ASEAN plus three (China, Japan, Korea) – towards an economic union in East Asia?

ASEAN plus three

Author(s): Karl-Peter Schönfisch and Bernhard Seliger (eds.)

ISBN:          89-954964

Publisher: Hanns Seidel Foundation, Seoul

Year:          2004

Price:      —

Reviewed by Bernhard Seliger, Resident representative of Hanns Seidel Foundation, Seoul Office

Economic integration has come to the forefront of economic policy making in East Asia, finally. After lagging behind in forming a comprehensive regional integration area for various historical, political, cultural and economic reasons, today the discussion ranges from the introduction of bilateral Free Trade Agreements through currency and financial market cooperation to a full fledged economic community. Heterogeneity of East Asian states and divergences in economic size and economic development are not longer seen purely as obstacles to integration, but also as potential complementarities. This has been the background of the conference series on economic integration in East Asia with special respect to the concept of a closer community, “ASEAN plus three (China, Japan, Korea)” in Seoul in December 2004, organized by Hanns Seidel Foundation Seoul and Singapore/ASEAN office in cooperation with Korean partners and sponsored by the Bavarian Ministry of the Economy, Transport and Technology. The first conference was organized with the Institute of East and West Studies of Yonsei University on December 1st, and the second with the Seoul ASEM Institute for International Relations and the Association Coréenne des Etudes Politiques Françaises on December 2nd. Both were generously funded by the Bavarian Ministry of the Economy, Transport and Technology.

The papers of these conferences have been revised and put together in this book. It aims at contributing to the ongoing discussion process on the “how” and “when” of economic integration, after the question of “if” seems to have been resolved in a largely affirmative way by the states of Southeast Asia and Northeast Asia. If we look back on the last years in regional integration in East Asia, we can see important changes, most obviously in the more active role that Northeast Asia, and here especially China, begins to play. This leads to possibilities before not explored for economic integration, but also to renewed competition between the states of the region. The attempts to establish a regional or sub-regional ‚hub of East Asia‘ by various countries in the region, among them Singapore and Korea, is one aspect. In this respect, it is important to see trade integration not as a zero-sum game, where one location looses if another wins, but as a positive sum game, where enhanced capacities of one participant also benefit others. And this not only concerns the economic and business sphere itself, but also the equally important additional political stability brought by greater unity in the region. Clearly, the economic benefits of economic integration are not independent from the methods of integration. While in the early 1990s the idea of ‚open regionalism‘ and the lack of institutionalization characterized the approach of many countries in the region towards economic integration, today greater institutional ties – for example, in form of binding FTA agreements – seem to be around the corner. It is important to discuss how these ties can be designed without stifling spontaneous evolution of private economic initiative. Therefore, this book takes a comparative view, by comparing European experiences of different institutional regimes of economic integration with the East Asian possibilities. Due to the political obstacles to integration in East Asia, businesses have been often been the initiators of economic cooperation. For businesses, domestic as well as foreign, a politically stable and economically free and prosperous environment is of utmost importance for success. This explains why the business partners of East Asia, among them the German region Bavaria, are equally interested in the integration process of East Asia – they are stakeholders in the process of East Asian integration.

The first group of papers looks at the European integration process and the possible lessons of Europe for the integration of East Asia. Werner Pascha from Essen/ Duisburg university in his paper distinguishes three forms of economic integration: Market integration is a de facto process and spontaneous, functional integration is the tearing down of barriers to trade by coordinated political action, for example by forming a free trade area and institutional integration goes beyond this, through setting up mechanisms or organizations for specific fields. Especially in the last field, the problem of government failure becomes inherent, as the European experience shows. Departing from a very different historical setting, as well East Asia as Europe developed specific forms of integration. In Europe, after World War II the issue of stability became very important and led to strong institutionalization of the integration process. In East Asia, the heterogeneity of countries in terms of size, economic development, political systems and cultural background led to a process of voluntary agreements (“open regionalism”) with no institutionalization. However, both approaches reached a point, where new decisions are necessary, to improve as well regional as multilateral progress on trade liberalization. In Europe, the institutionalization brought adverse political effects (government failure), in East Asia, the search for a stronger community just has begun.

Gerhard Prosi from Christian-Albrechts-University at Kiel in his paper again takes up the issue of heterogeneity. While it is sometimes described as an obstacle to integration in the sense of something undesirable, Prosi makes the case for competition, i.e. the case for a world cherishing heterogeneity. Indeed, Prosi maintains, without heterogeneity, the differences in tastes, preferences and resource endowment, there would be no economic progress. The European integration process has been moved forward by a competition process resulting from heterogeneity, but also resulting in heterogeneity. Only an institutional competition process of different solutions rather than a uniform, top-down process of development, allowed for an institutional “trial and error” – process and showed in a spontaneous process the advantages of specific institutional regimes. The sclerosis of economic systems, as is observable in the case of the European welfare state, can only be solved by institutional competition to find innovative solutions. For Europe, this means that competition rules are necessary, but no uniformity, with the result of a Europe of different speeds.

Jinwoo Choi from Hanyang University in his comparative analysis of EU and East Asian integration looks at integration processes in Europe and East Asia through the light of political theories. The recent moves towards economic and political cooperation and integration are somewhat of a puzzle as well from the point of view of realism as of functionalism and culturalism. Compared to Europe, the preconditions for integration in East Asia just seem not to be in place. However, a closer view on the European integration process shows that also in Europe the integration process has been far from smooth. Important lessons can be learned from the way, Europe had to deal with distributional questions and questions of legitimacy. When East Asian states are determined to overcome the problem of adverse initial conditions to integrations, as they seem to do now, Jinwoo Choi writes, then they should look at the way, Europe deals with the problems of distribution of gains of integration and problems of eroding legitimacy.

European integration from the beginning has not only been an economic problem, but also had political relevance, not the least in the field of security cooperation. This is the topic of the paper of Sangtu Ko from Yonsei University. In East Asia, numerous bilateral security problems (like territorial conflicts among many Southeast and Northeast Asian states), the division of the Korean peninsula as well as multilateral problems, especially proliferation of WMD, exist. To contain or solve these problems is not only a political imperative, but also important for the prospects of economic integration. Security integration can, as the example of the ASEAN members show, precede closer political and economic cooperation, and, eventually, integration. This was the experience in Europe, where first in the Western part and then for the whole of Europe security cooperation led to economic integration and political cooperation. For Northeast Asia, security cooperation is a new trend, which lacks firm institutions. The six party talks and the common interest of states in the region to contain North Korea’s nuclearization could initiate closer security cooperation in a regional, multilateral framework.

Jongwon Lee from Suwon University in his paper returns to the economic perspective of East Asia in comparison with Europe. Until ratifying an FTA with Chile in February 2004, Korea had been together with Mongolia one of only two countries among the WTO countries not having any FTA. Also Japan only recently began active regional trade policy. Now, however, trade integration is high on the political agenda. Compared to NAFTA (more than 45 percent) and the EU (more than 60 percent), intra-regional trade is low as well in ASEAN countries as in Northeast Asia (China, Japan, Korea – lower than 25 percent). Since tariffs are highest in China, medium in Korea and lowest in Japan, gains of free trade will be asymmetric. This can be compared to regional and national differences in the European countries joining the integration area. As in Europe, a form of compensatory regional policy, for example by a Northeast Asian development bank, or a “Mini-Marshall plan” from Japan could not only be used to achieve economic convergence, but also to overcome the historical legacy of Japan’s involvement in World War II.

A second group of papers deals more specifically with the issues of Southeast Asian integration and the role of Southeast Asia in a wider East Asian community. This is important, since there is a wide variety as well in country size (from giant China to tiny Singapore) and in economic development (with levels of per capita income varying more than 30 times between the highest and lowest level). Jose Tongzon from National University of Singapore looks at ASEAN plus three (China, Japan, Korea) versus ASEAN integration. He argues that both processes are not contradicting each other, but should be viewed as complimentary. Indeed, in such a big community as ASEAN plus three smaller, sub-regional integration projects can help to organize the integration process of the wider community more smoothly. At the same time, economically, the major players of Northeast Asia are indispensable for growth and development of Southeast Asia. In this sense, stronger ASEAN ties are not an impediment, but helpful to integration. A stronger ASEAN allows its member states to view the gains of integration with the big neighbours more equally. At the same time, ASEAN plus three integration fosters intra-regional trade and investment.

Nattapong Thongpakde from the National Institute of Development Administration in Thailand takes a Thai perspective on East Asian economic integration. Comparing the economic structure of East Asia, as well trade and investment structures are similar in the region. For multinational companies, the production process is often located in various countries and strongly complementary between Northeast and Southeast Asia. A wider, ASEAN plus three integration area could avoid the “Spaghetti bowl effect” of an intransparent tariff structure of a network of bilateral agreements and thereby avoid trade diversion to some extent. The strong dependency on the USA regarding trade and in some countries the strong political ties with the USA, a new definition of the role of China and Japan in East Asia, overcoming long-lasting distrust as well as faster economic development in Southeast Asia are problems to be overcome in the integration process.

The first proposal for economic integration in a wider, East Asian community, the proposal of an East Asian Economic Caucus, originated in Malaysia. Mohd Haflah Piei from the Malaysian Institute of Economic Research in his paper reconsiders this proposal, urging for stronger ASEAN ties with Northeast Asia. This would not only increase the bargaining power of East Asian states in the world economy, but also signal commitment to economic reform and policy credibility as well as exerting peer pressure for bolder reform among the countries until now less developed. Additionally market enlargement promises static and dynamic gains and the investment environment, especially for ASEAN , would be dramatically improved. However, adjustment costs from the loss of tariff revenue and industry restructuring can occur. Because of the potential effects of trade diversion in an integration area with many exceptions, the East Asian economic community should preferably include all sectors of the economy.

As mentioned before, Southeast Asia is characterized by heterogeneity in terms of size, population and economic development. For some of the smaller and newer ASEAN member states, integration is a huge challenge to be mastered. Pham Quoc Tru from the Central Institute for Economic Management, Vietnam looks at implication of the East Asian economic integration process for CLMV Countries (Cambodia, Laos, Myanmar and Vietnam). They are especially interested in reaping gains from integration in terms of a more secure investment environment through peace, political and economic stability and the mitigation of bilateral conflicts prevailing in CLMV. However, the fear the possibility of incurring large trade deficits and being finally politically dominated by the large neighbours in Northeast Asia, including the dismal perspective of excessive exploitation of natural resources in low-regulated CLMV. Moreover, CLMV have to overcome important internal challenges to fully participate in ASEAN and ASEAN plus three integration, Institutional transformation and institution building are necessary in the economy as well bureaucracy of the country, often riddled by the problems of corruption and red tape. The state owned sector in Vietnam and Laos is still plagued by low efficiency. But also the investment in human capital, by raising the experience and skills in terms of language, negotiation and professional management are necessary to enjoy a favourable position in East Asia.

A third and last group of papers tries to evaluate the perspectives for East Asian integration in the future. Jae-seung Lee of the Institute for Foreign Affairs and National Security in Seoul asks the question, if there is a perspective beyond economic community. He highlights the politics of economic integration in East Asia. From the beginning of integration, a political process was necessary to tear down barriers to trade and investment. Afterwards, Lee reviews various aspects of the integration process, namely ASEAN-AFTA versus Northeast Asian economic cooperation and the role of financial cooperation, which after the Asian crisis has become a sort of second leg of integration. Concrete steps for economic integration are proposed by the East Asian Vision Group, of which Jae-seung Lee is a member, a government-sponsored effort to define goals and ways of integration in East Asia. Steps of economic and financial integration might lead to an East Asian community, which however, is not uniform, but characterized by multi-layer integration, including projects on the regional and sub-regional level. Among the problems to overcome is the lack of clear regional leadership, especially after Japan’s “lost decade” of economic recession.

Young-jong Choi of the Catholic University of Seoul sees the East Asian integration process hampered by two forms of “underdevelopment” of the region: East Asia is as well “under-identified” as “under-institutionalized”. The regions needs as well a closer regional identity as closer institutional ties to achieve the vision of an East Asian community. The Asian crisis has in this respect been a catalyst, leading to the search for new forms of integration, like in the field of financial policy. ASEAN plus three is now emerging as a new body of economic and political cooperation. However, strong ties to the USA in some states and unresolved problems like the Korean division make bolder integration approaches for now impossible. Bilateral FTAs, as they are now negotiated among many East Asian states, might finally facilitate through a form of “domino effect” region-wide integration like in the European Union.

Seokwoo Kim from the University of Seoul looks at prospects and limitations of ASEAN plus three. The heterogeneity of countries in the region, hegemonic competition between Japan and China, China’s understanding as center of the world order in East Asia inherited from the 19th century, but also economic obstacles like overlapping industrial structures challenge the integration process. More important, there has to be a change of minds, from a “mercantilist” perception of trade (with the ultimate goal of a large trade surplus) to a perception of mutual beneficial trading relations. To overcome problems of policy formulation and coordination on the way to integration, as Korea experienced in the difficult ratification process of an FTA with Chile, special negotiation powers for governments regarding the economic integration process are a possible solution. Also, Seokwoo Kim proposes to begin with sectoral integration processes in uncontested sectors. Like the European integration process began sectorally with the ECSC, so the reasoning, a beginning of integration in some sectors would lead to more comprehensive agreements and finally in an East Asian community.

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