one tenth of China’s total during this period.

It is in the interest of both the ASEAN countries and China to exercise stronger political will and take a more pragmatic stance to prevent maritime boundary disputes from jeopardising their mutual economic interests.

Yang Fang is an Associate Research Fellow with the Maritime Security Programme at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

A version of this article originally appeared here as RSIS Commentary No 116/2011.

1. Can Indonesia mediate the South China Sea dispute?
2. The South China Sea dispute: a legal solution needed
3. South China Sea developments at the ASEAN Regional Forum

In East Asia, as elsewhere in the world, the risks that we continue to face in recovery from the global financial crisis, economically and politically, are a consequence not only of failure in national governance but also in the architecture of international governance, including regional architecture.

Failures that frustrated a coherent East Asian and international response to the big problems of the day (including payments imbalances, financial market reform, trade and exchange rate issues) in their global context.

The global financial crisis and the emergence of the Group of 20 (G20) has changed this dramatically and gives the G20′s Asian members the opportunity, at least, to assume a new role and their proper responsibilities in managing the world economic order. The ten-nation Association of Southeast Asian Nations (ASEAN) is still the fulcrum of Asian cooperation arrangements, including Asia Pacific Economic Cooperation (APEC), the ASEAN Regional Forum (ARF), ASEAN+3 (the 3 being Japan, China and Korea) and the newly expanded East Asian Summit (EAS). But with the rise of the bigger powers in Asia and the emergence of the G20 this seems likely to change. There is a new and immense fluidity in the shape of regional architecture despite the recent initiative to include the US and Russia in the EAS dialogues. The rise of Asia suggests that the time is right for Asian leadership. But what are the prospects for a coherent approach from Asia to the crisis in the international economy today? And can Asia step up to exercise the responsibilities the rest of the world now increasingly expects it to do?

In this week’s lead, Wendy Dobson sees the emergence of Asian leadership in global affairs as a slow and gradual process. ASEAN, which has been at the core of Asian institutional arrangements, hasn’t the strength to do what is needed now. So ‘will the region continue to cede the leadership of the world trading system to the United States and Europe, as it has through much of the post-war period? Or will it use its increasing economic weight to shape the world order by, say, helping to conclude the Doha Round, forging a new approach in the WTO post-Doha or building a Pacific-wide free trade area?’

It makes little sense for Asia to rely too heavily on Europe and the United States for leadership at the global level given their internal troubles that will distract them and cause defensive policies for the foreseeable future.

The scale of Asia’s impact on the global economy means that the need to mobilise regional efforts to deliver on Asia’s global responsibilities — in the financial and macro-economy, in trade policy (which the collapse of Doha makes a more urgent priority) and on climate change — is a task that is more and more pressing and one that needs to be managed more actively through regional institutions.

Getting this right in practice may be more complicated than it appears in principle. It will require decisions about which regional arrangements provide the most effective link between regional and global cooperation. Many of the initiatives will sensibly require strengthening East Asian arrangements (at least within ASEAN+6 which includes the +3 and India, Australia and New Zealand), perhaps via enhanced financial cooperation through finance ministry and finance agency involvement (the Asian Financial Stability Dialogue AFSD, for example). Others will benefit from participation of a broader Asia Pacific group.

Getting the connection between regional and global arrangements right will require careful attention to scheduling regional meetings and initiatives so that they can both make useful input into, and be reinforced by, the efforts in global cooperation. Success will depend heavily upon the logistical detail. There needs to be much careful thought given to this question. The legitimacy of the G20 will depend on how the interests and views of non-G20 members are brought to the G20 process. Structuring the timing of Asia’s regional meetings around the G20 to give the regional non-G20 members input and ownership of initiatives is an important start. The implication is that, while ASEAN provides a critical modus operandi for regional initiatives, the agenda and schedule for regional arrangements, if regional institutions are to remain relevant, needs also and essentially to be driven from elsewhere.

Dobson reckons that in Asia it is likely that efforts could be made to use scarce leadership resources better in the continuing variable geometry in which the broadest membership of East Asian arrangements meets to discuss strategic issues. With time and experience it might also engage in setting and monitoring goals and targets if such goals and targets were adopted, similar to the G20′s emerging role at the global level. Crises will require managers, though, and are likely to require a steering committee of the largest economies. That suggests a group of the large players, perhaps the six Asia members of the G20 (including Australia) working with North America might emerge as the leading players. How ASEAN remains relevant is another issue.

Meanwhile Asia has a great deal at stake in fronting up with recovery and growth strategies that support G20 efforts to deal with the collapse in global economic confidence.

Peter Drsydale

1. East Asia’s response to the global economic crisis
2. East Asia and the global financial crisis
3. Asia’s uncertain path to global economic leadership