SINO + ASEAN = East Asian Unification? Not Quite Part I
by Collin Spears, BFPR Chief Foreign Policy Correspondent
The Association of Southeast Asian Nations (ASEAN), founded 42 years ago, was created to provide a framework to advance regional stability in Southeast Asia at a time when the withdrawal of colonial powers had created a vacuum. This placed the newly independent states of the region in danger of succumbing to ethnic strife and communist insurgencies. Since the conclusion of the Cold War, ASEAN has embarked on a series of free trade initiatives, linking it to some of the Asian-Pacific regions most dynamic economies.
Over the last decade, ASEAN has negotiated free trade agreements (FTA) at breakneck speeds, signing deals with Japan, Australia, and New Zealand. It is also in the process of negotiating FTAs with India, South Korea, and China. The deal with China has garnered much attention, because it will create the third largest common market by trade volume, with a population of 1.8 billion and a US$2 trillion Gross Domestic Product (GDP). This will not only be the world’s largest FTA, but it will also possess a growth potential that is unparalleled.
ASEAN’s relationship with China has changed dramatically over the past four decades. At one time, Chinese sponsored communist insurgencies were one of the greatest threats to the security of Thailand, Malaysia, and, Cambodia. Even after these conflicts ceased, there was lingering suspicion on both sides. ASEAN has shown considerable enthusiasm for a Sino-ASEAN FTA, but its nigh inevitability has not quieted all concerns within the region over the growing power of China in Southeast Asia.
Background
ASEAN’s recent FTA activity has led to further economic integration, because members have come to release that the lack of centralized authority has damaged cohesiveness and efficiency. In 1992, the ASEAN signed an internal FTA. At the time, ASEAN had six members, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. By the end of the decade three more members ascended, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1999. ASEAN hoped the synergy generated between member-states would lead to greater competitiveness for their goods on the global market and attract more FDI to region to spur further economic development.
Never intended to be a political or economic union, ASEAN has been a collaborative body used to facilitate dialogue and consultation between sovereign nation-states. Rather than comparing it to the present day European Union, it is more instructive to compare it to 18th and early 19th century Europe, while remaining cognoscente that Southeast Asia is vastly more diverse culturally, religiously, politically, and economically. Europe in comparison appears ethnically homogenous and politically and economically uniform.
In December of 2008, the ASEAN Charter, was ratified by members and became legally binding. This was not only an effort to increase regional integration, but also to reaffirm the shared belief in national sovereignty and non-interference in the internal domestic matters of member-states. As a result, unlike the EU, ASEAN does not apply a common external tariff on imported goods. The ASEAN Secretariat does have authority to monitor compliance with the Charter or the AFTA, but has no legal authority to enforce member-state compliance, although it may aid in efforts to mediate disputes between states. Most disputes are still resolved through informal bilateral means. ASEAN does have the ability to issue resolutions on conflicts, which have the power of an advisory opinion. The ability to issue opinions on conflicts is an evolutionary step for the organization. ASEAN has come to a point where the policy of non-interference intersects interdependence and the organization has decided that sovereignty is not a zero-sum game.
Future political integration is dependent on ASEAN resolving its many territorial disputes. There is still a high level of nationalism in the region; member-countries are suspicious of each other due to centuries of conflict, followed by colonial isolation. There are disputes over territories, which have sparked violence, as was the case in a recent border clash between Cambodia and Thailand in 2008. Since these are issues are usually considered "internal affairs", no comprehensive plan has been initiated. Part of this is due to ASEAN’s structure; individual member-states have the ability to block such talks or organizational reforms; and therefore, decision-making proves ineffective without the influence of strong external actors.
Follow the Money
As with almost everywhere else, the global recession has affected Southeast Asia, but the affect of the U.S. subprime crisis has been limited, so no major collapses have occurred. Exports have dropped 35% in the region in the last year, but will likely even out over the rest of 2009 (Hill 2009). Most ASEAN members have current account surpluses, banks have conservative lending practices, and corporations have not leveraged too high. Moreover, their economies are still heavily agrarian, and therefore less affected by global market shifts. As a result, the region remains very open to trade. Over the last decade, production sharing has become the hallmark of East Asian export industries. This process involves a vertical division of labor, where manufacturing process is broken into stages. A factory in each nation specializes in the fabrication of a subcomponent for a single product, all of which eventually go to China for final assembly and export. Any ease in the product flow is mutually beneficial to all parties.
China and ASEAN launched their cooperation dialogue in 1991 and signed the China and ASEAN signed the China-ASEAN Framework Agreement on Comprehensive Economic Cooperation in 2001, which proposed the creation of a China-ASEAN FTA by 2010. China separately negotiated bilateral FTAs with each ASEAN member state. In 2004, a three-year period, called "early harvest" began, where ASEAN states would have access to the Chinese market, after which time, ASEAN states would have to reciprocate. The FTA began with the, a "trade in goods agreement" signed in 2004 and a "service agreement" in 2007. The "investment agreement" is the final step in the FTA deal, and was to have been concluded at the ASEAN +6 Summit in April of 2009, but anti-government riots in Thailand resulted in the postponement of the summit until July. The full FTA will go begin in 2010, with the more developed ASEAN members (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand); the FTA will apply to the remaining members (Cambodia, Laos, Myanmar and Vietnam) in 2015.
Trade Benefit and Disadvantages
During the 1990’s the GDP of China and ASEAN were comparable, at about US$1.9 billion. By 2005, China’s GDP was more than twice ASEANS at US$849 billion (Wattanapruttipaisan 2006). During the same period, ASEAN-China trade has increased considerably. Total trade in 2001 was US$39.5 billion and in 2006 it was US$114 billion (Hsiao et al. 2008). Chinese Vice Commerce Minister Gao Hucheng stated that Sino-ASEAN total trade was US$ 231.12 billion in 2008 and predicted that by 2010, bilateral trade will increase to US$1.2 trillion (Xiong Tong 2009). Conjointly, ASEAN rose in China’s overall trade from 6.0% in 1990 to 9.3% in 2007, while China increased in ASEAN’s overall trade from 2.4% in 1990 to 9.8% in 2006 (Zhao 2008). In 2007, ASEAN was China’s fourth largest trade partner after the European Union, the United States and Japan.
The Sino-ASEAN FTA, designed to capitalize off these trends and the massive scale of the common market could create a centrifugal force that will push nations such as Japan, South Korea, and possibly Taiwan to increase trade liberalization in order to remain competitive. In 2008, Japan signed its own FTA with ASEAN, which would reduce tariffs on 93% of imports from ASEAN and 90% of imports from Japan in 10 years. South Korea is moving closer completing its free trade deal with ASEAN. They have completed a deal to open up the service sector, which went into effect on May 1, 2009, but there are three more accords yet to be finalized: merchandise, investment, and dispute settlement.
Hao and Huang Chao-Jen (2008) found that, at least initially, ASEAN would benefit more from the FTA than China. The real GDP of other East Asian nations (Taiwan, South Korea, and Japan) will decrease by fractions of a percent (average of 0.0143%) due to the proposed Sino-ASEAN FTA; Taiwan will be affected the most and Japan the least. Investment in these nations will also decrease by close to 0.4%, whereas they will increase in ASEAN by over 4% and in China by 0.5%. The Sino-ASEAN zone’s imports will grow by 4.5% and exports: 2.7%. Once again, Japan, Taiwan, South Korea will see a 0.2% decrease in exports and a 0.72% decrease in imports.As China’s economy expands, imports from ASEAN countries for required production inputs will increase. Raul L. Cordenillo (2005) concluded that ACFTA (Asean-China Free Trade Agreement) will increase ASEAN’s exports to China by 48% and China’s exports to ASEAN will increase by 55.1%. This internal trade will increase ASEANS Real GDP by 0.9% (US$5.4 billion), while China’s Real GDP will expand by 0.3% (US$2.2 billion).
Most East Asian economies are competitive with each other in textiles, apparel, and electronic equipment, but under the FTA, ASEAN’s top exports to China will be electrical equipment, computer/machinery, chemicals, plastics, and rubber, and the bloc will see a decline in apparel. These products are mostly intermediate components for Chinese exports to third countries. China will benefit from transportation equipment and see a decline in wood products and petrochemicals. While, the ACFTA is not a prelude to European-style regional integration, it is likely that the increase in free trade will lead to a more cohesive ASEAN. It may also inspire surrounding nations to make up the economic loss suffered from ACFTA by expanding their trade relationship with ASEAN and China. Not only will more ASEAN and Chinese companies be willing to investment within the integrated market, so will companies from the Asian nations outside the agreement and beyond.
The narrative of hegemonic authoritarian China overwhelming a weaker ASEAN economically is empirically unjustified. In fact, at least in the initial years of ACFTA, ASEAN will benefit significantly more than China. However, as will be shown in the second part of this series, not all actors involved in the Pacific Rim are appreciative of greater regionalization in Asia.
Notes:
Chu Hao and Huang Chao-Jen. 2008. "Influence of the China plus ASEAN Free Trade Area on East Asia’s Economics and Trade" Taiwan Institute of Economic Research.
Hill, Hall. 2009. "Political Realignment In Southeast Asia"The Far Eastern Economic Review.
Hsiao, HH Michael and Yang, Alan. 2008. "Ins and outs of a China courtship"
Asia Times Online.
Wattanapruttipaisan, Thitapha. 2006. "ANALYSIS / ASEAN-CHINA PARTNERSHIP: A blossoming relationship" Bangkok Post.
Xiong, Tong. 2009. "MOC official: ASEAN likely to become China’s third largest trade partner" China View Online.
Zhao Jianglin. 2008. "Recent Development of China-ASEAN Trade and Economic Relations: From Regional Perspective" Institute of Asia-Pacific Studies, CASS, International Conference on ASEAN-China Trade Relations: 15 Years Development and Prospects, Hanoi, Dec. 6-8, 2007.
