China’s Rise and the Development of Asian Regional Integration (Research Series on the Chinese Dream and China’s Development Path) 9811646430, 9789811646430

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Research Series on the Chinese Dream and China’s Development Path

Jianglin Zhao Yuzhu Wang Xiaobing Zhou Zhongyuan Zhang

China’s Rise and the Development of Asian Regional Integration

Research Series on the Chinese Dream and China’s Development Path Series Editors Yang Li, Chinese Academy of Social Sciences, Beijing, China Peilin Li, Chinese Academy of Social Sciences, Beijing, China

Drawing on a large body of empirical studies done over the last two decades, this Series provides its readers with in-depth analyses of the past and present and forecasts for the future course of China’s development. It contains the latest research results made by members of the Chinese Academy of Social Sciences. This series is an invaluable companion to every researcher who is trying to gain a deeper understanding of the development model, path and experience unique to China. Thanks to the adoption of Socialism with Chinese characteristics, and the implementation of comprehensive reform and opening-up, China has made tremendous achievements in areas such as political reform, economic development, and social construction, and is making great strides towards the realization of the Chinese dream of national rejuvenation. In addition to presenting a detailed account of many of these achievements, the authors also discuss what lessons other countries can learn from China’s experience. Project Director Shouguang Xie, President, Social Sciences Academic Press Academic Advisors Fang Cai, Peiyong Gao, Lin Li, Qiang Li, Huaide Ma, Jiahua Pan, Changhong Pei, Ye Qi, Lei Wang, Ming Wang, Yuyan Zhang, Yongnian Zheng, Hong Zhou

More information about this series at http://www.springer.com/series/13571

Jianglin Zhao · Yuzhu Wang · Xiaobing Zhou · Zhongyuan Zhang

China’s Rise and the Development of Asian Regional Integration

Jianglin Zhao Chinese Academy of Social Sciences Beijing, China

Yuzhu Wang Chinese Academy of Social Sciences Beijing, China

Xiaobing Zhou Chinese Academy of Social Sciences Beijing, China

Zhongyuan Zhang Chinese Academy of Social Sciences Beijing, China

This book is published with financial support of the Chinese Fund for the Humanities and Social Sciences. ISSN 2363-6866 ISSN 2363-6874 (electronic) Research Series on the Chinese Dream and China’s Development Path ISBN 978-981-16-4643-0 ISBN 978-981-16-4644-7 (eBook) https://doi.org/10.1007/978-981-16-4644-7 Jointly published with Social Sciences Academic Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Social Sciences Academic Press. © Social Sciences Academic Press 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

This book is the result of the Chinese Academy of Social Sciences (CASS) 2011 research project entitled “China and the New Asian Market”, led by research fellow Jianglin Zhao. China’s rise has become an indisputable fact in recent years. The significance of this fact to the whole region has never been fully explored, though it will influence China’s future development and its relationship with Asia. This book is based on the study of this relationship from the standpoint of the region. After many years of development, Asia has crossed the threshold of a new development stage and became the manufacturing center of the world. With China as the place of final product assembly and the developed world as its market, Asia has had an export strategy which has created one economic miracle after another. But the financial crisis of 2008 has changed the economic picture of the world. The developed economies, mired in the subprime loan debacle and overburdened with debts, are unlikely to return to the limelight in the short term, forcing Asian countries to change their economic strategy and leverage their markets for future growth. Moreover, with the continued rise in per capita income, Asian economies seem ready for the next step in their economic development. From the market standpoint, Asian economies are at the crossroads of two transformative trends. One is the change of growth model from export-based to domestic demand-based, while the other is a consolidation of regional markets to satisfy the requirements of future economic growth. This book will focus on the latter trend. If the expanded domestic demand is unable to compensate for the reduced demand from the developed world, Asia’s industrialization will slow down, especially since this industrialization is of a collective nature. China seems poised to be the major participant if not the creator of the consolidated Asian market. Having adopted the policy of reform and opening up more than 30 years ago, China has become a major Asian and world power. In 2010, it overtook Japan as the second largest economy of the world and the largest Asian economy in terms of GDP. This fact has transformed China’s economic relations with other countries in the region and endowed it with the ability to lead Asia on a path of autonomous development. v

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China’s strategic interest in a consolidated regional market is threefold. First, a regional market can extend China’s window of opportunity in terms of economic development. As demand from the developed markets continues to be weak and the domestic market not fully developed, a regional market can have stabilizing effects on economic growth and industrialization. Second, a regional market protects the common interests of China and other Asian economies. After the financial crisis of 2008, it has become increasingly clear that China is the final consumer of regional products; in other words, China’s significance as a market has been made clear. China’s relationship with other Asian economies used to be focused on production; now it is focused on market. This change is favorable to the establishment of an Asian economic community. Third, a regional market is a theater in which China can implement its strategy. As an influential world power, China needs a regional market to facilitate the rise of the Asian region. This book explores the market issues in Asia’s industrialization and the possibility and continuity of China’s adjustment of its relationship with the Asian region in the next 5 to 10 years from a regional standpoint. It also tries to quantify the effects of China’s rise on the regional market. Major conclusions are the following. First, Asian industrialization, including China, has regional characteristics. Considering the constraints of individual markets, Asian economies share a collective desire for a regional market. Second, a consolidated regional market concerns not only the stability of China’s industrialization and economic development but also the implementation of China’s overall strategy. Third, due to the limitation of its economic capabilities, China is not yet the leader but a major participant in a regional market. So a consolidated regional market is still a goal, not a fact. This book is divided into nine chapters. Its authors are all researchers at the National Institute of International Strategy at CASS. I am the author of Chaps. 1, 2, 4, and 6, and the first and second sections of Chap. 9. Xiaobing Zhou is the author of Chap. 3, and Yuzhu Wang is the author of Chaps. 5 and 8 and the third section of Chap. 9. Chapter 7 is written by assistant research fellow Zhongyuan Zhang. We thank Social Sciences Academic Press (SSAP) and its editors for their tremendous support, and we welcome comments from you, the reader, as always. December 2013

Jianglin Zhao

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Background and Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 Studies in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2 Studies in Other Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Research Design, Methodology, and Conclusions . . . . . . . . . . . . . . . 1.3.1 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 Structure and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 1 3 4 5 7 9 9 10 10 14

2 External Market and Regional Industrialization . . . . . . . . . . . . . . . . . . 2.1 The Relationship Between External Market and Regional Industrialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 The Relationship Between External Market and a Big Country’s Industrialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 The Relationship Between External Market and Regional Industrialization . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 China’s Industrialization Under Restrictive Market Conditions . . . . 2.2.1 China’s Industrialization Under Open Conditions . . . . . . . . . 2.2.2 What Further Industrialization Requires of External Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

3 Structural Characteristics of Major Regional Markets . . . . . . . . . . . . . 3.1 Characteristics of the World Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Trends in the World Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Regional Changes in World Trade . . . . . . . . . . . . . . . . . . . . . . 3.1.3 Changes in Merchandise on the Global Market . . . . . . . . . . .

17 18 20 25 25 27 30 31 31 31 35 39

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3.2 Structures of Major Regional Markets . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 The North American Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 The EU Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 The Latin American Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Economic Systems in Major Regions of the World . . . . . . . . . . . . . . 3.3.1 Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43 43 45 50 56 56 60 63 64

4 Evolution of the Asian Market Structure . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Size of the Asian Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Changes in Regional Demand in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Changes in Asian Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 Trends in Asian Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Import in the Asian Market and Structural Changes . . . . . . . . . . . . . . 4.3.1 Changes in Intra-regional Import . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Structure of Intra-regional Import . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Assessment of Intra-regional Import . . . . . . . . . . . . . . . . . . . .

65 65 69 69 76 78 78 80 84

5 Cooperation and Development in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 5.1 Three Major Negotiation Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 5.1.1 The China-Japan-South Korea Free Trade Area . . . . . . . . . . . 89 5.1.2 The Trans-Pacific Partnership (TPP) . . . . . . . . . . . . . . . . . . . . 90 5.1.3 The Regional Comprehensive Economic Partnership (RCEP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 5.2 Development Trends in Asia–Pacific Cooperation . . . . . . . . . . . . . . . 97 5.2.1 Asia–Pacific Cooperation to See a Period of Framework Ambiguity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 5.2.2 East Asia Cooperation Undergoing Framework Reshaping and RCEP Emerging as a New Platform for Regional Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 5.2.3 East Asia Cooperation Within the Frameworks of CJSKFTA, TPP and RCEP . . . . . . . . . . . . . . . . . . . . . . . . . . 102 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 6 Changes in China’s Economic Relations in Asia . . . . . . . . . . . . . . . . . . . 6.1 Main Characteristics of Changes in China’s Economic Relations with Other Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 Changes in China’s Trade Relations with Other Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Capital Flows Between China and Other Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Contents

6.2 Economic Interactions Between China and the Rest of Asia . . . . . . . 6.2.1 Significance of Changes to Development Strategies in Asia to the Chinese Economy . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 The Significance of China’s Growth to Asia . . . . . . . . . . . . . . 6.3 Changes in China’s Economic Relations with Other Asian Countries: Intertwined Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Expansion of Scale: China–ASEAN Trade Relations Prior to the 1997 Asian Financial Crisis . . . . . . . . . . . . . . . . . 6.3.2 External Markets: The Basis for Developments in China–ASEAN Trade Relations Prior to the 2008 Global Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Intertwined Markets: New Developments in China– ASEAN Trade Relations in the Post-crisis Era . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Impact of China’s Rise on the Regional Market . . . . . . . . . . . . . . . . . . . 7.1 New Trends in Trade Development in East Asia . . . . . . . . . . . . . . . . . 7.2 China’s Position as Market for the Region . . . . . . . . . . . . . . . . . . . . . . 7.2.1 Trade Combination Degree (TCD) Between China and Other East Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Trade Complementarity Between China and Other East Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Trade Competitiveness Between China and Other East Asian Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.4 China’s Role in East Asia as a Market from the Angle of End Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Interplay Between China and the U.S. in the Asian Export Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Interplay Between China and the U.S. in the Consumer Goods Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 The Model and Calculation Methods . . . . . . . . . . . . . . . . . . . . 7.4.2 Results and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Main Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 China’s Participation in Asian Cooperation . . . . . . . . . . . . . . . . . . . . . . . 8.1 China’s Participation in Regional Cooperation in Asia . . . . . . . . . . . 8.1.1 “Upgrading” the ASEAN–China Free Trade Area (ACFTA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.2 East Asian Cooperation: Advancing the CJSKFTA . . . . . . . . 8.2 Impact of Major Asian Economies’ Cooperation Strategies on China’s Efforts to Establish a Regional Cooperation System . . . 8.2.1 Competition Between Major Players Driving Regional Cooperation in Asia–Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.2 RCEP and ASEAN’s “Core Position” . . . . . . . . . . . . . . . . . . .

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114 114 119 123 123

124 129 133 135 136 143 143 147 149 151 151 158 159 161 168 169 171 171 171 175 177 178 181

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8.3 The Challenge of Multilateral Framework Restructuring Facing China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Multilateral Partnerships to Stagnate in Next 5–10 Years, China to Turn to Regional Cooperation . . . . . . . . . . . . 8.3.2 APEC’s Weaker Role as Cooperation Platform for Asia–Pacific and East Asian Cooperation in Framework Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 RCEP Expected to be Advanced to the Maximum . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Strategic Direction and Pathways for China’s Consolidation of the Asian Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Challenges Facing China in Consolidating the Asian Market . . . . . . 9.1.1 Addressing Issues in the Chinese Economy in the Period of International Strategic Opportunities . . . . . . 9.1.2 Strategic Direction for China’s Consolidation of the Asian Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Main Pathways for China’s Consolidation of the Asian Market . . . . 9.2.1 Strategic Significance of Building an Asian Market . . . . . . . 9.2.2 Main Pathways for Building an Asian Market . . . . . . . . . . . . 9.3 China’s Cooperation Strategy for Asia . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 Competition in Regional Cooperation Framework in the Context of China’s Rise . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.2 Interdependence and the CJSKFTA . . . . . . . . . . . . . . . . . . . . . 9.3.3 The TPP and China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.4 RCEP and China’s Cooperation Strategies . . . . . . . . . . . . . . . 9.3.5 China’s Strategic Choices for Regional Cooperation . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

186 186

188 189 190 193 193 193 196 198 198 200 202 203 206 212 214 216 219

About the Author

Jianglin Zhao a Ph.D. in economics, is a Research Fellow and Director of the Office for Research of International Economic Relations at National Institute of International Strategy, Chinese Academy of Social Sciences (CASS) and was a Visiting Scholar at a number of Japanese and American universities and research organizations. She is the author of East Asia’s Technology, Intellectual Property Protection and Economic Growth (Economic Science Press, 2007), Editor of East Asian Growth Model: Transformation and Vision (Social Sciences Academic Press, 2010), and Post-Crisis Asian Growth and Strategic Adjustment (Social Sciences Academic Press, 2013), and has published a number of research papers.

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List of Figures

Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 2.4 Fig. 2.5 Fig. 2.6

Fig. 2.7 Fig. 2.8

Fig. 3.1

Fig. 3.2 Fig. 3.3 Fig. 3.4 Fig. 3.5 Fig. 3.6

A big country’s standard industrialization process under closed conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A big country’s economic development under open conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The relationship between market and industrialization in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of domestic and external demand on regional economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structural changes in Asia’s demand. Source World Bank . . . . . . Poverty in China. Note Poverty definition: daily income USD1.25, or monthly USD38. Source World Bank, World Development Indicators (WDI), http://data.worldbank.org/ indicator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign investment in China. Source World Investment Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structural changes in demand. Source 1978–1989 data from China Statistical Yearbook; 1990–2012 data from ADB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth in the world trade in goods. * Crude oil price is measured in USD/barrel of 2011. Source WTO databases; BP Statistical Review of World Energy . . . . . . . . . . . . . . . . . . . . . Major regions’ dependence on trade. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in global export by region. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in global import by region. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Global balance of trade. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regional reliance on intra- and extra-regional import. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . .

18 20 23 24 24

26 27

29

32 34 35 36 37 38 xiii

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Fig. 3.7 Fig. 3.8 Fig. 3.9

Fig. 3.10 Fig. 3.11 Fig. 3.12 Fig. 3.13

Fig. 3.14 Fig. 3.15 Fig. 3.16 Fig. 3.17 Fig. 3.18 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5 Fig. 4.6 Fig. 4.7 Fig. 4.8 Fig. 4.9 Fig. 4.10

List of Figures

Intra- and extra-regional export dependency. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . Changes in world Merchandise export. Source WTO. http://stat.wto.org/StatisticalProgram . . . . . . . . . . . . . . . . . . . . . . . Changes in export of manufactures. * Office and telecommunications equipment falls under the category of machinery and transportation equipment. Source WTO. http://stat.wto.org/StatisticalProgram . . . . . . . . . . . . . . . . . . . . . . . Changes in export of manufactures by region. Source WTO. http://stat.wto.org/StatisticalProgram . . . . . . . . . . . . . . . . . Changes in export of fuels and mining products by region. Source WTO. http://stat.wto.org/StatisticalProgram . . . . . . . . . . . Changes in export of agricultural products by region. Source WTO. http://stat.wto.org/StatisticalProgram . . . . . . . . . . . Changes in global export by Merchandise and region. Note The data is the yearly distribution of the various categories of global export. Source WTO. http://stat.wto.org/statistic alprogram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . North American trade. Source UNCTAD. http://unctadstat. unctad.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU trade. Source UNCTAD. http://unctadstat.unctad.org . . . . . . Composition of EU trade by country in 2012. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . Volume and growth of Latin American trade. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . Extra-regional trade by country in 2012. Source UNCTAD. http://unctadstat.unctad.org . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia’s percentage of world GDP. Note Data for 2014–2017 are forecasts. Source World Bank and IMF . . . . . . . . . . . . . . . . . . Asian economies’ shares of global GDP. Note Data for 2014–2017 are forecasts. Source World Bank and IMF . . . . . Asia consumption versus world consumption. Source World Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asian investment versus world investment. Note Data for 2014–2017 are forecasts. Source World Bank . . . . . . . . . . . . . Asia’s balance of trade. Source World Bank . . . . . . . . . . . . . . . . . Composition of Asia’s GDP. Source ADB and IMF . . . . . . . . . . . Change in Asian demand. Source ADB and IMF . . . . . . . . . . . . . Consumption in Asia’s developing countries. Source ADB and IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GDP composition in Asia’s developing countries. Source ADB and IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumption of Asia’s developing countries, Japan, EU and U.S. in 2012 (GDP = 100). Source ADB, IMF, EU website, and U.S. Bureau of Economic Analysis . . . . . . . . . . . . .

39 40

40 41 42 42

43 44 48 52 52 53 66 67 68 68 69 70 71 71 71

73

List of Figures

xv

Fig. 4.11 Fig. 4.12

73

Fig. 4.13 Fig. 4.14

Fig. 4.15 Fig. 4.16 Fig. 4.17 Fig. 6.1

Fig. 6.2

Fig. 6.3 Fig. 6.4 Fig. 6.5

Fig. 6.6

Fig. 6.7 Fig. 6.8

Asian countries’ demand in 2012. Source ADB and IMF . . . . . . Per capita income and savings-investment model 2005– 2012. Source ADB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of regional demand. Source ADB and IMF . . . . . . . . . . Structure of regional demand 2005–2012. Note Data represent the difference in consumption between 2005 and 2012. Source ADB and IMF . . . . . . . . . . . . . . . . . . . . . . . . . . Asia’s share of global import. Source UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Major asian economies’ shares of global import. Source UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia’s intra- and extra-regional import of consumer goods. Source UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in China’s trade position in East Asia. Note “East Asia” here includes China, Japan, South Korea, Taiwan (China), Singapore, Indonesia, Malaysia, Thailand, the Philippines, and Vietnam. Source UN Comtrade Database and the Asian Development Bank (ADB) . . . . . . . . . . . U.S. imports from Asia against total imports. Note “Asia” here refers to China, Japan, the “Four Asian Dragons” and ASEAN. The “Four Asian Dragons” here only include Taiwan Province, South Korea and Singapore, while “ASEAN” only includes Indonesia, Thailand, Malaysia, the Philippines and Vietnam. Source UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital inflows and outflows in Asia as of 2012. Source World Investment Report 2013 by the United Nations . . . . . . . . . Changes in the composition of Chinese exports to the rest of Asia. Source Calculated using UN Comtrade Database . . . . . . Changes in the composition of Chinese exports to the rest of Asia (all products to Asia at base of 100). Source Calculated using UN Comtrade Database . . . . . . . . . . . . . . . . . . . Population, GDP, per capita income, and current account as proportion of GDP. Source ADB and the International Monetary Fund (IMF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Major Asian economies’ deviation from the standard consumption model in 2009. Source ADB and IMF . . . . . . . . . . . America’s trade balance with China and Asia. Source UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76 76

77 79 79 80

106

107 111 115

116

120 121 122

xvi

Fig. 6.9

Fig. 6.10 Fig. 6.11 Fig. 6.12 Fig. 7.1

Fig. 7.2 Fig. 7.3 Fig. 9.1 Fig. 9.2

List of Figures

U.S. imports from East Asia against total imports. Note “Asia” here refers to China, Japan, the “Four Asian Dragons” and ASEAN. The “Four Asian Dragons” here only include Taiwan Province, South Korea and Singapore, while “ASEAN” only includes Indonesia, Thailand, Malaysia, the Philippines and Vietnam. Source Calculated using UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proportion of ASEAN exports to the U.S. and China as proportion of total exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in per capita income in China and ASEAN. Source IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments between China and ASEAN and their growth. Source Ministry of Commerce web site . . . . . . . . . . . . . . . . . . . . . Consume goods imports by China and the U.S. as a proportion of world total. Source UN Comtrade Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth rates of consumer goods imports by China and the U.S. Source UN Comtrade Database . . . . . . . . . . . . . . . . IRFs for the lncch, lngdp, and Incus variables, 1998–2012 (second-order lag) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TPP members’ contribution to the U.S. trade . . . . . . . . . . . . . . . . China–ASEAN trade since the establishment of dialogue. Source China customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

125 125 128 132

159 160 165 213 216

List of Tables

Table 1.1 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 3.7 Table 3.8 Table 3.9 Table 3.10 Table 3.11 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 5.1 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8

Structure and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Trade in the 21st century . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in share of U.S. trade Merchandise by Region . . . . . . Composition of EU Trade77 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Composition of EU trade Merchandise by region . . . . . . . . . . . EU balance of trade in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade balance of major EU countries in 2012 (in USD1 billion) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Latin American trade by region . . . . . . . . . . . . . . . . . . . . . . . . . . Composition of Latin American trade Merchandise . . . . . . . . . Latin American balance of trade in 2012 (in USD1 billion) . . . LA4’s balance of trade in 2012 (in USD1 billion) . . . . . . . . . . . Evolution of European economic system . . . . . . . . . . . . . . . . . . GDP of major economies in the world . . . . . . . . . . . . . . . . . . . . Asian demand 2005–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure of regional import (Total National Import = 100) . . . Structure of regional import (Total Regional Import = 100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Developed world versus Asia in post-crisis import . . . . . . . . . . Asia versus developed world in post-crisis import structure . . . Tariff reductions in the “10 + 1” free trade areas . . . . . . . . . . . . China’s trade relations with Asia . . . . . . . . . . . . . . . . . . . . . . . . . China’s trade balances with Asia and the World . . . . . . . . . . . . Capital flows within the region as of 2012 (inventory) . . . . . . . Industry breakdown for Chinese FDI as of 2010 . . . . . . . . . . . . Changes in the technological content of exports from major Asian countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of changes in Asian countries’ economic development strategies on China . . . . . . . . . . . . . . . . . . . . . . . . . Chinese tax cuts for ASEAN products by category . . . . . . . . . . Personal consumption in China, ASEAN and developed countries, 2005–2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11 44 46 47 49 50 51 53 54 55 56 57 66 75 81 83 85 87 103 108 109 112 113 118 119 127 130 xvii

xviii

Table 6.9 Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5 Table 7.6 Table 7.7 Table 7.8 Table 7.9 Table 7.10 Table 7.11 Table 7.12 Table 7.13 Table 7.14 Table 7.15 Table 7.16 Table 7.17

Table 7.18 Table 9.1 Table 9.2

List of Tables

Trade dependence between China and ASEAN . . . . . . . . . . . . . Changes in east Asian exports to Japan . . . . . . . . . . . . . . . . . . . . Changes in east Asian exports to China . . . . . . . . . . . . . . . . . . . Changes in east Asian exports to the U.S. . . . . . . . . . . . . . . . . . Changes in exports by east Asian economies according to the BEC classification, 2000–2012 . . . . . . . . . . . . . . . . . . . . . Changes in east Asian exports to China by category, 2000–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in east Asian exports to Japan by category, 2000–2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade combination degree (TCD) between Japan and other east Asian countries . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade combination degree (TCD) between China and other east Asian countries . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade combination degree (TCD) between the U.S. and east Asian countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade complementarity between Chinese and other east Asian countries (1995–2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade competitiveness between China and other east Asian countries (2000–2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in the proportion of consumer goods exported by east Asian economies to China, Japan and the U.S. . . . . . . . Results of panel data unit-root test for variables . . . . . . . . . . . . Co-integration test results between the variables ex2ch, ex2us, and gdp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interplay between Asian exports to the U.S. and exports to China (PMG and MG estimates) . . . . . . . . . . . . . . . . . . . . . . . Results of the Granger causality test on Asian exports to China and to the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of U.S. consumer goods imports from the rest of the world on chinese consumer goods imports (system GMM values) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variance decomposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in GDP of major countries in the world, 1991– 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade between China, Japan and South Korea . . . . . . . . . . . . . .

131 137 137 138 139 142 144 145 146 146 149 150 152 154 154 155 157

162 166 203 207

Chapter 1

Introduction

China’s rise has been an indisputable fact in recent years, but the overall significance of this fact has in the region has never been fully studied. This subject concerns China’s future development and its relationship with the region. This book attempts to describe the new economic relationship China may entertain with the region from the standpoint of the region.

1.1 Background and Significance 1.1.1 Background Background considerations for this book are the following: First, history has shown that regions have become an important platform and focus for national (or regional) activities1 as exemplified by the following phenomena: 1. The region is a major platform of economic activities by the economies within the region. For instance, 70% of EU’s external trade happens within the block. This means that major EU economic activities happen among members and not with the outside world. 2. The region is the theater in which members implement their national strategies such as free trade agreement and financial integration. The matured regional markets are in Europe and North America where most of the developed countries, the highest GDPs, and the most sophisticated market systems can be found. In contrast, Latin America and Africa have lower economic development and lack regional market mechanisms while Asia has raised the level of economic development and market integration markedly. Second, after many years of development, Asia entered into a new development stage and became the manufacturing center of the world. With China as the place of 1

Katzenstein encourages further study of regions. Katzenstein (2007).

© Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_1

1

2

1 Introduction

final product assembly and the developed world as its market, Asia has had an export strategy which has created one economic miracle after another. But the financial crisis of 2008 has changed the economic picture of the world. The developed economies, mired in the subprime loan debacle and overburdened with debts, are unlikely to return to the limelight in the short term, forcing Asian countries to change their economic strategy and leverage their markets for future growth. Moreover, the rise of an Asian economic community has propelled Asia to a new stage of economic development, and this is a big change resulting from the financial crisis. During the Asian financial crisis of 1997, Asian countries were unable to grow their economies by themselves and had to rely on the developed world to extricate themselves from the crisis. Today, with the steady increase in per capita income, Asian countries are able to decide on their own development paths; they can rely on their own and the region’s strengths to achieve the next economic goal.2 For this reason, a consolidated regional market has become the focus and goal for the Asian economies. Of course, the regional market is a mid- to long-term goal. Third, due to its rise, China can become the major participant if not the creator of an Asian regional market. More than thirty years after first adopting the policy of reform and opening-up, China has become a major Asian and world power. In 2010, it overtook Japan to become the second largest economy of the world and the largest Asian economy in terms of GDP. This fact has transformed China’s economic relations with other countries in the region and endowed it with the ability to lead Asia on a path of autonomous development. China’s strategic interest in a consolidated regional market is three-fold. First, a regional market can extend China’s window of opportunity in terms of economic development. This window of opportunity has changed to the extent that the external environment can no longer satisfy the requirements of China’s industrialization and economic development. The economy grows as the external markets change. As demand from the developed markets continues to be weak and the domestic market not fully developed, a regional market can have stabilizing effects on economic growth and industrialization. China must adjust its strategic thinking and actively create a regional market to create more opportunities for itself. Second, a regional market protects the common interests of China and other Asian economies. The growth of external markets and economic growth have not kept pace with the increase in Asia’s production capacity, and the situation has reached a critical point. There are two ways of solving this problem: either the external markets have to expand further to absorb more Asian products or Asia must make adjustments to its economic structure. It seems that the latter is more likely to happen. As China’s relationship with the other Asian economies has changed from production-focused to market-focused, China has to make some structural adjustments first and its neighbors will have to follow suit. 2

Akyuz feels that it is impossible for Asia to return to the era of export-oriented high growth since the developed countries are experiencing low growth and high unemployment after the global financial crisis. What Asian countries need to do is to find a balance between domestic and external demand and restructure their industries to focus on domestic demand and regional trade. Akyuz (2011).

1.1 Background and Significance

3

Third, China can implement its national strategy in a regional market. We have said that the region is an important platform for strategic and economic development. As an influential world power, China needs a unified regional market to further its strategic interests. The regional market can also serve as a natural showcase for the peaceful rise of China; it can help eliminate conflicts and bring about the rise of the Asian region.

1.1.2 Significance This study differs from others in the following ways: First, theoretical contribution. This book analyzes the relationship between market and industrialization from a regional standpoint. Existing research on industrialization has focused on individual countries and not on multi-national regions. Asia differs from other areas of the world in that it is undergoing regional industrialization.3 Economies at different levels of development are at different stages of industrialization; they may be transforming from agrarian to industrial, from labor- to technology-intensive, some highly developed economies in terms of GDP from technology—to knowledge-intensive, and from industrial to post-industrial. But common interests and challenges (e.g. how to overcome market restrictions during industrialization) unite Asian economies which are integrating at a faster speed as a result. The goal of this book is therefore to provide an analytical platform to discuss the future of the Asian economy and the strategy that China may adopt. Second, academic value. That this book takes the regional approach is unique. Most of the existing research discusses China’s economic transformation (changing of focus from export to internal demand) and extrapolates regional relationships from the Chinese perspective. This approach has some shortcomings: First, China is negatively impacted by the stagnating developed markets and has to rely on a prosperous and stable region to continue its industrialization. Second, since China is the largest Asian economy, any change in its strategic considerations will have reverberations in the region. China has to be mindful of the national interests of the other countries in the region. A focus on China is not sufficient to tease out the trends of regional relationships or turn in a credible regional strategy based on common interests. Third, practical value. To wield its influence as a regional power, China has first of all to become the instigator of a regional market. This represents a historical opportunity as well as a crucial challenge for China. The developed markets had matured during the long process of industrialization and are accessible to the world in the post-industrial period. China is still in the process of industrialization; it did not have enough time to develop a mature market but is thrust prematurely into the role of providing a market for the region. Thus, for an indefinite period in the future, China will be a producer and, more importantly, a consumer of regional products. 3

Latin America has some similar features but these are not as prevalent as in Asia.

4

1 Introduction

It can become a true regional power if it can successfully extend its market to the region. This is an auspicious time for China. The relationship between the ascendant power and the region is changing. This is a time of economic development and transformation for China and its neighbors and China can contribute positively to regional transformation. The majority of Asian economies are small and have limited spillover effect to the regional market. But China, due to its size, has the natural conditions to be the contributor to the regional market. In reality, being the consumer of regional products is the prime reason that the relationship between China and the region is changing, but it has taken many years for China to come to this point, and this situation has only become apparent after the financial crisis of 2008. China could be the leader of the region if it can realize its potentials during this auspicious time of change. Of course, China is not as good a consumer as the U.S. and will still be a major producer in the region for the foreseeable future, but it can take advantage of the scope of its expanding market to lead Asian countries to limit and utilize the spillover effects of each market to construct a relatively autonomous regional market.

1.2 The Problem This book reexamines the changes in regional relationships from the perspective of market demand and explores how China may change its relationship with the region in order to construct a regional strategy. A pressing issue for Asia now is how to construct a unified low-cost market big enough to satisfy the requirements of future growth. Some research4 suggests that the scope of the Asian market (including expanded national and regional demand) is insufficient to compensate for the reduced demand from the developed world. Asia’s industrialization will slow down if increased Asian capacity is not matched with a suitably sized market. The market is especially important as Asia industrializes collectively, and integrating a regional market has become the precondition for future Asian growth. The majority of existing research discusses regional relationships through the lens of production; the research includes theories on trade creation and industrial transformation such as the Flying Geese Pattern, and their point of departure is always production. Very few papers analyze the changes in economic relationships from the angle of a regional market and view the latter as a precondition for their research. 4

Even though emerging economies have increased the volume of import, Xiaosong Wang et al. argue that these economies are unable to weather a global crisis because the quantity of their final products is still small compared with the world’s total. Longhua Zhao et al. hold that external demand for Chinese products will worsen because the expanded internal demand of the emerging economies is not sufficient to compensate for the reduced demand of the developed world. Jimenez et al. find that an emerging economy’s export to the developed world is strongly related to economic growth and that South-South trade is unable to replace South-North trade. See Wang and Xie (2009), Zhao and Guo (2011), Jimenez and Razmi (2013).

1.2 The Problem

5

In reality, many questions prompt us to reexamine regional economic relationships: What caused the call for global rebalancing? Is the path for future Asian industrialization and modernization sustainable? Will collective industrialization bring about contentious competition and conflict? Will cooperation solve the problem of market that Asia is grappling today? We will examine existing studies and try to see if the changes in China’s relationship with the region and a consolidated regional market are possible, workable, and sustainable.

1.2.1 Studies in China Studies done inside China have a number of features in common: First, a change in research direction. In the past, the focus was on how the region affected China; now the focus is on how China affects the region. The fast pace of China’s economic development has made China more influential in the region, and Chinese experts are paying more attention to the Chinese factor in the structural changes that are happening in Asia. Some research suggests that a new Asian economic order is in the process of being formed and academia should focus on making this order more stable and defining the role China should play within it. Yunling Zhang5 thinks that China’s rapid development adds a wild card in the transformative Asian region while Ruan Zongze6 documents the interaction between China and East Asia and analyses their common interests. Ning Huan7 believes that China can have a stabilizing effect if it cooperates with its East Asian neighbors while Feng Wang8 indicates that import is bigger than export in regional trade and that China imports more than Japan. Wei Zhao9 points out that China’s vastly increased trade volume has changed the pattern of East Asian trade and a new Chinacentered triangular trade pattern is taking shape in which China will replace Japan as the prime instigator of a new East Asian industrial structure. Second, a change of research focus from production to consumption. Although most research studies how China changes the structure of regional trade as a regional producer, some researchers are keener on viewing China as a consumer. They delineate a future in which China is the provider of market. Studies by Xiao Li et al.10 as well as Zhaoyang Zheng and Xin Zhou11 point out that the strengthening China Factor is a trend of regional cooperation that should not be overlooked. After thirty years of development, the fast growing Chinese economy has changed the paradigm 5

Zhang (2007). Ruan (2007). 7 Huan (2008). 8 Wang (2008). 9 Zhao (2009). 10 Li et al., (2005). 11 Zheng and Zhou (2007). 6

6

1 Introduction

of regional economic cooperation, from the old Flying Geese Pattern to the current “rhombus-shaped framework”, and many East Asian countries have grown more reliant on the Chinese market. The conclusion that Xiao Li and Jinghui Fu12 draw from this is that China is playing the role of market provider and that this trend will strengthen as the Chinese economy grows and the RMB rises in value. However, China is not ready to replace the U.S. as the largest market for East Asian products. Yibing Ding et al.13 hold that the growing Chinese market is far from being on a par with the American and Japanese markets in terms of absorbing East Asian final products and that China needs to change the domestic economic structure to match the changing trade pattern. Dawei Li14 thinks the following about China’s import: it will increase faster than export, semi-processed products will continue to decline while technical and key parts will increase markedly, it will play a more important role in shaping some key industrial structures, commodities will still constitute an important part while consumer goods will increase appropriately, and the source of import will become more varied. Third, China’s regional strategic preparedness. Youwen Zhang15 thinks that China’s economic status in the world has risen after the financial crisis of 2008 and that China is poised to become an economic powerhouse. Jiayi Zou16 argues that under this new set of conditions, China needs more balanced economic relations with the world, including dynamic and balanced trade relations, bidirectional and controllable investment relations, diverse and independent currency relations, comprehensive and open geopolitical relations, and proactive and effective development relations. These balanced relationships will promote a virtuous cycle between China’s and the world’s development. Even though Chinese research has yielded fruitful results, it does not have a sufficient grasp on the realities of regional relationships and is not able to describe clearly the effects of Chinese influence on the region. These issues are precisely what this book wants to explore. Many studies think that China ought to turn to domestic demand in a restrictive external environment and make structural adjustments to respond to changes in the outside world. To rely less on external demand, Yongding Yu17 notes, structural changes are necessary even if export to the U.S. improves. Due to China’s lack of real strength, some researchers suggest that China should invite other countries to create a regional market together. Hualin Jin et al.18 hold that it is difficult for individual countries to expand domestic demand, and even China and Japan are unable to become a provider of market by themselves alone. It is more reasonable to create a regional economic model in which member states try to expand export and investment based on domestic demand. Positive interaction with 12

Li and Fu (2010). Ding et al. (2013). 14 Li (2011). 15 Zhang (2012a). 16 Zou (2011). 17 Yu (2010). 18 Jin and Jin (2009). 13

1.2 The Problem

7

the outside world is a necessary condition for China’s peaceful rise, and this is the reason we raise the integrated regional market as a possible strategy for China.

1.2.2 Studies in Other Countries China’s growing economic power has naturally attracted the attention of scholars around the world, who have begun to study this topic after the World Bank declared East Asia as the incubator of “growth miracles”. Their research puts China either under a comprehensive Asian framework or in a class by itself. After the global financial crisis erupted in 2008, some international organizations such as the IMF and the ADB put partial blame on East Asia. They felt that people in East Asia saved too much, spent too little, and exported too much to the world, especially to the U.S.; all of this caused an imbalance in world trade which needed to be rebalanced by reducing the savings rate and raising the ratio of consumption to GDP. In particular, some ADB reports19 argue that export-oriented growth has brought enormous profits to East Asia and will continue to do so for some years; it is this long-term trade surplus which has caused the imbalance in world trade and the eruption of the financial crisis. This kind of thinking has become mainstream and influenced East Asian governments’ decision-making. East Asian economies, including China and Japan, has started to make adjustments to their growth model, expanding domestic and regional markets to compensate for the reduction in foreign demand and resist large-scale external impact. Some studies by overseas scholars put China under the comprehensive Asian framework even when China wields important influence on regional growth and economic structure. These studies differ from this book in perspective. For those scholars who study China, they find that China exerts multi-faceted influence, both positive and negative, over the region. Their analysis of Chinese relationship with the region is centered on China’s economic growth, since the rapid expansion of China’s export is a threat to other regional economies. Toshio Watanabe20 studies China’s status as the world’s factory and thinks that China presents both challenges and opportunities for East Asia. Athukorala21 thinks that there is no evidence to suggest that China is becoming an exporter of technology (since it processes and assembles imported parts for export) or crowding out its East Asian neighbors. On the contrary, China’s rapid integration into the global production network provides new opportunities for its neighbors to export more parts to China. At the same time, mutual economic dependence within the region does not imply a reduction of regional dependence on the global economy. Kwan22 compares the economic structures of 19

Asian Development Bank. Uncoupling Asia: Myth and Reality, Asian Development Outlook 2007; Asian Development Outlook 2009: Rebalancing Asia’s Growth. 20 Watanabe (2003). 21 Athukorala (2009). 22 Kwan (2002).

8

1 Introduction

East Asian economies and feels that there is no evidence that China is disrupting the Flying-Geese Pattern. Even when China’s IT products show strong growth, it still lags behind Japan and other East Asian neighbors in terms of competitiveness. China cannot hope for a leap-frog type of development because it cannot raise the Chinese people’s productivity in the short term. Eichengreen et al.23 hold that China’s export is crowding out other East Asian economies in world markets. This crowding-out effect exists in the consumer goods markets of the underdeveloped countries but not in the capital goods markets of the developed economies. Moreover, the fast growth of China’s import in the region is reflected in the Asian developed economies’ export of capital goods to China. Greenaway et al.24 use a gravitation model to study whether and how China’s increased export has crowded out other Asian countries between 1990 and 2003. Their findings show China’s export has indeed done so, though the scope is small; but this effect is widening, especially in the markets of the developed world. Moreover, this effect is more pronounced for the more developed economies than for the less developed economies. In terms of value, Asian countries’ increased export to China is not enough to compensate for their loss in export in the world markets. Speaking of future trends, Athukorala et al.25 feel that East Asia has grown more dependent on the outside world, a decoupling theory is therefore inapplicable; China will make adjustments to its strategy due to economic rebalancing, and this may raise its status in the world. Park and Shin26 think that China has become more a consumer and less a producer, and China’s trade will become an engine of economic growth. Mundell27 thinks that even though China is still a developing country, its development will increasingly show the characteristics of a developed country. Today, after more than twenty consecutive years of fast growth, China is asked to make more contribution to the world, such as playing a more important role in the international monetary system and lowering its import restrictions to buy more goods from other countries. Some scholars believe that China’s expanded trade provides new opportunities for other developing countries. Having studied China’s influence on East Asian export, Sanjaya and Manuel28 believe that trade relations between China and the region are complementary and not antagonistic and that China is an engine for regional growth. Park and Shin29 do not think that China is an engine of East Asian growth, but the percentage of final products of China’s East Asian import has gone up while that of parts has gone down. This is an indication that China has become a consumer of the region and is no longer a pure producer. For countries in the region, trading with

23

Eichengreen et al. (2004). Greenaway et al., (2011). 25 Athukorala and Kohpaiboon (2010). 26 Park and Shin (2009). 27 Mundell (2012). 28 Sanjaya and Manuel (2004). 29 Park and Shin (2009). 24

1.2 The Problem

9

China can reduce the impact of reduced external demand in the short term and lead to economic growth in the long term. What these studies by overseas scholars show is that China is a major force in changing the regional economic structure. Within the next five to ten years, China may not have the power to mold the regional environment as some major world powers can, but it can certainly construct, or participate in the construction of, a regional market.30

1.3 Research Design, Methodology, and Conclusions 1.3.1 Research Design This book takes the region as point of departure and explores the following questions: As it industrializes, what will Asia do about the question of market and the rising China? As Asian economies confront a serious reduction in external demand, how will China modify its strategy to resolve the sharp market restrictions? Based on the answers to these questions, we will be able to delineate a path for China to construct an integrated regional market. First, we will create a framework for analyzing regional market and industrialization. We feel that the appearance of regional market has to do with the industrialization of a big country. An industrializing big nation restricts the external markets of the countries in the region but provides the conditions for a consolidated regional market. This has significance in understanding how an Asian market will develop. Second, Asia is the natural basis for China’s economic development. We will analyze the economic trends of the region and the ways in which regional economic relationships are changing in order to suggest the proper regional policies. Finally, this study concerns China’s national interests for the mid-to-long term. As the Asian economy changes, so do China’s regional relationships. The new relationships are likely to bring sustainable growth and leadership opportunities to China. This book will serve as a comparative study and explore the possibility and sustainability of new regional relationships and suggest a way to recreate a regional structure based on market demand.

30

Yunling Zhang believes that, even though China has the ability to turn around a difficult situation, the current international environment does not impede China’s development, so China does not seek to change the structure and order of international relations. Some studies have found that the external environment is conducive to China’s development since no contentious opposition or burning issue exists which demands a swift systemic change. So the principles of equality, openness, and competition should continue to be China’s strategy, using its economic might to gain more say in different domains. See Zhang (2013), Zhang (2012b). Deguang Zhang feels that the developing countries, especially the emerging economies, will play a larger role internationally and hasten a change in the international order. Zhang et al. (2010).

10

1 Introduction

1.3.2 Methodology This book uses two methodologies whose guiding principle is Marxism-Leninism: First, a dual emphasis on induction and deduction. We use induction for historical analysis and deduction for present and future analyses. Second, a combination of qualitative and quantitative analyses. For example we will quantify the regional market effect of China’s rise. We will explore the evolution of regional economic relations based on market demand and China’s growth. Economic theories often view growth from the perspective of supply and dismiss demand as a short-term variable. But the reality is that economic growth cannot avoid the issue of demand which is often the reason for financial crises in the world. For this reason, our analysis is based on demand, forgoing discussions about supply.

1.3.3 Structure and Conclusions This book takes the next five to ten years as its time frame and considers the regional effects generated by China’s development (e.g. using a regional market to stabilize China’s industrialization) as well as the trends of regional relationships, in order to delineate a strategy for China. Table 1.1 shows the book’s structure, content, and conclusions. The book comprises five parts and nine chapters with the following order: theoretical framework, regional market characteristics, the current Asian market (including economic activities and system-building), and a part devoted to China. The latter involves the characteristics and trends of China’s regional relations, its role in building a regional market, and China’s strategy for the future. This book takes the following views: Asia’s industrialization, including China’s, has regional characteristics. Due to the constraints of external markets, a singular regional market becomes the common goal of the constituent regional economies. A regional market has stabilizing effects on China’s industrialization and development and forms the natural base for implementing China’s strategy. Due to its limited economic strength, China does not wield enough influence over regional economic activities. A regional market is therefore a work in progress. This book is notable in a number of ways: 1.

2.

It expands a country’s industrialization to the regional level and creates a framework for analyzing the relationship between a regional market and industrialization. It believes that a regional economy will face the issue of structural transformation after reaching a certain level of development and explains in part why the ratio of intra-regional trade to total trade remains high in the developed world. It quantifies China’s influence on the regional economic structure.

1.3 Research Design, Methodology, and Conclusions

11

Table 1.1 Structure and conclusions Structure

Chapter

Topic

Part I Introduction

One

Background, significance, and topics

Conclusion

Part II Theoretical Framework

Two

Framework for analyzing regional market and Asian industrialization

Regional industrialization is related to the industrialization of a big country. On the other hand, “consolidation error” can lead to external market restrictions to appear early

Part III Asian Market

Three

Analysis of the formation and development of the world’s major regional markets and description of their common traits to provide a possible scenario of Asian regional market

The region is the major area of global trade. Most of the constituent states’ trade happens within the region and constitutes a major component of their trade with the outside world. A consolidated market helps bring down the cost of economic activities and deepen economic relationships

Four

Analysis of the formation and development of the existing Asian regional market, disclosing its basic characteristics by comparing it with regional markets of the developed world

The fast-growing Asian regional market has the potential of becoming the world’s largest consumer market in five to ten years. Compared with the developed world, the region is not yet an independent growth center and has to rely on the external markets for growth. This is because Asia has a lower level of economic development and, being the world’s factory, most of its products are for export outside the region (continued)

3.

It explains the significance of China’s participation in the consolidation of a regional market, from the regional standpoint. China’s economic development and strategic adjustment have regional significance; it cannot ignore the interests of the other economies within the region and will be the major facilitator of an autonomous Asia, independent of external influence.

12

1 Introduction

Table 1.1 (continued) Structure

Chapter

Topic

Conclusion

Five

Regional-level discussions. Asian market’s development is the result of regional micro-level economic activities and the elimination of trade barriers. Characteristics of regional cooperation, national interests, and trends. China must understand other countries’ interests to create an integrated Asian market

On the systemic level, the regional market is developing rapidly; regional economies participate in regional cooperation actively to create opportunities for themselves. Compared with the developed world, Asia lags behind in regional system-building. At the same time, since a good part of demand comes from outside the region, regional cooperation is subject to outside intervention, especially from the U.S.

Analysis of the changes in regional relationships from the perspective of market demand, for the sake of creating a regional market

China-Asia economic relationship is changing from production-oriented to market-oriented. The China-ASEAN relationship is a typical example

Seven

Quantify regional market’s structural changes brought about by China

Even though China is playing the role of market provider, its market cannot absorb as many Asian final products as the U.S. market, and cannot replace the U.S. as the largest market for Asia’s final products

Eight

Timetable for China’s participation in regional cooperation

Active participation in regional cooperation is necessary for regional market and collective rise

Part IV China’s Regional Six Relations

(continued)

1.3 Research Design, Methodology, and Conclusions

13

Table 1.1 (continued) Structure

Chapter

Topic

Conclusion

Part V China’s Strategic Considerations

Nine

China’s strategy for a consolidated regional market and the steps for the strategy’s implementation

Opportunities and challenges for a consolidated regional market. Opportunities: the regional economy is undergoing structural changes and China has the ability to rewrite the script of regional development; time is right for China to change its strategy. Challenges: China is unable to dictate regional development, unsure of the success of its transformation, and faces external interventiona . China’s possible behavior: inaction, some action (follows other economies’ strategic arrangement, such as ASEAN’s “10 + 3” cooperation), and proactivity (strives to be leader in regional market consolidation). China must consider the interests of other regional economies and world powers such as the U.S.

a Yong

Zhao thinks that China’s economic status is still constrained by the policy of international division of labor promoted by the hegemonic U.S. See Zhao (2013). Anyuan Zhang thinks that no contentious opposition exists in the external environment to impede China’s development. Of course, the existing international economic system is not molded according to China’s interests, nor is it ready to accept a large economy like China’s. The contradiction between China and the outside world is that the leading power is not ready to relinquish power to an ascendant power based on the principles of openness, freedom, and competition that the leading power champions. For the foreseeable future, therefore, China should stay in the international economic system while advocating for the principles of equality, openness, and competition, using its increasing might to gain more say in different domains. Zhang (2012)

14

1 Introduction

References Akyuz, Y. (2011). The global economic crisis and trade and growth prospects in East Asia. ADB economics working paper series no. 242. Athukorala, P. C. (2009). The rise of China and East Asian export performance: Is the crowding-out fear warranted? World Economy, 32(2), 234–266. Athukorala, P. C., & Kohpaiboon, A. (2010). East Asia in world trade: The decoupling fallacy, crisis, and policy challenges. FIW working paper series no. 52. Ding, Y. B., Liu, L., & Fu, Y. J. (2013). China’s new status in East Asia’s regional trade and its economic implications. Jilin Normal University Journal (Humanities & Social Science Edition), 3. Eichengreen, B., Rhee, Y., & Tong, H. (2004). The impact of China on the exports of other Asian countries. NBER working paper 10768. Greenaway, D., Mahabir, A., & Milner, C. (2011). Has China displaced other Asian countries’ exports? (C. L. Wu, & L. M. Ma, Trans.). Journal of Translation from Foreign Literature of Economics, 1. Huan, N. (2008). How China affects economic cooperation in East Asia: Based on regional differences in capacity structure in China and the compatibility with other East Asian countries. Economic Research Guide, 14. Jimenez, G. H., & Razmi, A. (2013). Can Asia sustain an export-led growth strategy in the aftermath of the global crisis? Exploring a neglected aspect? Journal of Asian Economics, 29, 45–61. Jin, H. L., & Jin, B. S. (2009). How to create a domestic demand-based growth model in East Asia. World Affairs. Katzenstein, P. J. (2007). A world of regions: Asia and Europe in the American imperium (Y. Q. Qin, et al., Trans.). Peking University Press. Kwan, C. H. (2002). The rise of China and Asia’s flying-geese pattern of economic development: An empirical analysis based on U.S. import statistics. RIETI discussion paper series 02-E-009. Li, X., D, Y. B., & Qin, T. T. (2005). China’s raised status in East Asian economy: Based on a study of trade developments. Forum of World Economics and Politics, 5. Li, X., & Fu, J. H. (2010). China as the provider of an East Asian market. Jilin University Journal Social Sciences Edition, 2. Li, D. W. (2011). China’s import trends in the twelfth five-year plan period. China Economic and Trade Herald, 18. Mundell, R. A. (2012). The role china plays in world economy in the post-crisis era. Chinese Business and Market, 2. Park, D., & Shin, K. (2009). Can trade with the People’s Republic of China be an engine of growth for developing Asia? ADB economics working paper series no. 172. Ruan, Z. Z. (2007). China’s rise and the transition of East Asia order: Shaping and expanding the shared interests. Peking University Press. Sanjaya, L., & Manuel, A. (2004). China’s competitive performance: A threat to East Asian manufactured exports? World Development, 32(9), 1441–1466. Wang, X. S., & Xie, S.X. (2009). Can emerging economies help the world overcome the economic crisis: From the perspective of import. Journal of International Trade, 9. Wang, F. (2008). Factors in trade expansion within East Asia. International Economics and Trade Research, 4. Watanabe, T. (2003). East Asia’s response to the rise of Chinese manufacturing (Y. J. Ni, et al., Trans.). Economy and Management Publishing House. Yu, Y. D. (2010). China’s challenges vis-a-vis American economic rebalancing. Studies of International Finance, 1. Zhang, Y. L. (2007). World market and the environment of China’s foreign trade. China Social Sciences Press. Zhang, Y. L. (2013). Creating an international environment for open cooperation. China Social Sciences Press.

References

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Zhang, A. Y. (2012). The global environment and China’s strategy. China Small and Medium Enterprises, 8. Zhang, Y. W. (2012a). China’s economic relations with the world: New themes and overall strategy. Exploration and Free Views, 9. Zhang, A. Y. (2012b). International economic environment and China’s strategy. Review of Economic Research, 43. Zhang, D. G., et al. (2010). Impending changes in the global system and international order. China Economic Weekly, 1. Zhao, Y. (2013). China’s international economic status raised: Manifestation, constraints and response. Expanding Horizons, 4. Zhao, L. H., & Guo, C. X. (2011). How external demand influences Chinese industries. Modern Economic Research, 12. Zhao, W. (2009). The China factor in East Asia’s Regional Economic Cooperation: A multiperspective analysis. Journal of Contemporary Asia-Pacific Studies, 2. Zheng, Z. Y., & Zhou, X. (2007). China’s status and function in East Asian trade structure. World Economy Studies, 8. Zou, J. Y. (2011). How to bring balance to economic relations. International Economic Review, 4.

Chapter 2

External Market and Regional Industrialization

This chapter departs from the traditional theories of industrialization in three ways. First, its focus is on the region but not the country. The traditional theories are developed based on the industrialization process of a single country and thus are not necessarily applicable to Asia’s industrialization process at large. Second, its discussions are mostly centered on the market because the market is considered a restrictive factor in industrialization. Third, it views big countries as having major influence on regional industrialization. Regional industrialization has similarities to the industrialization of a big country, though there are significant differences as well, since a region comprises many sovereign economies.

2.1 The Relationship Between External Market and Regional Industrialization The world’s industrialized regions are found only in Europe and North America, while Asia and Latin America are in the process of industrialization. The market, which is the major topic of this book, is intimately related to industrialization. The theories of industrialization often examine the changes in a country’s production process (supply) and rarely in its market (demand); this is because in economics demand is generally thought of as a short-term variable while industrialization is for the long term. The market, or demand, is therefore often viewed as a fact or precondition. But people have come to realize that the market is very important to industrialization. It is almost impossible for a small country to be industrialized if it lacks a market for its products.

© Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_2

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2.1.1 The Relationship Between External Market and a Big Country’s Industrialization We discuss first the relationship between a big country’s market condition and industrialization. It is a common belief that the goal of a country’s economic development is a rise in per capita income. There have been two basic models of economic development since the appearance of the industrial culture: the closed economy and the open economy, and the difference lies in whether a country wants to entertain deep and wide economic relationships with the outside world. In a closed economy, a country does not trade with the outside world; its economic development is achieved through interior circulation. Its production capacity matches the scope of its market, and it will industrialize independently and autonomously. At the initial stages of industrialization, the market expands at a slower pace than the increase in production resulting from technological advancement. Market restrictions severely limit the scope of production, making industrialization difficult to accomplish in the short term. This is the reason Europe took several centuries to industrialize. As income rises, people have more demand for products, and the nature of demand changes from agricultural goods to industrial goods. The industrial structure changes as well, with agriculture losing ground to industries. Agricultural laborers leave the countryside to work in the industrial and service sectors. When income rises further, the nature of desired industrial goods changes once again, from labor-intensive to more complex and capital-intensive, and the industrial structure changes once again to that of the heavy industry stage. Industrial development causes demand for post-production service to rise, and the industrial structure changes again, now favoring the service sector which ultimately ascends to the top of the economy (see Fig. 2.1). This is the industrialization process of a “big country”, and it is fairly standard. From the 1950s

Fig. 2.1 A big country’s standard industrialization process under closed conditions

2.1 The Relationship Between External Market and Regional Industrialization

19

to China’s reform and opening of 1978, India and China went through the standard industrialization process. We should mention that a small country would not have the requisite market for its industrialization and would not be industrialized under closed conditions. In an open economy, there are many paths to economic development. Because a country trades with the outside world, it can buy and sell goods and services in world markets, including buying and selling capital assets in the world’s financial markets. The market needed for its economic development can be arranged domestically or internationally. Its production capacity is no longer limited by the small domestic market, and it can make products for which it has a relative advantage. As long as external trade exists, the country can choose whether to industrialize or not. Generally speaking, an open economy is more likely to realize economic growth and structural changes. After World War II, some economies used an export-oriented strategy to industrialize and met with spectacular success; the “Four Asian Tigers” are examples of this. The economic achievements they made proved once again that industrialization is a path to prosperity and that, in the absence a domestic market, these newly industrialized countries could use external markets to shorten the distance between themselves and the developed world in a relatively short time. They are the inspiration for other emerging economies to follow the path of industrialization and attain higher standard of living.1 Of course, as they obtained access to the developed world’s markets, the newly industrialized economies had to accept the conditions placed on them by the developed world, especially at the initial stages of industrialization. These conditions have to do with the international division of labor which is led and set by the developed world. As it participates in this division of labor, an economy has to produce products or services for which it has a relative advantage to make use of the opportunities provided by the external markets. In contrast to a closed economy, an open economy has to make many systemic changes to satisfy external demand, such as tariffs, economic management, and even law.2 Once a domestic market is fully developed, whether a country can use it to industrialize on its own depends on the size of the economy. A small country has a limited economy; even if it reaches a high level of economic development, its domestic market will never be big enough for large-scale industrialization. This is not the case for a big country. Once its domestic market is developed, a big country can lead its own industrialization. In short, as a country begins to adopt an open economy, it has to rely on, and accept the terms of, the external markets whether it is big or small. As time goes on, this situation may change depending on the size of the country’s economy (See Fig. 2.2). The above-mentioned path of industrialization is not the only way for economic development. Resource-rich Middle Eastern countries and other countries with special advantages do not industrialize to attain higher standard of living. They may realize economic growth as long as they have something to trade in the external 1 2

Qian et al. (1989). Belokon (1997).

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2 External Market and Regional Industrialization

Fig. 2.2 A big country’s economic development under open conditions

markets, bypassing the process of industrialization. Examples of entering the postindustrial stage without being industrialized are limited to this kind of small or resource-rich countries. India attempts to raise its income level by developing the service sector first; whether this leap-frog kind of development model will be successful is still an unknown. In summary, a big country can choose to industrialize under closed (exemplified by Europe and the U.S.) or open conditions (as exemplified by Japan and the Four Asian Tigers). The process is faster under open conditions because the country can take advantage of external markets for its industrialization rather than waiting for its own domestic market to mature and expand. A big country can also choose the nonindustrial path for economic development, but whether this is an effective method is still an open question. In any event, external markets constitute the precondition for accelerated economic development.

2.1.2 The Relationship Between External Market and Regional Industrialization The primary means for economic development has always been production. Even though they have never denied the importance of consumption,3 mainstream economic theories have always been based on production. As the developed world moves into the post-industrial age, the focus of the world economy moves from production to consumption. Before this time, production was concentrated in a 3

Economists such as Kaldor, Kuznets, and Hansen hold that consumption is the ultimate goal of production and the most reliable driving force of economic growth. Ji (2013), Ren and Wang (2010).

2.1 The Relationship Between External Market and Regional Industrialization

21

country or a region and the products were exported to other countries or regions. The characteristic of this stage is that production was concentrated in a small number of places while consumption was not. When production was in trouble, the consumer markets were seriously affected; but when a consumer market was in trouble, production and other consumer markets might not be affected. In the consumption-oriented age, production is spread to production chains or networks due to a division of labor, but consumption is concentrated in the developed world. When a part in a production chain is in trouble, it can be replaced by a part of another chain, and the effect on the consumer markets is not great. But when a major consumer market is in trouble, it has negative effects on the whole production chain. Some studies4 have shown that demand has decisive effects on economic growth. In an environment of international division of labor, a country’s production may be highly specialized though its consumption may be very balanced. This high degree of separation between production and consumption leads to more economies joining the regional (indeed global) economy to maintain the balance between production and consumption, which is the condition for a relatively independent regional economy. But this balance can only be achieved with a large market, so the scope of the market is the major determinant of an independent regional economy. A regional market is composed of the countries or economies within the region. The market of a big country in the region can support its own growth and have the spillover effect; this means that, as it enters the post-industrial age and its ability to consume becomes greater than its production capacity, the big country can provide a market for the products of the region and wields leadership influence on the region and the world. The US is such an example. In contrast, a small or developing country does not have a market big enough to support its economic growth, so it has to rely on the regional or world market for the long term. Since the developed world has moved into the post-industrial age, some East Asian countries took the opportunity to industrialize. They utilized their resources and raised production capacity by exporting to the developed markets. Their industrialization took only several decades while the same process took the developed world

4

Dongli Liang thinks that there are imperfections in the traditional growth model. Demand, not supply, determines economic growth in a market economy. In a growth model which takes into account the restrictive effects of demand, investment in new technology may not lead to growth. Fei Liu et al. argue that modernization driven by consumption is a sustainable strategy and should be promoted without delay. Liang (2007), Liu and Li (2011).

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over a hundred years to complete. It was the “limitless” markets5 of the developed world which made the East Asian economic miracles possible. East Asia’s phenomenal growth caused its production capacity to far exceed its market’s ability to consume. When the external markets became stagnant and put pressure on East Asian capacity, economic growth became unstable. The Asian financial crisis of 1997 and the global financial crisis of 2008 hampered Asian growth. Now the challenge facing Asian countries is whether they can expand their domestic markets quickly enough to match their production capacity and stabilize regional economic development. East Asia’s success stories show that economies of a region can rely on external markets to hasten industrialization. But, when capacity exceeds external demand, the issue of market becomes a challenge to further industrialization. The solution is the creation of a regional market, and this is the question this book will attempt to answer. As Fig. 2.3 shows, regional industrialization relies on domestic markets to complete when external markets are not available. In this case, the balance between supply and demand is reached at E2, representing a slow industrialization. When external markets are available, even if technology and price remain unchanged, the balance between supply and demand is reached at E1, representing accelerated industrialization; this is because external demand alleviates the insufficiency of supply, demand, and market. When external demand reduces over time, domestic demand will increase due to the increased per capita income brought by regional economic growth, and the D1 curve will move outwards when a new equilibrium point E4 appears. However, the D2 curve’s moving left leads to the moving lower of supply–demand curve that involves external demand, so eventually equilibrium is reached at E3. The increase in domestic demand brought by that in regional per capita income cannot offset the decline in external demand, leading to the growing gap between supply and demand or domestic and external markets in the region. In this case, policies such as reducing tariffs and non-tariff barriers should be introduced to expand regional market so as to prevent the gaps in the market from slowing down the regional industrialization process. Since the sovereignty of many economies is concerned, regional market integration is both an economic issue and a political issue, and thus a very difficult process. 5

Feng Wang has studied China’s import from the East Asian region during the period between 1995 and 2006. Using the panel co-integration testing method, he has shown that the expansion of East Asian regional trade comes from a deepening of vertical division of labor based on specialization and an increase in external demand. Hui Tian has studied the relationship between American consumption and China’s export to the U.S. using the co-integration testing method and ECM on the data from 1995 to 2008. He has found that there is consistent co-integration as well as Granger causality between the changes in American consumption and China’s export to the U.S. Shurong Zi believes that changes in external consumption influence China’s export of consumer goods. He has shown that the rise in demand from the developed countries is the cause of the increase in China’s export of consumer goods. Yanhong Zhang’s empirical study also shows external demand as the cause of China’s export growth. Wang (2008); Tian and Li (2012), Zi and Wen (2005), Zi (2006), Zhang (2009).

2.1 The Relationship Between External Market and Regional Industrialization

23

Fig. 2.3 The relationship between market and industrialization in Asia

As time goes on and income level rises in a region, and as domestic demand expands faster than external demand declines, regional industrialization can sustain its own momentum. Of course, external demand still plays a role in regional industrialization, albeit a less important one (See Fig. 2.4). The above chart represents the structural changes to Asia’s demand since the 1970s. As Fig. 2.5 shows, the ratio of Asia’s final consumption expenditure to GDP has been stable but trending downward while the ratio of investment to GDP has been stable but trending upward. A key point in the chart happens around 2008, when external demand as a driver of growth begins to decline. After 2008, Asia’s final consumption declines while investment rises, reflecting the fact that Asia is still in the middle stage of industrialization; per capita income is around USD3,000 at this point, when industrialization needs investment to stimulate growth and to compensate for the decline in external demand. This is the reason Asia is able to maintain relatively high growth rate after the financial crisis of 2008. Of course, China, Japan, South Korea, and ASEAN countries were very effective in crafting

24

2 External Market and Regional Industrialization

Fig. 2.4 Effects of domestic and external demand on regional economy

Fig. 2.5 Structural changes in Asia’s demand. Source World Bank

policies which attracted foreign investment during this period, strengthening the role investment played in raising economic growth.

2.2 China’s Industrialization Under Restrictive Market Conditions

25

2.2 China’s Industrialization Under Restrictive Market Conditions An industrializing big country with an open economy may have options other than the traditional path to industrialization. At the initial stages of industrialization, a big country can resolve the issue of insufficient domestic market by opening up the economy (even though it would not lack the effects of a bigger economy at the later stages of industrialization). As it develops economically, a big country will increasingly feel the effects of its size; the main problem it will face is that the external markets are not able to absorb its increased capacity and it has to look for new markets. Generally speaking, the big country will first rely on its own domestic market, but this is not the topic of our book. The big country will then rely on the regional market; whether there is room to expand, and how to expand, the current markets into a regional market is the topic of this book. The big country must make the necessary adjustments itself before it is able to consolidate the regional market; in additional to its own growth, it must have other strategic considerations before other countries will accept its peaceful rise. This is the framework under which our book is written. China had to change its development policy to deal with the difficulties of industrialization. Due to its small market, China participated in the international division of labor by developing industries for which it has some advantage and exported to the international markets.

2.2.1 China’s Industrialization Under Open Conditions China implemented the opening-up policy in 1978. This means that it had abandoned the policy of autonomous industrialization which was adopted in the 1950s and allowed international forces to influence its economic development. China changed its economy from closed to open and developed labor-intensive industries; this is a method proven effective by the industrialized countries old and new. That China developed labor-intensive industries is intimately linked to the international division of labor of that time. The policy of reform and opening-up represented the need to actively change the country in order to solve some pressing internal problems, one of which is prevalent poverty. According to the World Bank’s definition, there were 834 million poor people in China in 1981, representing 84 percent of the population; they were mostly concentrated in the rural areas (See Fig. 2.6). To solve the problem of poverty, China had to move surplus labor of the countryside to the industrial sector, which had to be expanded to take in the extra labor. This is the reason China chose labor-intensive industries. But who would buy the products once they were produced by the laborers? Even though China had built a relatively comprehensive industrial production system under closed economic conditions, the nature of this system was capital-intensive and income was kept low. Per

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Fig. 2.6 Poverty in China. Note Poverty definition: daily income USD1.25, or monthly USD38. Source World Bank, World Development Indicators (WDI), http://data.worldbank.org/indicator

capita GDP was around USD200 in 1978; income this low could not sustain the large-scale consumption that was needed by the labor-intensive industries. It is hard to shorten the economic development course if the labor-intensive sector still relies on the expansion of domestic market. The contradiction between the limited market and the unlimited (it seemed so at the beginning of reform and opening-up) labor had to be resolved somehow. With the advantage of large labor supply, China could solve the problems of employment and market by participating in the Asian division of labor. Asia’s advantage was in the labor-intensive manufacturing industry which dates to the mid- and late-1960s when the developed world (such as Europe and the United States) was making some industrial adjustments. The manufacturing industry was transferred to Asia because it became too costly to sustain in the developed world. The division of labor consisted of Asia making products for the developed world to consume. In the 1980s, Japan and the “Four Asian Tigers” began to transfer labor-intensive industries and China became the destination of small-scaled manufacturing work, mostly from Hong Kong. Having adopted reforms to accommodate the requirements of the external markets, China began to accept manufacturing work on a massive scale in the 1990s. Foreign investments poured in (See Fig. 2.7), and China’s manufacturing industry grew rapidly.6 Around the time of the Asian financial crisis in 1997, China was the final destination of Asia’s manufacturing transfers and production chains; that is to say, it processed and assembled Asia’s manufactured goods and exported them to the developed world.7

6

Accumulated foreign direct investment reached USD1,048.38 billion between 1979 and 2010, 70 percent of it went into the manufacturing and real estate sectors. See China Statistical Yearbook and the website of the Ministry of Commerce of the People’s Republic of China. 7 Zhou (2011).

2.2 China’s Industrialization Under Restrictive Market Conditions

27

Fig. 2.7 Foreign investment in China. Source World Investment Reports

China’s participation in the international division of labor is actually a continuation of the old path of industrial transfers. Compared with other more advanced Asian economies, China had cheap labor, ample resources, and a certain level of manufacturing skills. These are the advantages which earned China a place in the international division of labor. Despite the lateness of its participation, China became the world’s factory due to the size of its economy. After thirty years of development, China has made achievements which it was unable to make under closed conditions. It has completed the initial stages of industrialization with the support of the developed markets and marched toward capitaland technology-intensive industries. With rapid rise in per capita income and significance reduction in poverty, China has earned a place on, albeit near the bottom of, the list of mid- to high-income countries.8

2.2.2 What Further Industrialization Requires of External Markets Having adopted the policy of reform and opening-up, China has gone on the traditional path of industrialization of the developing countries, and the changes in industrial structure are closer to the standard model. But being a big country, China can only have limited help from external markets, and the current policy is to rely on 8

The World Bank divides countries of the world into four categories according to their per capita GNI (gross national income) in 2009: low-income countries with per capita GNI under USD995; low- to mid-income countries with per capita GNI between USD996 and USD3,945; mid- to highincome countries with per capita GNI between USD3,946 and USD12,195; and high-income countries with per capita GNI above USD12,196. According to this scheme, China was a low- to midincome country in 2009, figuring on top of the list. India was on the same list, though figuring at the bottom of the list.

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domestic demand for economic growth. If this policy proves successful, China’s future development model will be closer to that of an industrialized power. There is data to suggest that China’s economic development is transitioning from external market-dependent to domestic market-dependent. This means that China is going from a model for developing countries to that of an industrialized power. This change is the result of the contradiction between the limited external markets and the limitless expansion of the manufacturing industry. We may say that the limits placed on Chinese products by external markets have reached a limiting point, diminishing the possibility that China will seek further expansion of the external markets. In the initial stages of industrialization, China had to rely on external markets due to the limitations of its own market. But as China gained production capacity, trade growth narrowed. For example, the U.S. had steadily increased its import from Asia before the mid-1980s and during the ten years before the Asian financial crisis of 1997, import from Asia was at 40 percent of total import. The percentage of import from Asia declined after 1997 and stabilized at 35 percent in the twenty-first century. When China used export to drive its economy, it was through competitiveness that it gained market share; this fact expresses itself in the changes in trade relationships among Asian countries.9 Regional economies had primarily exported to the U.S. before China joined the Asian system of production; afterward, they began to export to China and China in turned exported to the U.S. In other words, the multilateral trade relationships between the U.S. and Asia have changed into a bilateral trade relationship between the U.S. and China. After the global financial crisis of 2008, the developed world led by the U.S. asked Asian countries to tweak their export-driven economies and lower their trade surplus. This shows that the global markets want to forcibly restrict their demand of Asian goods and this no doubt has an astringent effect on the Chinese economy. As China faces challenges in export, its domestic market begins to dominate economic development after over thirty years of development and may become the major driving force for future development. Having completed the initial stages of industrialization, China’s economy has become the second largest of the world. The rapid rise of people’s income has compelled economic growth to rely more on domestic demand and provided the conditions for a new era in which economic development is centered on the domestic market. A telling sign of this is that China has experienced relatively high growth even when world trade has gone down by a large margin. This proves that growth is based on domestic, not external, demand. Another sign of change concerns individual consumption. Individual consumption had always been in a state of decline since the policy of reform and opening-up was adopted; this decline ceased after the global financial crisis erupted (Fig. 2.8), indicating the rise of the domestic market as the major driver of economic growth. The Twelfth Five-Year Plan has put raising people’s income at its core, ushering in the era of economic development centered on domestic demand. This is the traditional path of an industrialized power.

9

Zhao (2010).

2.2 China’s Industrialization Under Restrictive Market Conditions

29

Fig. 2.8 Structural changes in demand. Source 1978–1989 data from China Statistical Yearbook; 1990–2012 data from ADB

Although the restrictions placed on Chinese products by global markets are increasing, there are no obvious signs that Chinese manufacturing industry is declining; a complete transformation will take some time to realize. The preponderance of the manufacturing sector in GDP has persisted for a long time due to the following reasons: First, heavy industries had been a major component of GDP before reform and opening-up in 1978; after 1978, the labor-intensive manufacturing sector kept this percentage high, so the industrial sector has always been a major component of GDP. Second, after 1978, a high percentage of products produced by China are for the world’s consumption, and this fact makes it hard to reduce the role the manufacturing sector plays in the economy. Third, the developed world’s manufacturing sector contributed less to GDP after its capita income reached a certain level, while China has barely gone over the threshold of a mid-income country and there is still room for development in the capital- and technology-intensive industries. But China’s shift from a manufacturing-dominant to a service-dominant economy is unmistakable, and the Twelfth Five-Year Plan states this direction clearly. On the one hand, the large-scale manufacturing industry has created advantageous conditions for expanding the service industry. For a long period of time, the service required by the manufacturing sector was funded by foreign capital; it will now be funded more and more by Chinese capital as the service industry matures through competition. On the other hand, consumption-based service industry will expand as per capita income increases, but the growth of the service industry will not be as dramatic as that of the manufacturing industry in the past. China’s economic growth will not be too low either, because China has enjoyed high growth in the past and the manufacturing sector still needs to grow as a result of urbanization, poverty, and regional differences. China should still enjoy higher growth rate than other developed or developing economies.

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In short, for the foreseeable future, China, with a per capita income of USD6,000, will rely less on external demand than domestic demand, upgrade its industrial structure, and develop its service industry. Such is the standard way of global economic development.

References Belokon. (1997). Open economy and economic progress: Experience of Japan and the NIEs. World Economy and International Relations, 1997(1) (Q. Xiao, Trans.). Published in The Journal of Foreign Finance and Economics, 1997(4). Ji, M. (2013). The evolution of demand and the sustained and balanced growth of the Chinese economy. Social Science, 2. Liang, D. L. (2007). Growth under the restrictive conditions of demand. Nanjing Journal of Social Sciences, 1. Liu, F., & Li, T. J. (2011). Modernization driven by production or consumption. Inquiry into Economic Issues, 2. Qian, N. L., et al. (1989). Comparative study of industrialization and economic growth (pp. 211– 258). SDX Joint Publishing. Ren, B. Y., & Wang, L. Z. (2010). China’s consumption and investment. Nankai University Press. Tian, H., & Li, M. (2012). How American consumption influences China’s export. Consumer Economics, 1. Wang, F. (2008). Vertical division of labor based on specialization, external demand, and the expansion of East Asian trade. Forum of World Economics and Politics, 3. Zhang, Y. H. (2009). External demand and China’s export. Economic Theory and Business Management, 1. Zhao, J. L. (2010). East Asian growth model: Transformation and prospects. Social Sciences Academic Press. Zhou, X. B. (2011). Asia’s export model after the Asian financial crisis. In X. Y. Li (Ed.), Annual report on development of Asia-Pacific (pp. 43–53). Social Sciences Academic Press. Zi, S. R., & Wen, Q. X. (2005). How external demand influences China’s export. Seeker, 9. Zi, S. R. (2006). How demand from the developed world influences China’s export of consumer goods. Consumer Economics, 3.

Chapter 3

Structural Characteristics of Major Regional Markets

We can study the major regional markets of the world to provide a model for the Asian market. The study should include structural features as well as systems-building.

3.1 Characteristics of the World Market 3.1.1 Trends in the World Market World trade has maintained high rates of growth in the twenty-first century. It recorded the lowest growth since WWII during the global financial crisis of 2008, but rebounded quickly to the pre-crisis level. Looking at the broader picture, the growth in world trade in the twenty-first century has been so strong and lasted so long that only the period before and after the oil crisis in the 1970s is comparable, and even the decline in trade during the crisis period is similar. When we consider the structural changes in economic growth and trade made after the oil crisis, the current uncertainty regarding crisis recovery, and the calls for changes in world trade, we may say that world trade is in a state of high growth and instability.

3.1.1.1

Growth in the World Economy and Trade in Recent Years

When we look at the growth in production (supply) and in GDP (demand) in the twenty-first century, we see that these two are more or less the same (Fig. 3.1). When we compare these two kinds of growth, we see that growth in trade volume1 is higher, meaning that trade is the method through which production is connected to 1

Figure 3.1 shows export volume. From the global standpoint, export volume is basically the same as import volume, and export volume and trade volume share the same trends.

© Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_3

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Fig. 3.1 Growth in the world trade in goods. * Crude oil price is measured in USD/barrel of 2011. Source WTO databases; BP Statistical Review of World Energy

consumption. What reflects trade volume is trade value, which includes the increase in value of trade-related activities and the increase in price of the products. We thus see that in the twenty-first century, trade value has increased rapidly, trade volume steadily, and production capacity slowly. If we look at the history of world trade since WWII, we see that the above trends formed during the period from the late 1960s to the early 1970s and have continued to today. These trends in world trade were caused by the structural changes in three global systems in that period and the result is that more and more countries and products were thrown into the whirring machine of world trade which has become increasingly strategy-focused and opportunistic. First, structural changes happened in global production. After the late 1950s, industrial countries such as the U.S. and the U.K. slowed their industrial production and entered the post-industrial (or service-oriented) period. Other newly industrialized countries followed suit in the 1960s and early 1970s. That their industrial production had slowed manifests in the reduced importance of the manufacturing sector in the economy, and the reason for the latter is that income and the cost of manufacturing rose, making these countries less competitive. Technology and the international division of labor have modularized the production process, giving birth to the idea of production chain or production network. A country can either upgrade its production process or transfer part of it to another country which can do it in a more cost-effective way. The result of this kind of structural changes is that a lot of intermediate or semi-finished products flow in the global markets, increasing global trade volume. Second, structural changes happened in the global trade system. After WWII, Europe’s and Japan’s economies recovered quickly and world trade expanded. Major industrialized countries led by the U.S. wanted global markets to open up, and, using GATT (General Agreement on Tariffs and Trade) as platform, held multilateral discussions to reduce tariffs and increase trade. These discussions took years to

3.1 Characteristics of the World Market

33

conclude; issues and disputes were ironed out gradually and tariffs were reduced by 35%2 on industrial products first, then on agricultural products later. The purpose of GATT discussions was to reduce trade barriers between industrialized countries, but developing countries were included later in this global trade system. The result of the Sixth Round of GATT discussions, begun in 1964, included a section on “trade and development”; it stipulated that the developed countries did not expect developing countries to make equal concessions on trade. By the time WTO was established in 1995, GATT included 128 countries. Third, structural changes happened in the global monetary system, which led to a change in the global price structure. The U.S. dollar-based international monetary system was formed after WWII. Global currencies were linked to the dollar based on the gold reserve of the U.S. and could be exchanged for gold at USD35 an ounce. American balance of payment began to show a deficit in the 1950s; the government budget was in the red in the 1960s due to the Vietnam War, which in turn worsened the balance of payment and reduced the gold reserve. In March 1968, an international rush to exchange dollars for gold forced the U.S. to use a floating rate for gold conversion. In 1971, foreign central banks could no longer exchange dollars for gold, and the dollar was essentially taken off the gold standard. The fixed exchange rate was stopped in 1973, ending the international monetary system based on the dollar. The global price system changed as well. Resource products such as oil began to acquire the qualities of financial instruments and fluctuated wildly in price (Fig. 3.1). At about this time trade value separated itself from trade volume and production capacity; it fluctuated wildly according to the price of oil. World trade between the mid-1970s to the mid-1980s exhibited the same kind of trends of the three global systems mentioned above. The wild swings in world prices and the decline or transfer of manufacturing in or from the industrialized world reduced global economic growth. The price of products went down precipitously in response, and between 1980 and 1985 we saw the rare condition where production capacity, trade volume, and trade value all grew at a lower rate than the economic growth rate. We can see from this that the structural changes of that era were so wide and deep that we could hardly image them today. These structural changes ended after late 1980s, and the trend of trade value, trade volume, and production capacity in decreasing order of growth began to take hold. Even the global financial crisis of 2008 failed to disrupt this trend.

3.1.1.2

Growing Impact of Trade on Economic Growth

Higher growth rates for trade than for economic growth indicates an increase in trade’s contribution toward the economy. The world depends more on trade now, and it seems that there is a global rush to export.

2

A similar reduction was reached between the Fifth Round (1960) and the Seventh Round (1973). A reduction of 40% was reached in the Eighth Round (1986).

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3 Structural Characteristics of Major Regional Markets

Fig. 3.2 Major regions’ dependence on trade. Source UNCTAD. http://unctadstat.unctad.org

After the structural changes of the mid-1980s, world trade returned to a state of high-speed growth, and resulted in the growing dependence of the world economy on trade, a trend only interrupted briefly during the serious recession of 2009. The degree of dependence rose to 63.1% in 2011, only slightly lower than the historical height of 64.1% in 2008. But, when we look at trade in major regions of the world, we see that not all of them have turned to more export. There are three categories of regions as shown in Fig. 3.2. The first category is the Americas (North America and South America). Trade dependency here is clearly below the global level. Latin America’s trade dependency rose rapidly at some point in the twenty-first century, though there was no such rise during the previous twenty years. North America’s trade dependency is the lowest among the major regions; there has been some sustained growth, but the rate in the twenty-first century is the lowest. The second category is Asia (East and South Asia). Even though Japan and the Four Asian Tigers have had an export strategy, trade dependency of this region before the twenty-first century is lower than the global level. In the twenty-first century, due to the expansion of the Chinese economy, this region has quickly raised its trade dependency above the global level. The third category is the EU and other regions, whose trade dependency is far higher than the global level. Trade has always been important to the EU, whereas the other regions saw a spike in trade dependency only after the 1990s. The disintegration of the Soviet Union and the formation of the CIS could be the reason for this spike. The unrealistic economies and exchange rates of the CIS stabilized during the 1990s, and trade dependency of the other regions narrowed gradually.

3.1 Characteristics of the World Market

35

3.1.2 Regional Changes in World Trade Since the beginning of the twenty-first century, world trade has seen the following regional changes. First, developed countries of North America and Europe have seen their status in world trade drop precipitously while the status of Asia, Latin America, and other regions has risen. Second, from the standpoint of balance of trade, the global financial crisis in 2008 has exerted wide influence over world trade; the Asian region has not only ceded its title of having the most trade surplus to the other regions, it is now in a state of trade deficit.

3.1.2.1

Changes in Global Export

Global export has changed since the start of the twenty-first century (Fig. 3.3). The proportion of the EU and North American export to total world export has dropped tremendously, from 57% in 2000 to 44.6% in 2012. Export from Asian and other regions rose from 43 to 56.4%. These changes show that the developed world can no longer claim the leadership position in world trade as it did before. The EU’s downward slide in export began during the oil crisis of the 1970s whereas Asia’s rise in export dates back to Japan’s economic boom of the 1960s. These two changes are the continuation of historical trends, and the difference is only in the direction of the changes. It is noteworthy that Asia’s export stopped rising after 2009, when Japan slowed export growth if not decreased export volume. This led to a deficit in Japan’s trade, which had never happened since the 1980s. We may say that the drop in Japanese export is the manifestation of the developed world’s reduced status in Asia’s export. Recent changes have occurred in North America and other regions. American export started to decline steadily in the late 1960s; this trend was reversed in the

Fig. 3.3 Changes in global export by region. Source UNCTAD. http://unctadstat.unctad.org

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1980s with the “new economy” centered on IT and high technology, which kept export rising in the 1990s. The new economy (or the dot-com) bubble burst in the twenty-first century, and American export declined rapidly. After the global financial crisis caused export from other regions to drop precipitously, the U.S. adopted the policy of Quantitative Easing and stimulated the manufacturing industry to ease the decline in export. It is clear that the U.S. was more successful than Europe in dealing with the financial crisis. Export from other regions consists mainly of energy, such as oil, from Middle Eastern countries, Russia, and the old Eastern Bloc countries. When the price of oil is high, export from these countries would go up, and this trend is obvious during the two oil crises of the 1970s. The sustained high oil price in the twenty-first century is the reason for the large volume of export from these countries.

3.1.2.2

Changes in Global Import

Changes in global import (Fig. 3.4) are similar to those of global export, except the difference in scope. Two things are noteworthy. First, import of the North American region has hovered around 20% of total global import for a long time; it reached a historical high of 25.3% in 2000, mainly because East Asian countries increased their export to the U.S. after the Asian financial crisis of 1997. The U.S. was the only country which imported more goods and services between 1997 and 2000. But after the bursting of the dot-com bubble, American import declined to its normal level of 20%. Second, Asia (East and South) has raised its share of global import. After the 2008 global financial crisis, Asian import rose as European import declined, and Asia imported more than Europe in 2012 for the first time in history.

Fig. 3.4 Changes in global import by region. Source UNCTAD. http://unctadstat.unctad.org

3.1 Characteristics of the World Market

3.1.2.3

37

Changes in Global Balance of Trade

Theoretically speaking, global trade should be balanced in terms of import and export, but statistical data shows a consistent deficit. The ratio of the absolute value of deficit to global trade volume reached 3% after WWII, and went on a slow decline subsequently; it was below 1% for five consecutive years during the 1990s and in 2006. It was 0.4% in 2012. Asia has gone from a trade surplus to a trade deficit situation; this is the most prominent change in global trade since the global financial crisis of 2008 (Fig. 3.5). Asia had a trade surplus since the 1980s, reaching USD200 billion after the Asian financial crisis of 1997. The trade surplus was kept at that level until 2010, dropped precipitously in 2011, and turned to a deficit situation in 2012. This change has mostly to do with Japan. In the thirty years from 1981 to 2010, Japan had a trade surplus big enough to offset Asian trade deficit and make Asia a trade surplus region. Actually, Asia ex-Japan became a trade surplus region after 1998. But in 2011 Japan had a trade deficit which got worse in 2012 and turned Asia into a trade deficit region. North America is the biggest trade deficit region. Its trade deficit started in the 1970s, ballooned to become the biggest in the world in the 1980s, and kept expanding in the 1990s. After 2006, the deficit stopped expanding and began to contract somewhat. The balance of trade of Europe and Latin America has been in a state of relative balance. Europe’s trade deficit began to expand in the twenty-first century but contracted after 2008 and returned to a balanced state in 2012. Latin America is the opposite; its trade surplus expanded, then contracted, and became small after 2008. As North America, the EU, and Asia became trade deficit regions, the other regions began to have a trade surplus. This phenomenon had occurred during the 1970s when oil price rose tremendously, and it is for the same reason that this region is enjoying a large trade surplus in the twenty-first century.

Fig. 3.5 Global balance of trade. Source UNCTAD. http://unctadstat.unctad.org

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3.1.2.4

3 Structural Characteristics of Major Regional Markets

Regional Reliance on External Markets

There is great difference in the degrees to which the various regions rely on external trade. The reason is that there is more variance in the regions’ dependence on intraregional trade yet the dependence on external trade is similar among the regions. The regions do not leave too much room for external trade, and regional trade expansion is mostly achieved through intra-regional trade. There is great difference in regional dependence on import, but the dependence on Extra-regional import (the ratio of Extra-regional import to GDP) is remarkably similar among the regions. Even though there is more difference in dependence on Extra-regional trade in the twenty-first century due to the difference in trade growth, it is remarkable that the dependence on Extra-regional trade is similar (Fig. 3.6). This shows that even though there is great difference in economic scope, level, openness, and the closeness of intra-regional relationships in the various regions, they leave similar room for Extra-regional trade. In other words, there is a limit to how open the regions are to external trade, and high-level economic cooperation between regions will not change the situation. There is also great difference in intra- and extra-regional export dependency (Fig. 3.7). Developed regions such as Europe and North America are less dependent on extra-regional export than Asia and Latin America. The global financial crisis of 2008 started in the U.S. and gravely affected the U.S. and European markets; perhaps the European market fared worse than the U.S. market. This fact increased the proportion of their extra-regional export while decreased Asia’s and Latin America’s proportion of the same. The result is that Europe, Asia, and Latin America have more or less the same degree of dependence on extra-regional export.

Fig. 3.6 Regional reliance on intra- and extra-regional import. Source UNCTAD. http://unctadstat. unctad.org

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Fig. 3.7 Intra- and extra-regional export dependency. Source UNCTAD. http://unctadstat.unc tad.org

3.1.3 Changes in Merchandise on the Global Market 3.1.3.1

Merchandise

Global merchandise is mainly composed of manufactured goods, fuels and mining products, and agricultural products.3 Total world merchandise export was valued at USD17.93 trillion in 2012, of which USD11.49 trillion was manufactured goods, USD4.18 trillion was fuels and mining products, and USD1.66 trillion was agricultural products, representing 64.1%, 23.3%, and 9.2% of total export respectively (Fig. 3.8). In the twenty-first century, the major change in world export is the reduction in the proportion of manufactured goods, from 74.7% in 2000 to 64.1% in 2012. The proportion bounced back slightly after the global financial crisis, but only because total world export was down, and the decline resumed afterward. In contrast, the share of fuels and mining products rose since the beginning of the twenty-first century; the rise halted in 2008 but resumed afterward. This is mainly due to the rise in price of resource products, especially oil. Agricultural products’ proportion in world export has been stable in the twenty-first century, increasing slightly from 8.8% in 2000 to 9.2% in 2012. The main cause of the decline in manufactured goods is the decline of office and telecommunications products in the twenty-first century. The latter category of products rose in the 1980s and 1990s due to the dot-com boom and the IT revolution. 3

According to the WTO’s classification, manufactured goods include sections 5, 6, 7, 8 in the Standard International Trade Classification (SITC) minus division 68 and group 891; fuels and mining products include SITC section 3 and divisions 27, 28, and 68; agricultural products include SITC sections 0, 1, 2, 4 minus 27 and 28. http://stat.wto.org/statisticalProgram/WSDBStatProgram TechNotes.aspx?Language=E#Def_Meth_Com.

40

Fig. 3.8 rogram

3 Structural Characteristics of Major Regional Markets

Changes in world Merchandise export. Source WTO. http://stat.wto.org/StatisticalP

Their decline in the twenty-first century is the consequence of the end of the dot-com phenomenon (Fig. 3.9). The proportion of chemicals has risen within manufactured goods. The reason is that the price of oil, a component of chemicals, has risen during this period, and the BRICS countries have raised their demand of these products due to industrialization.

Fig. 3.9 Changes in export of manufactures. * Office and telecommunications equipment falls under the category of machinery and transportation equipment. Source WTO. http://stat.wto.org/Statistic alProgram

3.1 Characteristics of the World Market

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Fig. 3.10 Changes in export of manufactures by region. Source WTO. http://stat.wto.org/Statistic alProgram

3.1.3.2

Changes in Global Export4 by Region

The following tables show the distribution of the major components of global export. They also show the import structure of the various regions. Export of manufactured goods to North America and the EU has declined in the twenty-first century. The watershed event is the global financial crisis of 2008. North America’s import of manufactured goods was in a state of steady decline until 2008 when the decline stopped. The EU is the opposite; its import of manufactured goods was stable, but dropped precipitously after 2008. This shows that the financial crisis has had a deeper impact on the EU. Export of manufactured goods to Asia, Latin America, and other regions has risen steadily, and the rise in import to Asia is very pronounced after 2008 (Fig. 3.10). In the twenty-first century, the biggest change in the global export of fuels and mining products is that Asia’s share of import of this category of merchandise has climbed steadily and it has become the biggest importing region. Asia’s import accelerated in 2005 and did not stop during the global financial crisis. The “Other” region has also increased its share of import, but its rate of growth is less than Asia’s. The developed world has decreased its import in a pronounced way. North America has reduced its import of fuels and mining products in a sustained way, a contrast to its import of manufactured goods, which has stopped declining after 2008 (Fig. 3.11). In the twenty-first century, the changes in the global export of agricultural products are similar to those in manufactured goods. North America reduced its import before 2008 but stabilized afterward, while the EU had a stable rate of import until 2008 when it reduced its share of import. Asia, Latin America, and the other regions all increased their import of agricultural products in varying degrees (Fig. 3.12). 4

The composition of regions in this section is based on WTO database, http://stat.wto.org/statisticalProgram/WSDBStatProgramTechNotes.aspx?language=E#Def_Meth_Com.

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3 Structural Characteristics of Major Regional Markets

Fig. 3.11 Changes in export of fuels and mining products by region. Source WTO. http://stat.wto. org/StatisticalProgram

Fig. 3.12 Changes in export of agricultural products by region. Source WTO. http://stat.wto.org/ StatisticalProgram

When we look at all the categories of global export and compare the data for 2000 with that for 2012, we see that the biggest changes of 2012 happened in the export of manufactured goods to the EU and North America, dropping eight percentage points and 7.4% points respectively. The biggest growth is in the export of fuels and mining products to Asia, by five percentage points, while the second biggest growth is in the export of manufactured goods to the other regions, by 2.9% points. The data shows that the old trend where Europe and North America absorbed a high share of manufactured goods has changed, and the other regions of the world have raised their capability in absorbing global export (Fig. 3.13).

3.2 Structures of Major Regional Markets

43

Fig. 3.13 Changes in global export by Merchandise and region. Note The data is the yearly distribution of the various categories of global export. Source WTO. http://stat.wto.org/statistic alprogram

3.2 Structures of Major Regional Markets In this section we analyze the world’s major regional markets in terms of trade partners and products.

3.2.1 The North American Market 3.2.1.1

Growth and Characteristics

In the twenty-first century, North American trade has the following characteristics. First, growth has been kept at the same level since the 1980s. Even though the global financial crisis slowed growth considerably, it went back to the pre-crisis level after recovery. Second, trade deficit has been consistently large. Third, trade deficit stopped expanding after 2006 and in fact shrank somewhat, and the reason is that export exceeded import, and this phenomenon is intimately related to the changes in U.S. trade after the crisis, which we will discuss below (Fig. 3.14).

3.2.1.2

Changes in U.S. Intra- and Extra-Regional Trade

The U.S. is the most important trade partner in NAFTA, representing 65.2% of total regional export and 73.7% of total regional import in 2012. It is the major source of regional trade deficit which was USD797.1 billion in 2012, of which USD788.2 billion came from the U.S.

44

3 Structural Characteristics of Major Regional Markets

Fig. 3.14 North American trade. Source UNCTAD. http://unctadstat.unctad.org

The U.S. has made some adjustments to its trade policies in the twenty-first century. The basic trend has been to expand trade with regions other than NAFTA; that is to say, lower trade volume with North America and Europe, keep the same level of trade with Asia, and increase trade with Latin America and the other regions (Table 3.1). The global financial crisis is the watershed event for these adjustments: before 2008, the U.S. decreased export to North America but increased export to the other regions; after 2008, it decreased export to the EU and increased export to Latin America. In contrast, trade with Asia has been kept on the same level before and after 2008. Compared with the adjustments in export, those in import were put in place mainly before 2008 and only minor ones were adopted after 2008. Pre-2008 adjustments in import were similar to those in export of the same period, namely that import from Table 3.1 U.S. Trade in the 21st century Region

Unit: % Export 2000

Import 2007

2012

2000

2007

2012

NAFTA

36.9

33.1

32.9

29.4

26.3

26.0

Outside NAFTA

63.1

66.9

67.1

70.6

73.7

74.0

East and South Asia

25.7

25.0

25.1

37.1

36.6

37.8

EU

16.7

21.6

21.3

17.2

18.7

18.0

Latin America

6.1

7.5

10.4

5.3

6.0

6.9

Region

9.7

13.0

14.4

9.6

13.0

12.6

Source UNCTAD. http://unctadstat.unctad.org

3.2 Structures of Major Regional Markets

45

North America decreased while that from the other regions increased. Import from Europe, Asia, and Latin America did not change much. We can see from this data that the main reason that the U.S. trade deficit did not get worse after 2008 is the expanded export to Latin America (2.9) which offset the reduction of export to the EU (4.1%).

3.2.1.3 1.

Changes in U.S. Trade Merchandise

Changes by Merchandise and Region Before 2008

The bursting of the dot-com bubble caused the trade in manufactured goods to drop at the beginning of the twenty-first century. Between 2000 and 2007, U.S. import and export of manufactured goods within the North American region dropped by 4.8% points and 5.1% points respectively, while export of manufactured goods to Asia was reduced by 1.7% points. During the same period, U.S. import of fuels and mining products increased by 7.4% points, of which 2.1% points was from the North American region and 5.3% points came from outside the region. The main reason for this increase is the rapid rise of oil price in the twenty-first century (Table 3.2). 2.

Changes by Merchandise and Region After 2008

The global financial crisis of 2008 dealt a heavy blow to the global economy. American Extra-regional trade, primarily with the EU, dropped sharply, which caused the proportion of manufactured goods in total export to drop rapidly, from 77.5 to 64.4% between 2007 and 2012 (it was 82.6% in 2000). The ratio of manufactured goods going to the EU to total export dropped by 6.5% points while that going to Asia dropped by 4.3% points. The reduction in export of manufactured goods forced the U.S. to increase its export of other products. The Extra-regional export of miscellaneous products increased by 5.3% points, mostly to the EU and Asia; that of fuels increased by 4.1% points (mostly due to an increase of oil price) while that of agricultural products increased by 2.1% points. In reality, agricultural products have become a more important item of export since the start of the twenty-first century, as shown in Table 3.2.

3.2.2 The EU Market 3.2.2.1

Growth and Characteristics

In the thirty years between 1970 and 2000, EU external trade experienced two significant growth periods due to the oil crises and a low growth period in the late 1990s. In the twenty-first century, EU external trade has returned to relatively high growth,

46

3 Structural Characteristics of Major Regional Markets

Table 3.2 Changes in share of U.S. trade Merchandise by Region Product group

Region

Unit: % Export 2000

Fuels

Other products

2000

2007

2012

1.7

3.6

8.9

11.1

18.5

18.6

North America

0.9

1.5

2.7

3.6

5.7

6.3

Outside North America

0.8

2.1

6.2

7.5

12.8

12.3

EU

0.2

0.5

1.6

0.8

1.3

1.1

Latin America

0.2

0.7

2.5

2.0

2.9

3.3

0.2

0.3

0.9

0.3

0.5

0.4

World

82.6

77.5

64.4

76.0

69.0

68.6

North America

31.5

26.4

24.5

21.0

16.2

15.5

Outside North America

51.1

51.1

39.9

55.0

52.8

53.0

EU

18.6

17.6

11.1

15.4

14.4

13.4

5.2

5.8

6.2

1.9

1.7

1.7

East and South Asia

20.4

18.7

14.4

34.6

33.8

34.6

World

12.3

15.6

17.9

9.0

9.5

10.0

North America

3.4

4.1

4.3

3.2

3.3

3.5

Outside North America

9.0

11.5

13.6

5.8

6.2

6.6

EU

2.1

2.6

2.2

1.5

1.5

1.4

Latin America

0.5

0.7

0.7

1.2

1.4

1.7

Latin America Primary products

2012

World

East and South Asia Manufactures

Import 2007

East and South Asia

4.3

5.4

7.5

1.3

1.5

2.0

World

3.3

3.2

8.8

3.9

3.0

2.8

North America

1.2

1.1

1.4

1.7

1.1

0.8

Outside North America

2.1

2.1

7.4

2.2

1.9

2.0

EU

0.7

0.6

2.3

1.0

0.8

0.8

Latin America

0.3

0.4

0.9

0.2

0.1

0.2

East and South Asia

0.7

0.5

2.3

0.8

0.7

0.8

Source UNCTAD. http://unctadstatunctad.org

at over 10% for the six years after 2002; this is very rare since the oil crises. But the global financial crisis of 2008 dealt a serious blow to the EU, and the subsequent debt crisis cast an even more ominous shadow over the EU, pushing it into a black hole of financial crises. The EU trade picture is not very clear at this point. There are 27 member states in the EU as of 2012. There is great difference among them in terms of size, development level, and structure of the economy, but there is no large trade imbalance as in the case of the U.S. Trade has been kept in a balanced state for a long time; there was a trade surplus at the beginning of the twenty-first century, but the global financial crisis shrank EU’s import market and reduced its trade deficit, and trade has more or less returned to a balanced state in 2012 (Fig. 3.15).

3.2 Structures of Major Regional Markets

47

Table 3.3 Composition of EU Trade77 Region

Unit: % Export 2000

Import 2007

2012

2000

2007

2012

EU

67.5

67.8

61.8

61.7

61.5

56.3

Outside EU

32.5

32.2

38.2

38.3

38.5

43.7

East and South Asia

7.3

7.2

9.6

13.5

14.4

14.9

North America

10.5

8.0

8.0

9.1

6.0

6.4

Latin America

1.5

1.2

1.9

1.6

2.0

2.2

13.3

15.8

18.7

14.0

16.0

20.2

Other

Source UNCTAD. http://unctadstat.unctad.org

3.2.2.2

Composition of EU Trade

The EU’s external trade was stable from 2000 to 2008, but changes came with the global financial crisis. The EU curbed its internal trade but expanded external trade. It first expanded export to traditional trade partners such as Africa and the former Eastern Bloc countries (both included in the other regions), then to Asia and Latin America; export to North America remained stable. Import from the other regions expanded as well; this is mainly due to the import of energy from the Middle East and former Eastern Bloc countries which saw a tremendous price increase (Table 3.3). Germany, France, the Netherlands, Italy, and Belgium are the earliest member states of the EU. Along with the UK, they constitute the core of EU trade, representing 70.1% of total export and 69.5% of total import in 2012. Spain’s share of EU trade was slightly above 5% while that of other member states was less than 5% (Fig. 3.16).

3.2.2.3

Changes in EU Trade Merchandise by Region

Between 2000 to 2008, trade with North America was down; import of North American manufactured goods decreased by 2.8%, and export of manufactured goods to North America decreased by 2.3%. The main reason for the drop is the bursting of the dot-com bubble in the U.S. Moreover, import of fuels was up 3.1%, of which 2% is from the other regions (Table 3.4). The EU was seriously affected by the global financial crisis which shrank the EU market, downgraded its status in international trade, and modified the structure of its trade. First of all, the proportion of manufactured goods in intra-EU trade was down by 6.9% points between 2007 and 2012, and this is the most pronounced change during this period. This reduction in intra-EU trade was offset somewhat by a 2.9% points increase in export of manufactured goods, of which 1.8% points went to Asia. Second, the EU’s share of global trade in fuels went up; import of fuels

48

3 Structural Characteristics of Major Regional Markets

Fig. 3.15 EU trade. Source UNCTAD. http://unctadstat.unctad.org

was up by 6.2% points, of which 3.9% points came from the other regions, while intra-EU import of fuels was up 1.7% points. Export of fuels was up 2.7% points; this is because some EU countries such as the Netherlands imported fuels from outside EU and then exported them to other EU countries. The proportion of imported fuels rose markedly because oil price was up during this period (USD395 billion in total increase) and import of manufactured goods was down by USD153.8 billion.

3.2.2.4

EU Balance of Trade

EU trade is in a balanced state, mostly because the imbalance in traded merchandise is offset by the imbalance in trading regions. In 2012, balance in traded merchandise was achieved by the large surplus in manufactured goods (USD554.2 billion) offsetting the large deficit in fuels (USD581.3 billion). In terms of trading regions, deficit in fuels was mostly caused by extra-EU trade (USD573.5 billion), while the surplus in manufactured goods was mostly caused by intra-EU (USD240.9 billion) and extraEU trade (USD313.2 billion). The result is a surplus in intra-EU trade (USD303.2 billion) and a deficit in extra-EU trade (USD330.2 billion), representing a balanced picture (Table 3.5). There is trade imbalance in six major EU countries, but the overall picture is balanced. Put in a different way, the balanced state of extra-EU trade is achieved through the canceling out of the trade imbalances that exist in the six major EU countries. France and the UK have relatively large trade deficit while Germany, Italy, the Netherlands, and Belgium have varying degrees of trade surplus, and the total is a USD15.9 billion trade surplus among the six countries.5 Looked at individually, the 5

This is UNCTAD data for 2012 (http://unctadstat.unctad.org).

3.2 Structures of Major Regional Markets

49

Table 3.4 Composition of EU trade Merchandise by region Product group

Region

Unit: % Export

Fuels

Manufactured Goods

Primary products

Import

2000

2007

2012

2000

2007

2012

World

4.0

5.3

8.0

8.7

11.8

18.0

EU

2.8

3.5

5.1

2.6

3.5

5.2

Outside EU

1.2

1.8

2.9

6.1

8.4

12.8

North America

0.5

0.6

0.6

0.2

0.2

0.7

Latin America

0.0

0.0

0.1

0.1

0.2

0.3

Asia

0.0

0.1

0.3

0.3

0.4

0.4

Other

0.7

1.1

2.0

5.5

7.5

11.4

World

78.3

77.0

72.8

71.9

69.4

63.0

EU

51.9

50.8

43.9

47.2

46.0

39.5

Outside EU

26.3

26.1

29.0

24.7

23.4

23.4

North America

8.8

6.5

6.5

7.5

4.7

4.4

Latin America

1.3

1.1

1.6

0.4

0.4

0.4

Asia

5.9

5.8

7.6

12.3

13.0

13.3

Other

10.4

12.8

13.3

4.6

5.3

5.2

World

15.3

12.4

13.0

14.9

14.1

14.5

EU

8.7

9.5

10.2

8.3

8.8

9.3

Outside EU

3.6

3.5

4.7

5.8

5.7

6.0

North America

0.8

0.7

0.6

1.0

0.7

0.7

Latin America

0.1

0.1

0.1

1.1

1.4

1.4

Asia

1.0

1.0

1.4

0.8

0.8

1.0

Other

1.7

1.7

2.5

2.9

2.7

2.9

Source UNCTAD. http://unctadstat.unctad.org

six countries can be divided into three groups. The first group has a surplus from production and includes Germany and Italy. It has a trade surplus in manufactured goods and a trade deficit in fuels and primary products. The second group has a surplus from trade and includes the Netherlands and Belgium. It has a high degree of dependence on trade, with Belgium at 182% and the Netherlands at 160%. In contrast, Germany is at 76% and the UK, France, and Italy each at 48%. The Netherlands has Europe’s biggest port at Rotterdam while Belgium has the second largest port at Antwerp. Both countries import from outside the EU and then re-export to EU countries. The Netherlands is the most obvious case, with a trade deficit of USD161.1 billion with countries outside the EU and a trade surplus of USD225.6 billion with EU countries, making it the country with the second largest trade surplus within EU behind Germany. The third group has a trade deficit in consumer goods and includes France and the UK. Both countries have a trade deficit both in manufactured goods and fuels, with a total deficit of USD31.46 billion (Table 3.6).

50

3 Structural Characteristics of Major Regional Markets

Table 3.5 EU balance of trade in 2012

Export (USD1 billion)

Import (USD1 billion)

Region

Total volume

World

5,785.2

EU

3,576.7

Outside EU

Fuels

Manufactured Goods

Primary products

Other products

464.5

4,213.6

860.4

246.7

294.3

2,538.3

588.6

155.5

2,208.4

170.2

1,675.3

271.8

91.1

World

5,812.1

1,045.8

3,659.5

887.6

219.3

EU

3,273.5

302.1

2,297.4

541.4

132.7

Outside EU

2,538.6

743.7

1,362.1

346.2

86.6

Balance of trade (USD1 billion)

World

−27.0

−581.3

554.2

−27.3

27.4

EU

303.2

−7.8

240.9

47.2

22.8

−330.2

−573.5

313.2

−74.5

4.5

Percentage of import

World

100.0

8.0

72.8

14.9

4.3

EU

61.8

5.1

43.9

10.2

2.7

Outside EU

38.2

2.9

29.0

4.7

1.6

Percentage of export

Outside EU

World

100.0

18.0

63.0

15.3

3.8

EU

56.3

5.2

39.5

9.3

2.3

Outside EU

43.7

12.8

23.4

6.0

1.5

Source UNCTAD. http://unctadstat.unctad.org

3.2.3 The Latin American Market 3.2.3.1

Growth and Characteristics

The Latin American region6 exports resource-related products and imports manufactured goods, and its economic growth is therefore heavily influenced by the price of resources. When resource prices are up, the region experiences good economic conditions, such as in the 1970s and the large part of the period since the beginning of the twenty-first century. When resource prices are down, the economy slows or goes into a recession, and import declines. But export is always the driving force behind growth and recovery, even when the price of resources is not good. During an economic downturn or even a recession, there is often a reduction in trade surplus or deficit, such as in the “lost decade” of the 1980s and the late 1990s. During a recovery or growth period, import of manufactured goods increases while trade surplus decreases or even disappears, such as in the early 1990s. But in this century, Latin America has seen higher growth after 2003, and export has been on a rapid rise 6

The Latin American region does not include Mexico, which is in the NAFTA region.

3.2 Structures of Major Regional Markets

51

Table 3.6 Trade balance of major EU countries in 2012 (in USD1 billion) Country

World Total volume

EU Fuels

Manufactures

Primary products

Total volume

Fuels

−106.7

−90.0

−38.9

8.6

−59.5

−25.5

242.9

−134.8

396.2

−24.3

143.8

−28.2

−207.9

−29.6

−100.3

−44.2

−93.3

25.6

9.0

−25.2

29.1

1.5

15.9

−19.4

Italy

14.1

−78.8

114.6

−24.7

11.7

0.4

The Netherlands

64.5

−42.2

39.6

40.0

225.6

40.4

15.9

−400.6

440.3

−43.1

244.2

−6.7

France Germany UK Belgium

Total Country

EU Manufactures

Outside EU Primary products

Total volume

Fuels

Manufactures

Primary products

France

−48.0

5.2

−47.1

−64.5

9.1

3.4

Germany

186.8

0.8

99.1

−106.6

209.4

−25.0

UK

−94.6

−27.7

−114.6

−55.2

−5.7

−16.5

Belgium

26.7

6.3

−6.9

−5.8

2.4

−4.7

Italy

29.8

−18.8

2.4

−79.1

84.8

−5.8

The Netherlands

101.3

54.9

−161.1

−82.6

−61.7

−14.8

Total

202.0

20.7

−228.2

−393.8

238.3

−63.4

Source UNCTAD. http://unctadstat.unctad.org

due to the increase in the price of resources. Import has risen as well, but not as fast as export, and this explains the relatively large trade surplus (Fig. 3.17).

3.2.3.2 1.

Latin America’s Internal and External Trade

Changes in Latin American Trade by Region

Intra-regional trade has been relatively stable in the twenty-first century. Between 2000 and 2012, export decreased by 2.6% points and import by 2.9% age points. There have been some changes in Extra-regional trade during this period. Export to Asia rose by 17% points. Export to North America was down by nine percentage points between 2000 and 2007 and by five percentage points afterward. Export to the EU was down by six percentage points between 2007 and 2012. The timing of these changes is related to the ending of the dot-com phenomenon in the U.S. and the severe effects the global financial crisis had on the EU. Latin America imported more from Asia and less from Europe and North America during this period as well,

52

3 Structural Characteristics of Major Regional Markets

Fig. 3.16 Composition of EU trade by country in 2012. Source UNCTAD. http://unctadstat.unc tad.org

Fig. 3.17 Volume and growth of Latin American trade. Source UNCTAD. http://unctadstat.unc tad.org

but these changes happened before the global financial crisis in 2008. After 2008, the changes moderated and even reversed course, as import from North America registered a two percentage points increase (Table 3.7). 2.

Major Countries in Latin American Trade

In 2012, Brazil took a third of Latin America’s Extra-regional import; Venezuela, Argentina, and Chile combined to take a third as well, Columbia and Peru each took more than 5%, and the rest of the countries in the region took less than 3% except Ecuador, which took more than 3%. The six countries which took more than 5% of Extra-regional import took 84.7% of total export and 78.7% of total import in

3.2 Structures of Major Regional Markets

53

Table 3.7 Latin American trade by region Region

Unit: % Export 2000

Import 2007

2012

2000

2007

2012

Latin America

23.86

22.03

21.22

26.03

26.61

23.16

Outside Latin America

76.14

77.97

78.78

73.97

73.39

76.84

East and South Asia

10.57

18.05

27.60

14.76

22.95

26.57

EU

19.40

19.29

15.33

19.75

15.09

14.91

NAFTA

36.07

26.96

23.20

31.27

24.97

26.92

Other

10.10

13.68

12.65

8.19

10.38

8.45

Source UNCTAD. http://unctadstat.unctad.org

Fig. 3.18 Extra-regional trade by country in 2012. Source UNCTAD. http://unctadstat.unctad.org

combination. The Latin American region contributed to 3.9% of global export and 3.7% of global import (Fig. 3.18).

3.2.3.3

Changes in Latin American Trade Merchandise by Region

In terms of Extra-regional trade in 2012, 73% of export were resource-related products and 73% of import were manufactured goods. In the twenty-first century, intraregional trade has been relatively stable while extra-regional trade has seen some major changes (Table 3.8). Before the global financial crisis of 2008, regional export of manufactured goods to North America was down 5.3% points while export of primary products to Asia was up by 5.7% points. In terms of import, fuels were up by 4.2% points, of which 1.8% points came from the other regions and 1.6% points came from North America;

54

3 Structural Characteristics of Major Regional Markets

Table 3.8 Composition of Latin American trade Merchandise Product group

Region

Unit: % Export

Fuels

World Latin America Outside Latin America

2012

2000

2007

2012

23.2

21.5

25.1

10.9

14.2

16.0

4.8

3.5

4.3

5.4

4.5

4.1

18.4

18.0

20.8

5.5

9.7

11.9

0.3

1.4

6.7

0.3

1.2

0.8

EU

1.1

1.9

2.4

0.5

0.5

0.9 5.2

13.8

11.0

10.0

0.9

2.5

Other

3.1

3.7

1.7

3.8

5.6

4.9

World

35.3

31.3

26.0

75.9

71.3

72.6

Latin America

13.0

13.1

11.4

14.0

15.3

12.0

Outside Latin America

22.3

18.1

14.6

61.9

56.0

60.6

1.9

2.5

2.4

13.9

19.2

25.3

Asia EU

5.1

4.6

3.3

17.7

13.4

13.2

13.6

8.3

5.8

26.7

19.3

18.2

Other

1.7

2.8

3.1

3.5

4.1

3.8

World

40.3

45.9

47.7

12.4

11.4

11.0

6.0

5.3

5.5

6.5

6.7

6.2

34.3

40.6

42.2

5.8

4.7

4.9

Asia

8.3

14.0

18.1

0.4

0.6

0.8

EU

13.1

12.8

9.6

1.4

1.0

1.0

North America

8.5

7.5

7.1

3.3

2.7

2.5

Other

4.4

6.4

7.4

0.7

0.5

0.6

North America Primary products

2007

Asia North America Manufactures

Import

2000

Latin America Outside Latin America

Source UNCTAD. http://unctadstat.unctad.org

the import of manufactured goods was down by 4.6% points, resulting from a drop of 7.4% points from North America, a drop of 4.3% points from the EU, and a rise of 5.3% points from Asia. Asia became as important a source of manufactured goods as North America. After 2008, trade with Asia continued to rise. Export of fuels to Asia rose 5.3% points, and that of primary products 3.9% points. Import of manufactured goods from Asia maintained the previous growth trend and increased 6.1% points, making Asia the primary source of manufactured goods, constituting a quarter of total import. Trade with the EU and North America continued to drop, though at a moderate rate. Export of manufactured goods to North America dropped by 2.5% points, while export of primary products to the EU dropped by 3.2% points. In contrast, import of fuels from North America increased by 2.7% points.

3.2 Structures of Major Regional Markets

3.2.3.4

55

Latin American Balance of Trade

In the twenty-first century, there has been a relatively long period (the elevens years between 2002 and 2012) of trade surplus (Fig. 3.16); this is similar to the surplus period between 1982 and 1992. In terms of intra-regional trade, there was a sustained trade deficit prior to 2008, though a small trade surplus happened in 2006. After 2008, import shrank more than export, leading to trade surplus between 2009 and 2011; the situation reversed in 2012 and caused a trade deficit. In terms of Extra-regional trade, there has been a consistent trade surplus. Prior to 2008, the surplus came mainly from the developed markets. The latter shrank after 2008, trade decreased rapidly, and there was even a trade deficit with North America. In contrast, trade surplus grew with Asia and the other regions as trade tilted toward Asia (Table 3.9). The four largest trading countries in Latin America all have abundant natural resources, such as iron ores in Brazil, petroleum in Venezuela, agricultural and mineral products in Argentina, and copper in Chile. These resource-related products constitute the major items of export for these countries, and because resource prices are up in the twenty-first century, they also constitute the reason for the trade surplus of the Latin American region. As described above, the LA4 are major regional trading countries and exporters of resource-related products; their combined total trade constitutes two-thirds of regional trade. Their trade surplus is the reason why Latin America is a trade surplus region. The LA4’s trade surplus comes mainly from the export of primary products and their trade deficit comes mainly from the import of manufactured goods. Their trade imbalance comes from extra-regional trade. In 2012, the four countries had Table 3.9 Latin American balance of trade in 2012 (in USD1 billion) Trading partner Latin America

World Latin America Outside Latin America Asia EU North America

LA4a

2007

2012

7.8

74.5

34.9

−1.8

−1.9

−5.7

9.6

76.5

40.6

−6.3

−6.2

16.6

0.9

31.2

8.2 −17.1

10.9

28.0

Other

4.0

23.4

32.9

World

18.3

97.9

66.1

Latin America Outside Latin America a LA4

2000

3.7

3.8

2.4

14.6

94.2

63.7

refers to Brazil, Argentina, Venezuela, and Chile, each of which contributes to more than 10% of regional trade Source UNCTAD. http://unctadstat.unctad.org

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3 Structural Characteristics of Major Regional Markets

Table 3.10 LA4’sa balance of trade in 2012 (in USD1 billion) Region

Product group

Export

Import

World

Total volume

497.6

431.5

Latin America

66.1

Fuels

110.8

69.5

41.2

Manufactures

131.6

317.0

−185.4

Primary products

247.6

44.3

203.3

Total volume

92.2

89.8

2.4

Fuels

10.4

15.8

−5.4

Manufactures

56.5

48.2

8.3

Primary products Outside Latin America

Balance

25.3

25.8

0.5

Total volume

405.4

341.7

63.7

Fuels

100.4

53.8

46.6

75.1

268.8

−193.6

222.3

18.5

203.8

Manufactures Primary products a LA4

means Brazil, Argentina, Venezuela, and Chile, each of which contributes to more than 10% of regional trade Source UNCTAD. http://unctadstat.unctad.org

a trade surplus of USD250.4 billion in resource-related products and a trade deficit of USD193.6 billion in manufactured goods. Their combined status in trade reflects the general trade status of the region (Table 3.10).

3.3 Economic Systems in Major Regions of the World The economic systems of Europe, North America, and Latin America are intimately related to the economic development and the strategic and political exigencies of the major member states.

3.3.1 Europe After WWII, the major trend in European economic development is integration, and this process of integration in the last seventy years can be divided into three stages (Table 3.11). The first stage is the economic recovery period between the late 1940s and the end of 1950s after WWII. What drove regional cooperation was federalism and functionalism. Federalism means top-down regional integration, but the emphasis was placed first on political integration which, it was hoped, would lead to economic integration; this is because economic integration might not lead to political integration.

3.3 Economic Systems in Major Regions of the World

57

Table 3.11 Evolution of European economic system Stage

Period

Theory

Form of cooperation

Background

Post-war recovery

1940s

Federalism

Organization of European Economic Cooperation (1947)

Marshall Plan, CMEA

1950s

Functionalism

European Coal and Steel Community (1957)

Economic recovery facilitates competition against the U.S

1960s

Neofunctionalism, intergovernmentalism

European Communities (1965), Customs Union

Dollar off gold standard

Westward expansion, European Currency Union (1979)

Recession due to oil crises

Economic and political independence

1970s

Pan-European state

1980s

Neofunctionalism

Southward expansion, single market (1985)

End of Cold War, unification of Germany

1990s

Liberal intergovernmentalism

EU (1991), northward expansion

Disintegration of Soviet Union, Eastern Bloc

Around 2000s

Multi-level governance

Euro (1999–2002), eastward expansion

Global financial crisis

2000s

Expansion during debt crisis

Europe was facing severe economic problems and the difficult task of rebuilding after WWII, in addition to the political security pressures from the Soviet Union and the Eastern Bloc. The U.S. proposed the Marshall Plan to help Europe counter these difficulties and open up the European market for American products at the same time. The Marshall Plan required that the target of its aid be an organization rather than a collection of individual countries, so the Organization for European Economic Co-operation (OEEC) was established in 1948 (later renamed the Organization for Economic Co-operation and Development). The next year, the Soviet Union and the Eastern Bloc established the Council for Mutual Economic Assistance (CMEA). The Marshall Plan was instrumental in European economic recovery; it took the first step

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3 Structural Characteristics of Major Regional Markets

in European economic integration and created the basis for the entry of American capital and products into the European market. Functionalism believes that the delivery of benefits to the people needs the alignment between organization and policy, so it is a bottom-up process, achievable through the expansion of functional cooperation between two sectors into other sectors, and finally into the political realm. The European Coal and Steel Community (ECSC), proposed in 1950 and established in 1952, represented the first step toward functional cooperation. The foreign ministers of the six member states agreed in 1955 that this functional cooperation should be carried over to other economic realms, and the European Economic Community was established in 1957. Functional cooperation in the economic domain meant industrial cooperation, which was driven by pressing political and security concerns. The Cold War, led by the U.S. and the Soviet Union, pushed Western European countries, which shared a history of contention among them, to embrace collectivism for their own security and independence. The ECSC initiated international cooperation in industrial production. The CMEA whose foundation is the planned economy, actually went further in cooperation and the division of labor. But both organizations did not extend industrial cooperation into the production process during this period. The division of labor mainly had to do with coordination on the product level rather than on the production level. This is because neither the division of labor on the production level nor logistics had developed sufficiently. The second stage is the period between the 1960s and the 1980s, when Europe regained its economic and political independence. The growing European economy and the Vietnam War in the 1960s caused the U.S. to lose its economic preeminence vis-a-vis Europe. An important indication of this is the U.S. dollar being taken off the gold standard and the ending of the Bretton Woods system in the late 1960s. Europe began to create its own monetary system in the late 1970s. In the late 1980s, the unification of Germany and the disintegration of the Soviet Union ended the Cold War; in the absence of political security pressures from the Eastern Bloc and a reason to team with the U.S., Europe gained a measure of political independence. During this period, changes in Europe’s political and economic strength affected regional cooperation and brought forth neofunctionalism, then intergovernmentalism, and back to neofunctionalism. Functionalism and neofunctionalism conceptualize cooperation in the same way; that is to say, functional cooperation between individual sectors will spill over to other domains such as politics. But whereas functionalism does not believe that international functional cooperation has to be supranational, neofunctionalism thinks that functional cooperation has to be supranational, that regional integration is a political process and therefore has to define functions and systems and consider political factors such as ideology and values. Neofunctionalism had spawn the European Economic Community and the General Assembly (renamed the European Parliament in 1962) in 1958, and the Customs Union and the European Communities in 1965. France’s “empty chair” politics of 1965 reflected the importance of national interest and political power. With this as background, neofunctionalism was gradually

3.3 Economic Systems in Major Regions of the World

59

replaced by intergovernmentalism which believes that member states prefer to cooperate in domains of low political significance such as agriculture and trade but exercise their sovereignty in domains of high political significance such as foreign policy, national security, and the military; in other words, they would not exchange political control for material benefit. Intergovernmentalism reflects the member states’ desire for independence, after having made gains in economic development and political power. But the oil crisis of the 1970s and the disintegration of the Soviet Union in the late 1980s and early 1990s accelerated European integration. The European Community wanted to have a unified Europe and be able to respond to world events with a single voice, and neofunctionalism came back for an encore. The European Communities expanded westward in the 1970s to include the UK and two other countries and southward in the 1980s to include Spain and two other countries. To raise the level of cooperation, it called for a singular monetary system, a common currency, and a unified market. The third stage extends from the 1990s to today. With the EU as platform, Europe has the largest economy in the world and strives to change its status and role in the world by becoming a federated pan-European state. Since its birth twenty years ago, the EU has absorbed the bonus resulting from the Cold War and continued to expand. The EU now includes Sweden and two other countries in the north, Poland and eleven other countries in the east, and Croatia in the Balkans. Moreover, a single European market was established in 1993, the common currency went into circulation between 1999 and 2002, and the Euro zone expanded even during the debt crisis. In the political realm, the Maastricht Treaty was signed in 1992, requiring member states to have common foreign and security policies and work toward a common defense policy. The member states signed the Constitutional Treaty in 2004, but the 2015 referenda in France and the Netherlands failed to ratify it. An amended and simplified version called the Lisbon Treaty was put into effect in 2009 (Table 3.11). Europe has become a region with a high degree of economic and political independence; integration has become the operative word for its overall strategy and philosophy. The liberal intergovernmentalism of the 1990s represents a change in European strategy; it combines neofunctionalism’s supranational organizations and intergovernmentalism’s protection of sovereignty, and believes that the government is the main actor of cooperation and the participants’ common goal is national economic benefit. Later, multi-level governance expands cooperative entities to include supranational organizations, governments on the national and local levels, social groups, industries, and even individuals. It believes that welfare and policies have many levels and stages, and the cooperative mechanisms must therefore have many levels of governance. But the end of the Cold War means that Europe faces less external pressure. As the EU expands aggressively, it has become clear that member states have different demands for welfare and different capabilities at implementation. Distribution of rights, responsibilities, and welfare becomes out of whack, and contradictions among members regarding development goals and implementation begin to show. Many events, from the rejection of the Constitutional Treaty to the disagreement over how

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to aid member states during the global financial crisis, reveal just how serious the contradictions are. The governments and the general public within the EU have different understanding of how the EU should function. Many member states and people accept the transnational but not the supranational aspects of the EU. This is the reason that when Germany proposed in 2012 to adopt a universal constitution to compete against the emerging economies, the proposal did not receive the active support from the majority of the member states. In summary, the main question in European regional cooperation is the degree of necessity, comprehensiveness, and depth of the supranational mechanisms; the deciding factors are the internal balance of power, the external pressure, and the desirability of supranational mechanisms.

3.3.2 North America 3.3.2.1

Pre-NAFTA Regional Economic System

The U.S. and Canada have many things in common: border, language, religion, social customs, and values. Their economic relationship is much more intimate than the average run-of-the-mill kind. But because the U.S. possesses superior strength, Canada has long resisted elevating their mutual economic relationship until the late 1970s. Mexico also shares a border and close economic relationship with the U.S. But due to historical and political reasons, it is wary of American influence. For all these reasons, no sophisticated regional economic system was in place prior to the 1980s. After WWII, the U.S. became an economic powerhouse and strove to open markets all over the world. It wanted global multilateral free trade and, using GATT as platform, pushed for reduced tariffs and customs duties. The developed markets’ weighted average tariff rate was reduced to 6.3% during the Uruguay Round of talks in 1986. But due to the oil crises of the 1970s, the developed countries’ economic growth had slowed and trade protectionism began to rear its head. Global trade liberalization became more difficult to achieve, and American economic power was in slow decline as well. So in the 1980s, the U.S. adjusted its policies and gave trade liberalization a bi-lateral and regional bent. Canada became the first test case for this new trend in trade liberalization, and a regional free trade zone began to take form as Mexico joined in the talks. Canada had several chances to enter into a free trade relationship with the U.S. after WWII, but failed to seize them due to suspicion and hesitation on the part of its government. The U.S.-Canadian free trade talks began in January 1948 and reached tentative agreement two months later. Both parties agreed to remove all tariffs and most quotas on products, the only exception was agricultural products which were regulated by special stipulations. But the Canadian government feared economic control by its southern neighbor and did not ratify the agreement. An important step toward a regional economic system came in 1965, when Canada and the U.S. signed

3.3 Economic Systems in Major Regions of the World

61

the Auto Pact (APTA) removing tariffs on cars, trucks, buses, and auto parts. This is in fact the beginning of a system of international division of labor, going from inter-product (cars) to intra-product (parts) cooperation. Behind the trade agreement is industrial cooperation. Between the late 1970s and mid-1980s, the U.S. and Canada discussed bilateral and multilateral free trade within the North American region. Beginning in June 1986, both parties began to hold protracted talks on a regional free trade zone; an agreement was reached in 1988 and became effective the next year. There was virtually no resistance to a U.S.-Canada free trade agreement within the U.S. during the talks, but the opposite was true for Canada. The Canadian Prime Minister had to dissolve the Parliament and hold elections to get the agreement ratified. The opposition feared most of all the loss of employment and sovereignty. Mexico is a developing country sharing a border with the U.S. It has consistently implemented an import substitution policy after WWII; its economy has experienced fast growth but relied increasingly on the export of oil. The US raised the topic of a regional free trade zone with Mexico in the 1970s, but Mexico did not enter into talks with its powerful northern neighbor due to political considerations. Mexico’s economic development encountered obstacles starting in the late 1970s. First, the oil price plummeted in 1982, inflicting huge losses to the Mexican economy. Second, forty years of import substitution policy caused structural imbalance to the economy, diminishing economic effects and raising external debts. To get out of this predicament, the Mexican government adopted a series of liberalizing measures such as instituting selective export and import substitution after the end of 1982. For external trade, it removed most of the import licenses, simplified customs procedure, and lowered tariffs. For the domestic manufacturing sector, especially for non-oilrelated and industrial products, it implemented export-friendly measures. It applied for GATT membership in 1986. The trend during that period is the formation of regional trade blocs, as exemplified by the European Community. Mexico, being in the North American region, started bilateral free trade discussions with the U.S. in August 1986, following the U.S.Canadian talks. Wary of American power, Mexico ended the discussions at some point. After the signing of Canada-United States Free Trade Agreement in 1989 and the big changes in Eastern Europe in the 1990s, Mexico put its economic relationship with the U.S. on the front burner again, and Mexico officially entered into bilateral free trade talks with the U.S. in June 1990. Canada’s attitude toward the free trade zone also became more proactive and entered into the U.S.-Mexico trade talks in September 1990. Bilateral talks morphed into trilateral talks, and the three countries signed the North American Free Trade Agreement in 1992, which became effective in 1994.

3.3.2.2

Regional Economic System Within the NAFTA Framework

The U.S. is the leader in the North American region and therefore heavily influential in the building of the regional economic system. As stated before, American support

62

3 Structural Characteristics of Major Regional Markets

for the regional free trade zone is a strategic decision to counter the resurgent and unified Europe which often holds differing world views. President Reagan’s trade policies in the 1980s combine multilateral trade relationships with North American regionalism.7 The North American free trade zone is the U.S.’s response to globalization, not an attempt to solve regional economic conflicts; that is to say, the U.S. wants to use the regional market to further its global influence. This is the reason that the U.S. did not try to deepen regional cooperation once NAFTA was in effect, but tried to include NAFTA stipulations in other regional mechanisms of economic cooperation such as the Asia Pacific Economic Co-operation (APEC) and Free Trade Area of the Americas (FTAA). NAFTA was the springboard for FTAA, the conception of which was proposed in September 1994, the year NAFTA became effective. The idea was to extend NAFTA agreement to Central and South America, culminating in the establishment of FTAA in 2005. On December 9, 1994, a pan-American summit was held in Miami attended by leaders of thirty-four American states excluding Cuba. There was a declaration of principles and action plan and a date for the official establishment of FTAA. Because most of the Latin American economies are similar to Mexico’s, the U.S. used the content of the U.S.-Mexico free trade agreement in the FTAA talks. There was stiff domestic opposition in the U.S. coming from the farming, labor, and environmental protection organizations. Some politicians were also opposed to it as well, and the U.S. government could only promote the pan-American free trade zone haltingly. Latin American countries had reservations about FTAA. Some welcomed the idea, but the majority felt that, although a free trade agreement would bring many opportunities, the income gap between countries was so large as to make economic integration impossible, and the cost they had to bear would be huge, including opening up the domestic markets, changing the existing systems, and putting national economies at risk. FTAA could be a disaster for their region which lacked economic strength and competitiveness. Given these reservations, economic integration in the Americas could not move forward. Latin American countries wanted a longer grace period and would not agree to the time table set by the U.S. The talks remained at the level of goals setting, principles declaring, and organization designing; they would not end in concrete steps toward economic integration. In summary, the model of NAFTA is one in which a powerful nation leads a number of weaker countries. The powerful nation can expect little economic benefit, even economic loss, in the end; the benefit is mainly political and strategic. The weaker countries could gain more economic benefit, but at the cost of changing their economic and political systems and foreign policies. Whether this model is adopted or expanded depends on how much benefit the powerful nation thinks it can get out of it.

7

Chen et al. (1996).

3.3 Economic Systems in Major Regions of the World

63

3.3.3 Latin America 3.3.3.1

Regional Economic System Before the 1980s

Starting from the 1930s, Latin American countries gradually adopted policies of import substitution industrialization, paving the way for the internally oriented Latin American Structuralism. Under import substitution industrialization, Latin American countries became industrialized by exporting resources and importing equipment. Since they imported much more than they exported, these countries had to borrow money to complete their industrialization. Evidently, this kind of model is not amenable to regional economic development but strengthens the inward economic structure instead and leads to heavy dependence on external capital and capital goods. There was a proposal for a Latin American common market and free trade zone in 1948, when the UN created the Economic Commission for Latin America. In the 1960s and 1970s, more regional cooperation organizations were established, such as the Central American Common Market (CACM), La Plata Basin Organization, Andean Group, the Caribbean Community (CARICOM), Latin American Economic System, and Amazon Cooperation Treaty Organization (ACTO). But due to the internal orientation of the economies and the regional political conflicts, these organizations did not wield significant influence over economic integration.

3.3.3.2

Regional Economic System After the 1980s

A debt crisis erupted in Latin America in the early 1980s, forcing countries of the region to rely more on industrializing for their economic growth than exporting resources. The plummeting oil price during this period and the burden of previous debts from import substitution industrialization caused the debt crisis to erupt. The success of export-oriented East Asian economies compelled Latin American countries to try export-oriented industrialization. The external markets and economic relationships changed accordingly, and the Latin American countries had more at stake in trade liberalization measures such as lowering tariffs and establishing global cooperative mechanisms. With the formation of European and North American trade blocs, the trend toward regionalization was especially strong in the late 1980s. Latin American countries had no choice but to hasten the creation of a regional market, and before the EU single market took effect, they created or reaffirmed eight free trade zones or common markets in 1991, basically covering all of Latin America.8 Many regional cooperative mechanisms were established afterward, with fluctuating membership, but the trend was for more regionalism and independence. This trend has continued into the twenty-first century, with center-left parties coming into power in many Latin American countries. At the end of 2011, the Community of 8

Shen (1992).

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3 Structural Characteristics of Major Regional Markets

Latin American and Caribbean States was formed; member states comprise all the countries in the Americas except the U.S. and Canada. But the economic relationships between member states are not tight; there is not much intra-regional trade, and the cooperation is mainly for political purposes. While it is true that many regional cooperative organizations exist, there is still a lot of work to do to achieve a regional economic system.

References Chen, Z. Y., et al. (1996). NAFTA—An attempt at north-south economic integration (p. 231). Economy and Management Publishing House. Shen, A. (1992). Strategic change in Latin American integration. Journal of Latin American Studies, 1.

Chapter 4

Evolution of the Asian Market Structure

After the global financial crisis of 2008, Asian countries began to adjust their economic policies to rely more on domestic demand for growth. Domestic demand here includes not only domestic consumption and investment but also export to the regional market. We will focus on the size and structural changes of the Asian market in this chapter.

4.1 Size of the Asian Market The Asian market started to develop after WWII and has not ceased to expand, in terms of percentage of world GDP, since the 1960 (Fig. 4.1). This expansion can be divided into three stages: There is a period of steady growth between 1960 and 1997, when Asia’s percentage of world GDP rose from 15% in 1960 to 28% in 1997, an increase of 13% points. After the Asian financial crisis in 1997, the percentage went down to 21% in 2008. This is an indication that the Asian financial crisis hit Asian economies hard. The depreciation of Asian currencies and the slow growth of Japan are the causes of this reduction in Asia’s share of world GDP, but the latter rose again after the global financial crisis of 2008, going from around 21% in 2008 to about 30% in 2012, about the same level as 1997. The Asian GDP was USD21 trillion in 2012 and according to the IMF, Asia’s percentage of world GDP will continue to rise. Both the EU’s and the U.S.’s shares of World GDP have become smaller, especially after the global financial crisis. Asia’s GDP exceeded the U.S.’s in 2009 and the EU’s in 2010. Asia (excluding China) is still not a rival of North America or the EU. Japan’s percentage of world GDP has been on a steady decline, offsetting the gains made by the other Asian countries. In 2012, Asia (excluding China), the EU, and North

© Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_4

65

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4 Evolution of the Asian Market Structure

Fig. 4.1 Asia’s percentage of world GDP. Note Data for 2014–2017 are forecasts. Source World Bank and IMF

America contributed to 16.8%, 23.1%, and 21.9% of world GDP respectively, and the GDP of Asia (excluding China) was USD12 trillion. Asia with China included had a GDP of USD21 trillion in 2012, or 30.2% of world GDP, five percentage points more than the EU and seven percentage points more than the U.S. It is estimated that the difference between China and the U.S. in terms of percentage of world GDP will be 6 percent in 2018; but if we include the other Asian countries, Asia will be ahead of the U.S. by about ten percentage points (Table 4.1). There are some structural changes in Asia’s GDP as well (Fig. 4.2). Japan’s GDP has the form of an inverted “U”, reaching its pinnacle just before the Asian financial crisis, and then declining until China overtook it in 2010. The Four Asian Tigers were ahead of China around 1978; China overtook the Four Asian Tigers in 1997. Table 4.1 GDP of major economies in the world Region

Size (USD1 trillion)

Share (%)

2005

2010 2012 2013 2018 2005

2010

2012

2013

2018

World

45.7

63.5

71.7

74.2

97.6

100.0

100.0 100.0 100.0 100.0

EU

13.8

16.3

16.6

17.2

19.8

30.4

25.9

23.8

23.2

20.2

U.S

12.6

14.5

15.7

16.2

21.1

27.7

22.9

22.5

21.9

21.6

China

2.3

5.9

8.4

9.0

13.8

5.0

9.5

12.0

12.1

14.1

Asia (excl. China)

8.0

11.3

12.6

11.8

15.7

17.7

17.9

18.1

15.9

16.1

10.3

17.2

21.0

20.8

29.5

22.7

27.4

30.2

28.0

30.2

Asia

Note 2018 data are forecasts Source IMF

4.1 Size of the Asian Market

67

Fig. 4.2 Asian economies’ shares of global GDP. Note Data for 2014–2017 are forecasts. Source World Bank and IMF

ASEAN’s GDP was on a steady climb between 1978 and 2008, and became neck and neck with that of the Four Asian Tigers after 2008. South Asia’s GDP is also on the rise and has a good chance of bypassing the Four Asian Tigers after India implemented the second stage of the Look East policy. Among Asia’s economies, China’s share of global GDP has risen the fastest. After 1997, China’s economy exceeded the Four Asian Tigers’ economy first, and Japan’s, enlarging Asia’s share of global GDP. Asia’s GDP represents only the size of the regional market. We will try to analyze Asia’s GDP from the perspective of demand (consumption, investment, and trade surplus). In terms of final consumption expenditure, there are three stages to the expansion of Asia’s consumption: There is a steady climb of Asian consumption as a percentage of world GDP from around 15% in 1960 to about 25% in 1997, a rise of about ten percentage points. After the Asian financial crisis, consumption declined until it reached about 20% in 2008. The Asian financial crisis had a deep effect on Asian countries and reduced their abilities to consume. Asian consumption rose again after the global financial crisis, reaching 25% again in 2012, the same level before the Asian financial crisis. Asia’s final consumption expenditure was USD12.3 trillion in 2011, almost at the same level as the U.S. China’s share of global consumption is on the rise while Japan’s share has stabilized after the steady decline after 1997 (Fig. 4.3). In terms of investment, there are also three stages to the expansion of Asian investment: There was a steady climb of Asian investment as a percentage of world GDP from about 20% in 1960 to about 35% in 1997, a rise of around fifteen percentage points; this is a reflection of Asia’s rising status as the world’s factory. After the Asian financial crisis, investment declined and stabilized at around 30% before the global financial crisis. Asian investment rose again after 2008, reaching 40% in 2011 and

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4 Evolution of the Asian Market Structure

Fig. 4.3 Asia consumption versus world consumption. Source World Bank

exceeding the level of 1997. Asian investment was USD6.1 trillion in 2011, far exceeding that of the U.S. China’s share of global investment is on the rise while Japan’s share has stabilized after the steady decline after 1997 (Fig. 4.4). Asia is a trade surplus region of the world. The shares of surplus are larger for China, ASEAN, and the Four Asian Tigers while South Asia has a trade deficit. But regional trade surplus growth has turned negative after 2008 as Fig. 4.5 shows.

Fig. 4.4 Asian investment versus world investment. Note Data for 2014–2017 are forecasts. Source World Bank

4.2 Changes in Regional Demand in 2008

69

Fig. 4.5 Asia’s balance of trade. Source World Bank

4.2 Changes in Regional Demand in 2008 If we take the demand structure of Europe and America as the standard, Asian demand has room for improvement.

4.2.1 Changes in Asian Demand The engine for Asian growth has changed from external to internal demand, especially to consumption from the private sector.

4.2.1.1

Overall Changes in Internal Demand

Between 2000 and 2012, steady growth in private consumption was the main contributor to economic growth in Asia. Over the same period, investment and government spending changed little. Trade is a more complicated issue; import and export as percentages of GDP were rising, but current account surplus was decreasing; the latter was in the red in 2012 (Fig. 4.6).

4.2.1.2

Changes in Internal Demand

Private consumption constituted the main part of the Asian economy and its importance as the driver of growth kept rising. The total value of private consumption was

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4 Evolution of the Asian Market Structure

Fig. 4.6 Composition of Asia’s GDP. Source ADB and IMF

over USD7 trillion for twenty-five Asian economies1 in 2012. Private consumption as a percentage of GDP rose from 57.3% in 2000 to 58.3% in 2012. The role government spending plays in GDP growth remained stable and was valued at USD2 trillion for the twenty-five Asian economies in 2012. Government spending as a percentage of GDP increased from 15.3% in 2000 to 16% in 2012. The role investment plays in GDP growth remained stable also and was valued at USD3 trillion for the twenty-five Asian economies in 2012. Investment as a percentage of GDP was around 25.2% for the period between 2000 and 2012. The trade situation is more complex. Export reached USD3.7 trillion for the twenty-five economies in 2012, going from 20.4% of GDP in 2000 to 30.7% in 2012, a rise of 10.3% points. Import exceeded USD3.8 trillion in 2012, going from 18.4% of GDP in 2000 to 31.8% in 2012, a rise of 13.4% points. Trade balance fell from 2% of GDP in 2000 to −1.1% in 2012, representing a trade deficit of USD120 billion. The trade situation shows that Asia is becoming more connected with the outside world, that trade is unmistakably a driver of economic growth, and that domestic demand has become more important since external demand has seen negative growth (Fig. 4.7). The drivers of growth changed in Asia’s developing countries. Demand in the twenty-four countries (excluding Japan) showed the following changes: Between 2000 and 2012, private consumption was the major driver of growth, but its importance diminished while investment and government spending rose in importance. In terms of trade, import and export as percentage of GDP has risen while current account balance as percentage of GDP went down; trade was in a more or less balanced state (Figs. 4.8 and 4.9).

1

The twenty-five Asian economies are: Japan, South Korea, Mongolia, Singapore, Malaysia, Indonesia, Thailand, the Philippines, Brunei, Vietnam, Laos, Cambodia, Myanmar, India, Pakistan,

4.2 Changes in Regional Demand in 2008

Fig. 4.7 Change in Asian demand. Source ADB and IMF

Fig. 4.8 Consumption in Asia’s developing countries. Source ADB and IMF

Fig. 4.9 GDP composition in Asia’s developing countries. Source ADB and IMF

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72

4 Evolution of the Asian Market Structure

Private consumption was the major component of the economies of Asian developing countries, though its importance declined slightly. It reached USD3.4 trillion in the twenty-four developing countries in Asia in 2012, dropping from 59.2% of GDP in 2000 to 55.7% in 2012. Government spending became slightly more important as a driver of growth, reaching USD0.7 trillion in the twenty-four developing countries in Asia in 2012. It went up from 11.1% of GDP in 2000 to 11.7% in 2012. Government spending was not a major component of the developing countries’ economies. Investment became more important as a driver of growth, reaching USD1.8 trillion in the twenty-four developing countries in 2012, going from 25.6% of GDP in 2000 to 29.7% in 2012, an increase of 4.1% points. The trade situation is more complex. Export of the twenty-four developing countries reached USD2.8 trillion in 2012, going from 45.2% of GDP in 2000 to 46.4% in 2012, an increase of 1.2% points. Import reached USD2.8 trillion in 2012, going from 41.7% of GDP in 2000 to 46.5% in 2012, an increase of about five percentage points. Trade surplus fell from 3.5% of GDP in 2000 to −0.1% in 2012. The trade situation shows that Asian developing countries are more connected to the outside world; since import is growing faster than export, these countries are not relying solely on the external markets. Import has become increasingly important for economic growth, and the narrowing of trade surplus is an indication that external demand has become less important for economic growth.

4.2.1.3

Comparison of Asian, European, and American Demand

In terms of demand, Japan is closer to Europe and the U.S. while the twenty-four Asian developing countries are farther from these three economies. This shows that the twenty-four developing countries have more room to evolve economically. Private and government spending is lower and investment is higher in the twenty-four countries than in the developed economies while trade surplus is more or less on the same level everywhere. This is an indication that the twenty-four Asian countries are in the process of industrialization which augments investment and constrains consumption (Fig. 4.10). For the long term, Asia needs to raise private and government spending to expand internal demand. If we take the developed countries’ consumption data as the norm, that is to say, private consumption accounting for 60% of GDP, government spending and investment each accounting for around 20%, and a balanced trade situation, then Japan is the only Asian country which is close to this norm. The developing countries of Asia have ample room to adjust their demand further (Fig. 4.11). Compared with the developed countries, the majority of Asian developing countries have private consumption which is either higher or lower than 60%, and their government spending is consistently lower than 20% due to consistently lower Bangladesh, Nepal, Sri Lanka, Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Turkmenistan.

4.2 Changes in Regional Demand in 2008

73

Fig. 4.10 Consumption of Asia’s developing countries, Japan, EU and U.S. in 2012 (GDP = 100). Source ADB, IMF, EU website, and U.S. Bureau of Economic Analysis

Fig. 4.11 Asian countries’ demand in 2012. Source ADB and IMF

government revenues. Government spending is tied to economic development; to blindly expand government spending is not sustainable (e.g. the adoption of “retreat” policies after the global financial crisis) and can lead to a debt crisis. Government spending can be expanded only when economic development has a reached a certain level. In contrast, investment as a percentage of GDP is higher than 20% in most of the developing countries (except Pakistan, Cambodia, and the Philippines). Investment exceeds 30% in Vietnam, Mongolia, India, and Indonesia, whose economies are driven by investment. The balance of trade of these developing countries is very different; some have trade surplus while others have trade deficit.

74

4 Evolution of the Asian Market Structure

In short, Asian demand is different compared with other global regions, and Asian countries have to adjust their demand structures differently as well. Some need to reduce investment while others need to decrease their dependence on external markets. But all the Asian developing countries have to raise government spending. Asian countries with higher per capita income are getting closer to the consumption model of the developed countries while the opposite is true for countries with lower per capita income. Japan and Malaysia have higher private consumption while Indonesia, Thailand, and some Central Asian countries have lower private consumption. Government spending is stable or rising slightly for most Asian countries. In contrast, investment is decreasing in some ASEAN and Central and South Asian countries and increasing in other countries, especially in Mongolia, Indonesia, and Myanmar. The Balance of trade is very different in these countries, but the trend of the past decade is a reduced trade surplus, indicating a balancing of interior and external markets (Table 4.2).

4.2.1.4

Savings-Investment Model

Economies at different levels of development have different savings-investment models and require different structural adjustments. In Japan the difference between savings and investment is zero, meaning people’s savings are used for investment. This is the sign of a developed country (Fig. 4.12). Asian developing countries with per capital income below USD10,000 have insufficient savings while those with per capital income over USD10,000 (including developed countries) have higher savings balance. The countries with insufficient savings are in the process of industrialization; they need much more investment than their savings can provide, so they have to relying on external sources (e.g. foreign investment) for their economic development. Countries with high savings balance have no problem with investment, and they can use their savings for private or government spending, especially the government spending. The government may issue bonds to absorb the extra savings for the purpose of public construction or social welfare.

4.2.1.5

Asian Economies’ Contribution to the Regional Market

The Asian economies’ contribution to the regional market and the economic changes they undergo are all different. Generally speaking, domestic demand plays a more important role for the developing economies. Japan is the leader in private and government spending within the region while China is the leader in investment. The developing countries contribute the most in regional import and export (Fig. 4.13). In terms of economic changes, Japan’s contribution in regional private and government spending, investment, and trade has declined; in particular, trade declined by over twenty percentage points between 2005 and 2012. The developing countries’ contribution in investment and import and export has declined, but their contribution in private and government spending has increased. China’s contribution in all aspects

51,161

46,736

41,703

23,113

10,304

5,678

3,627

3,592

2,873

2,614

1,528

1,492

1,296

934

835

818

626

Singapore

Japan

Brunei

South Korea

Malaysia

Thailand

Mongolia

Indonesia

Sri Lanka

The Philippines

Vietnam

India

Pakistan

Cambodia

Myanmar

Bangladesh

Nepal

Source ADB and IMF

Per capita GDP in 2012 (USD)

Country Trade surplus

26.5 34.9

77.8

30.3

16.2

14.9

35.6

27.2

18.5

30.3

35.3

63.5

28.0

25.5

27.6

13.6

20.6

27.0

75.2

70.9

81.9

82.5

56.8

64.5

74.2

69.6

54.6

53.2

52.7

49.1

53.5

20.5

60.9

39.2

9.7

10.7

5.6

5.8

10.5

11.8

5.9

10.5

13.5

8.9

14.1

13.2

13.5

15.8

17.3

20.5 2.2 −2.1

−2.0 −0.3 −2.5

−3.1 −6.5

−3.2 −2.0 −9.8 0.5 −0.8 −1.0 −1.5 5.6 −2.4 −16.0 0.7 −1.7

1.4 −25.9 −1.6 −13.7 −3.2 3.5 −7.7 −7.9 −4.0 −0.3 −8.9 −23.4

8.4

2.0

17.1

−2.2

−4.2

1.3

4.1

10.2

26.0

3.1

4.9

11.9

3.1

50.2

3.1

7.0 −1.9

−0.9

22.2 −2.0

Investment

Private consumption

Government spending

Private consumption

Investment

2005–2012 change (%)

Demand structure in 2012 (%)

Table 4.2 Asian demand 2005–2012

1.8

0.0

0.0

0.0

2.6

1.0

0.5

1.5

0.4

0.8

2.0

−0.5

2.0

2.0

−1.1

2.1

−0.8

Government spending

−8.5

−2.5

−0.4

4.7

−4.1

−5.0

6.8

2.4

−4.7

−5.7

−21.1

2.5

−10.0

0.4

7.3

−3.4

−7.2

Trade surplus

4.2 Changes in Regional Demand in 2008 75

76

4 Evolution of the Asian Market Structure

Fig. 4.12 Per capita income and savings-investment model 2005–2012. Source ADB

Fig. 4.13 Structure of regional demand. Source ADB and IMF

has increased (Fig. 4.14). We can see that the developing countries will contribute more to the expansion of the regional market in the future.

4.2.2 Trends in Asian Demand Global rebalancing will cause a tightening of external markets for Asia in the next five to ten years. It would be a challenge for Asian growth even if external markets remain unchanged, since it is difficult to wean Asia off its long-term export-oriented

4.2 Changes in Regional Demand in 2008

77

Fig. 4.14 Structure of regional demand 2005–2012. Note Data represent the difference in consumption between 2005 and 2012. Source ADB and IMF

strategy and dependence on external markets for economic growth. The tightening of external markets will force Asian countries to make some macro-level changes, such as expanding domestic demand to compensate for the reduction in external demand. The expansion of domestic demand will be on the national as well as regional levels. Asian demand may undergo the following changes based on current demand and future economic strategy: First, investment is a major engine of growth for Asia, especially for Asian developing countries. Investment as a percentage of GDP for Asian countries is already higher than that of the developed world, but because Asian countries are still industrializing, the need of investment remains unabated. Of course, the domains of investment of these countries are different according their level of economic development, and so are their investment policies. When the level of economic development is higher, a country (such as South Korea, Malaysia, and China) may invest in more advanced industries (such as new energy and green technology) and transfer traditional industries to regions of lower economic development (such as South Asia and new member states of ASEAN) due to the increase of production cost and the requirements of the regional markets. The countries of lower economic development still need traditional industries and infrastructure for their growth. Second, consumption, especially private consumption, will become another engine for growth. Some Asian countries such as Malaysia have seen an increase in private consumption due to the rise in per capital income. Other less developed countries have low private consumption, but once they carry out their strategy of economic development for the next ten to fifteen years, they will surely see private consumption rise to the level of the standard model. Based on current data, it is undeniable that private consumption will be the major factor in economic growth. Third, the picture of external demand is more complicated. Asia will still need external demand for its growth in the future, even if global rebalancing pressures

78

4 Evolution of the Asian Market Structure

may motivate Asian countries to reduce their dependence on external markets. It is a fact that current conditions are not ripe for Asia to rely on domestic demand for economic growth, and the export-oriented growth model would not change for the short term. Economically advanced Asian countries such as Japan and South Korea still need external markets for their growth, while less developed countries need external markets for their industrialization. Of course, some of their export is for the Asian regional market, not wholly for the external world. Asia designates the regional market as the destination of its export due to the pressures of global rebalancing and the unstable state of external demand. If the latter recovers, Asia has the capability to increase its export. In recent years, intermediate products constitute the majority of export to the regional market while final products are mostly shipped to the external markets; export products and markets are not likely to change in the near future. On the one hand, Asia relies on export for economic growth and import for domestic production and everyday needs, and the importance of trade has increased. On the other hand, the reduction in trade surplus means that the contribution of trade to economic growth is diminishing. The effects of trade on economic growth cannot be ascertained by studying the changes in data. Fourth, the consolidation of the regional market will be a driver for economic growth. Asia is ripe for transforming its economic structure. It is more important than ever to ensure a stable environment for growth, and regional states have more at stake in creating a regional market. There will be more regional cooperation in Asia even if outside interference still exists and Asia is unlikely to create a regional market as independent as the EU.

4.3 Import in the Asian Market and Structural Changes Asia’s import represents its need for outside products. What needs to be explained is that Asian import has two categories: intra-regional and Extra-regional. Intraregional import comes from the regional market. If we categorize the products, we will see that it is the intra-regionally traded consumer goods which represent the true scope of the regional market, and this is what we will discuss in this section.

4.3.1 Changes in Intra-regional Import The size of Asia’s intra-regional import market expresses Asia’s import power. Global import was USD18.5 trillion in 2012, of which USD6.6 trillion came from Asia. This is equivalent to the combined import from the Euro Zone and the U.S., and China’s share was USD1.8 trillion. Asian import was on the rise, from 15% of global total in the 1970s to 35% in 2012. During the financial crises in 1997 and 2008, the figure remained at around 30% (Fig. 4.15).

4.3 Import in the Asian Market and Structural Changes

79

Fig. 4.15 Asia’s share of global import. Source UN Comtrade Database

Asian developing countries are the main contributor to Asian import growth. The main contributor was Japan in the 1960s, the Four Asian Tigers in the 1970s, and China after the Asian financial crisis of 1997 (Fig. 4.16). The volume of import of consumer goods reflects the true size of the intra- and Extra-regional markets, and we will analyze the import of consumer goods here. As a percentage of global import, Asia’s import of consumer goods is on the same level as the U.S. But as a percentage of regional (or national in the case of the U.S.) import, Asia’s import of consumer goods stands at 10 percent while that of the U.S. stands at 20%. This shows that the U.S. is a global market while Asia is a global factory (Fig. 4.17). Asia’s import is mainly intra-regional, especially for consumer goods. Asian countries are very different in nature. Some are producers, such as China; others are

Fig. 4.16 Major asian economies’ shares of global import. Source UN Comtrade Database

80

4 Evolution of the Asian Market Structure

Fig. 4.17 Asia’s intra- and extra-regional import of consumer goods. Source UN Comtrade Database

consumers, such as Japan. Asia is the world’s factory, and it is only natural that Asian import is predominantly intra-regional.

4.3.2 Structure of Intra-regional Import Asian countries adjusted their trade policies after the global financial crisis in 2008; they veered toward intra-regional trade, and the trend of regional economic integration has become increasingly clear. In terms of import structure between 2005 and 2012 (Table 4.3), Asian developing countries reduced their intra-regional import as a percentage of global import by 2.3% points, mainly in parts, while Japan’s share remained the same. But Japan increased its intra-regional import as a percentage of total Japanese import, and this is an indication that Japan has increasingly close trade relations with the region. China reduced intra-regional import by eight percentage points, mainly in parts and capital goods from Japan. But China increased its intra-regional import of consumer goods, and this is an indication that China is becoming a regional consumer. When we look at the products imported, we see that Asian developing countries and China are importing mostly raw material, parts, and capital goods and a small percentage of consumer goods. Japan is the dominant regional consumer, and China still has a long way to go to become a major regional consumer. When we include China in regional import total (Table 4.4), the rankings of regional import between 2005 and 2012 change. Japan’s regional import of all kinds

3.6 5.5 15.2

Parts

Capital goods

Total

Asia

China

Developing countries in Asia

5.3

Raw materials

12.9

7.4

6.5

Capital goods

21.0

Total

Parts

4.3

Capital goods

Raw materials

3.3

Parts

11.8

4.4

Consumer goods

8.8

Raw materials

19.6

Total

Consumer goods

4.1

2.2

Capital goods

8.5

Raw materials

Parts

3.0

Consumer goods

7.1

6.1

13.9

11.4

21.3

5.3

3.4

4.2

8.1

20.2

1.8

2.7

9.7

3.3

2.9 13.0

−3.1 −5.4

2.7 22.5

−2.4

6.6

8.5

−1.2

−1.9

0.0

0.6

9.9

5.5

10.7

13.3

14 8.1

−2.2 −4.3

17 13

−2 15.2

−1.4

3.9

0.3

−0.4 1

11.0

2.5

2.8

0.2

1.0

0.1

4.0

1.4

4.6

−0.3

1.4

1

4.5

−2.0

1.9

0.6

−0.1

0.4

2005

2005–2012

−0.2

22.9

3.2

7.5

9.9

1.1

9.8

2.3

3.2

3.4

0.3

2012

7.7

10.1

17

2.7

13.4

3.6

3.2

4.6

0.3

21.6

2.2

4.2

8.8

2.0

9.2

1.9

2.7

3.6

0.4

2012

Developing countries in Asia

−0.7

25.2

9.4 4.4

−1.5 −0.4 0.6

9.9

0.6

1.2

0.3

2005

2005–2012 0.4

2012

2005

Consumer goods

Japan

China

Japan

Unit: percent

Import product

Source of import

Table 4.3 Structure of regional import (Total National Import = 100)

(continued)

−0.3

−3.9

0

−1.2

2.4

1.1

0.4

0.6

−1.1

−0.9

−0.5

−2.4

0.3

0.1

−3.8

−0.9

−1.9

−0.9

−0.2

2005–2012

4.3 Import in the Asian Market and Structural Changes 81

2005–2012

21.6

47.6

13.7

11.5

100.0

Raw materials

Parts

Capital goods

Total

100.0

10.4

10.0

53.9

19.7 29.5 19.4

−3.6 −1.1 100.0

45.2

3.3

−1.9 6.3

40.4

0.8

2005

2012 41.5

2005

40.6

China

Japan

Unit: percent

Consumer goods

Total

Import product

Source UN Comtrade Database

World

Source of import

Table 4.3 (continued)

100.0

14.1

23.3

50.1

4.4

32.7

2012

−5.3

−6.3

5.0

100.0

14.3

25.1

46.1

7.2

46.5

−7.8 1.1

2005

2005–2012

100.0

12.8

17.5

52.3

7.3

44.2

2012

Developing countries in Asia

−1.5

−7.6

6.2

0.1

−2.3

2005–2012

82 4 Evolution of the Asian Market Structure

6.3

6.9

3.5

Raw materials

Parts

Capital goods

Capital goods

3.9

2.4

2.3

Parts

Consumer goods

4.7

Raw materials

1.2

Capital goods

1.7

4.5

Parts

Consumer goods

1.6

Source UN Comtrade Database

Asia

China

2.2

3.2

6.3

5.2

2.8

2.4

1.9

3.7

1.6

0.8

4.4

1.5

1.2

6.7

−0.2

5.1

12.4

−1.6

2.0

8.7

18.5

4.2

10.4

−0.6

0.6

0.7

−1.1

1.3

15.3

8.8

−1.2

1.2

2.7

0.1 10.0

2.9

4.3

0.0

9.3

−0.5

3.0

2.5

2.0

1.5

3.0

−0.4

9.3

0.65

7.2

3.1

−1.5 0.6

4.9

−1.0

6.8

−0.1

1.0

7.0

0.7

−0.5

5.1

2005

0.0

0.6

2005–2012

3.0

0.4

−0.1

2.2

3.1

0.3

3.0

2012

8.9

19.5

3.1

11.6

4.1

5.3

0.4

3.7

2.6

10.1

2.3

4.8

2.2

4.1

0.4

3.1

2012

0.2

0.9

−1.2

−3.6

1.4

0.9

−1.2

0.7

−0.4

0.8

0.2

−2.4

−0.9

−0.8

−0.3

−1.9

2005–2012

Developing countries in Asia (%)

−0.2

6.4

−1.0

3.7

Capital goods

Raw materials

3.6

Parts

Consumer goods

0.3

Raw materials

Developing countries in Asia

2.4

2005–2012

2005

2012

2005

Consumer goods

Japan

China (%)

Japan (%)

Import product

Source of import

Table 4.4 Structure of regional import (Total Regional Import = 100)

4.3 Import in the Asian Market and Structural Changes 83

84

4 Evolution of the Asian Market Structure

of products drops and is not the dominant importer. The developing countries’ shares of import from China, Japan, and the region show a slight decreasing trend. They import less raw material and consumer goods and more parts and capital goods; this may be due to the fact that they are in a stage where investment is the driver of growth and the industries are mostly capital-intensive. China’s share in regional import is trending upward, especially in consumer goods; it imports fewer capital goods from Japan, however. China’s share of regional import of consumer goods is half that of the Asian developing countries in 2005; in 2012, China is on a par with the developing countries. This shows that China is on its way to become a regional consumer. In summary, there are only some small changes in regional trade, but they might become trends for the future. These changes include: Japan is strengthening its trade relationship with the region, even though it has a smaller role in regional trade; Asian developing countries are importing more goods tied to production, such as raw material, parts, and capital goods, and their export of consumer goods is trending downward; even though the Asian region’s role in China’s external trade remains unchanged, China is becoming more important in regional trade and morphing into a regional consumer.

4.3.3 Assessment of Intra-regional Import Asia is raising its ability to import and can one day become the world’s top importing region. It struggled during the global financial crisis, but its import did not go down as dramatically as the developed world. Moreover, its import grew at a faster rate postcrisis. We can illustrate this using the data of two representative years: 2007, when global import reached a record, and 2010, when the world recovers from the global financial crisis. A comparison of the data shows that Asia has not only recovered from the financial crisis but also expanded import at a faster rate, while developed countries such as the U.S., Germany, and Japan are still in the process of recovery. The developed countries’ import dropped by about 30% in 2009 and reached USD7.2 trillion in 2010, lower than the figure of USD7.4 trillion in 2007. The U.S. imported USD1.97 trillion of goods in 2010, slightly higher than the USD1.92 trillion in 2006, but not as high as the USD2.02 trillion in 2007. Asia’s import was USD3.1 trillion in 2010, exceeding the total of the U.S. and Germany combined, and representing 42.8% of the total import of the developed world; the figure is 30.5% in 2007, a rise of 12.3% points. This shows that the developed world has become less important as a global market while a new Asian regional market is in the process of forming and developing. In terms of products whose importation has not recovered (recovery here means importation showing positive growth in 2010 compared with 2007), the figure is 50% of total import for the developed world. The figure is less for Japan, at around 21%. But for Asia, the figure is only 5.5%, and Asia’s total import is slightly higher than Japan’s. The developed world still has a lot of products which it has not resumed

4.3 Import in the Asian Market and Structural Changes

85

Table 4.5 Developed world versus Asia in post-crisis import All products

U.S

Germany

Japan

Developed world

Asia

Total import in 2007 (USD100 million)

20,171

10,593

6222

74,241

22,646

Total import in 2010 (USD100 million)

19,665

10,668

6926

71,923

30,778

Import growth in 2009 (%)

−26

−22.1

−27.6

−25.1

−18.0

Import growth during 2007–2010 (%)

−0.8

0.2

3.6

−1.1

10.8

Products whose import was yet to recovered after the financial crisis Total import in 2007 (USD100 million)

11,733

6132_

1750

44,484

1917

Total import in 2010 (USD100 million)

9886

5249

1439

38,031

1690

Difference between 2010 and 2007 (USD100 million)

−1847

−882

−311

6452

−227

Share of products whose growth was not recovered in total import (%)

50.3

49.2

20.8

52.9

5.5

Average annual growth of total import during 2007–2010 (%)

−5.5

−5.0

−6.3

−5.1

−4.1

Note Figures are for SITC 4 products showing negative import growth compared with 2007. Asia includes China, South Korea, Singapore, Indonesia, Malaysia, Thailand, the Philippines, Cambodia, India, Sri Lanka, and Pakistan (2010 available data) Source UN Comtrade Database

importing and which amount to about USD300 billion, mainly in industrial goods. In contrast, Asia has imported more goods (valued at USD800 billion) in 2010 than in 2007, more than enough to compensate for the lacuna left by the developed world. This shows that Asia is gradually replacing the developed world as a global market (Table 4.5). But, the product mix of Asian import is very different from that of the developed countries. This is the reason that Asia is not able to completely replace the developed world as a global market and it also shows the direction of future changes Asia has to undergo. If we classify the products according to their usage,2 we may say that there are no big changes in the structure of import of Asia or the developed world between 2007 and 2010. For the developed world, intermediate products represented over 50% of total import, final products such as capital and consumer goods represent around 35%, of which about 14% were capital goods and over 20% were consumer goods. For Asia, intermediate products accounted for 70% of total import while final 2

The UN classifies products into capital, intermediate, consumer, and other goods. This is the Board Economic Catalogue (BEC) classification.

86

4 Evolution of the Asian Market Structure

products accounted for about 20%; Asia imports ten percentage points more capital goods than consumer goods (Table 4.6). We can see from the above table that the developed world imports more final products, especially consumer goods, whereas Asia imports more production-related goods and fewer consumer goods. Consumer goods accounted for only 5% of total import for Asia and over 20% for the developed world. In contrast, intermediate goods accounted for 53% of total import for the developed world, twenty percentage points lower than Asia. Based on the SITC 3 product classification of the UN, the trade structure similarity coefficient3 (TSSC) shows that there is a difference in trade structure between Asia and the developed world. The TSSC is 0.673 in 2000 and 0.768 in 2010; it has become higher, but there is still not much similarity in trade structure. If Asia wants to compensate for the trade lacuna left by the developed world, it would do so in intermediate goods. Actually, Asia can partly fill the lacuna of capital goods as well. When we compare the import data of 2007 and 2010, we see that the developed world has recovered, if not increased, its importation of semi- and non-durable goods; it is the durable, intermediate, capital, and other goods which have not caught up with the 2007 levels. Asia can compensate for the trade lacuna of capital and intermediate goods, but not of durable and other goods. After all, Asia is still a producer, not a consumer. Because the developed world had already transferred the manufacturing capacity elsewhere, it was able to recover the importation of semi- and non-durable goods after the global financial crisis. But Asia already had tremendous manufacturing capacity, it would surely limit its import of consumer goods. Apart from non-durable goods, Asia can only partly fill the trade lacuna left by the developed world; this is especially true for raw material and capital, durable, and semi-durable goods. We can see that even though Asia can compensate in volume, up to a point, for the trade lacuna left by the developed world, it cannot replace the developed world for structural reasons. This is why the developed world is still the primary global market.

3

The trade structure similarity coefficient is a method of measuring the similarity of industrial structure between two regions, proposed by the UN. We use it here to measure the similarity in trade structure between Asia and the developed world. The formula is the following: k 

Si j =

( X in X jn )      k    k 2   X2  X in jn n=1

n=1

n=1

Where n represents certain traded product, k represents the product type number, Xin and Xjn represent product n’s proportion of total trade of Asia and the developed world respectively. The value of Sij is between 0 and 1; the higher it is, the more similarity in trade structure between Asia and the developed world.

4.3 Import in the Asian Market and Structural Changes

87

Table 4.6 Asia versus developed world in post-crisis import structure All products

Developed world

Asia

Share in 2007 Share in Difference Share in Share in (%) 2010 (%) between 2010 2007 (%) 2010 (%) and 2007 (USD100 million)

Difference between 2010 and 2007 (USD100 million)

Intermediate goods

52.7

52.7

−1223

73.0

72.9

5,908

Raw materials

38.5

38.9

−576

46.8

49.7

4,692

Parts

14.2

13.8

−648

26.2

23.2

1,215

Capital goods 13.8

13.6

−451

15.6

14.5

925

Consumer goods

20.8

21.9

362

5.5

5.4

416

Durables

78

4.2

4.1

−158

1.0

1.0

Semidurables 6.6

6.8

5

1.7

1.4

52

Nondurables

10.0

11.0

515

2.8

3.0

286

Other

12.7

11.8

−1006

5.9

7.2

883

Total

100.0

100.0

−2318

100.0

100.0

8,132

All products

Developed world

Asia

Share in 2007 Share in Difference Share in Share in (%) 2010 (%) between 2010 2007 (%) 2010 (%) and 2007 (USD100 million)

Difference between 2010 and 2007 (USD100 million)

Intermediate goods

52.7

52.7

−1223

73.0

72.9

5,908

Raw materials

38.5

38.9

−576

46.8

49.7

4,692

Parts

14.2

13.8

−648

26.2

23.2

1,215

Capital goods 13.8

13.6

−451

15.6

14.5

925

Consumer goods

20.8

21.9

362

5.5

5.4

416

Durables

4.2

4.1

−158

1.0

1.0

78

Semidurables 6.6

6.8

5

1.7

1.4

52

Nondurables

10.0

11.0

515

2.8

3.0

286

Other

12.7

11.8

−1006

5.9

7.2

883

Total

100.0

100.0

−2318

100.0

100.0

8,132

Note Asia’s data are based on the lacuna of products left by the developed world and not by itself Source UN Comtrade Database

Chapter 5

Cooperation and Development in Asia

Since the proposal of the Trans-Pacific Partnership Agreement (TPP) and subsequently the idea of the “rebalance to Asia”, at the very least China has felt that the U.S. has shifted towards the containment of China.1 As the U.S.’s Asia–Pacific strategy is believed to be targeted at China2 China has had no choice but to take a close look at the environment in which her peaceful rise is occurring,3 for the U.S.-led regional cooperation strategy for Asia–Pacific nations would act as a strong counter to China.

5.1 Three Major Negotiation Processes 5.1.1 The China-Japan-South Korea Free Trade Area The China-Japan-South Korea Free Trade Area was mooted as early as in the late 1990s, following the 1997 Asian financial crisis. Come the twenty-first century, the three nations engaged in joint study of the subject for many years but were unable to achieve breakthroughs. Following the advent of the 2008 global financial crisis the leaders of the three nations pushed the project onto the fast track at an independent summit. The move by the leaders of the three nations to launch a joint study on partnerships between the three nations in various areas laid the foundation for the establishment of the Free Trade Area. In 2011, the leaders of the three nations 1

Zhang (2013). The “China factor” has been regarded to be at the core of America’s Asia–Pacific policy. Some believe that the U.S. is worried about the threat of marginalization in the event of being constantly left out of partnerships in East Asia. E.g.: Wang (2013). Others believe that the U.S. has taken this approach in order to counter China’s rising influence in Asia. E.g.: Yang (2012). 3 Li (2013). 2

© Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_5

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reached general consensus on the negotiations for the Free Trade Area. However, the leaders’ summit held in May 2012, which was expected to deliver substantive results, did not result in the announcement of [such the negotiations] due to certain reasons. The Diaoyu Islands dispute that subsequently erupted between China and Japan also cast a pall on the project. Nevertheless, senior officials from the three nations managed to reach consensus on negotiations for the Free Trade Area. The three nations announced the start of FTA negotiations in November 2012, during a summit for East Asian leaders. To date, the three nations have held the first round of FTA negotiations between March 26 and 28, 2013. Based on the current state of China-South Korea bilateral negotiations, advance may be difficult due to the lack of agreement between the two parties on key industries. We can foresee that room for compromise in terms of economic interests to further diminish when Japan—highly sensitive to demands from the agriculture sector—join in the FTA talks; on the other hand, tensions in bilateral relations due to territorial disputes have also not been alleviated. As such, the talks are expected to take a rocky path forward.

5.1.2 The Trans-Pacific Partnership (TPP) The TPP proposal has its origins in the so-called P4 agreement between Brunei, Chile, Singapore, and New Zealand, which in turn arose from an even earlier P3 (Pacific-3) agreement Singapore and New Zealand had established a Closer Economic Relations agreement following the 1997 Asian financial crisis. Thereafter, during the 2001 Shanghai Asia–Pacific Economic Cooperation (APEC) summit Chile and New Zealand proposed the idea of establishing trilateral cooperation with Singapore. In 2002, these three nations kickstarted negotiations for the Trans-Pacific Strategic Economic Partnership (TPSEP), and in 2004 Brunei joined the second round of negotiations as an observer. In 2005, Brunei became an official negotiating party in the process, and in July that year the four nations signed the TPSEP agreement. The agreement between Singapore and New Zealand officially took effect in May 2006, and the P4 partnership was officially formed. Though the P4 agreement, these four small and comparatively open APEC economies undertook to accord each other privileges and to strengthen their cooperation in terms of the trade of goods and services, intellectual property rights, and investment, etc. This is a binding agreement that seeks to abolish all import taxes by the year 2017. The P4 agreement contains twenty articles (supplemental agreement) include the following: general opening terms, definitions, trade in goods, rules of origin, customs procedures, trade relief measures, health and quarantine measures for flora and fauna, technical barriers to trade, competition policy, intellectual property rights, government procurement, trade in services, short-term migration of peoples, transparency, dispute resolution, strategic cooperation, management and system terms, general conditions, exceptions, other terms. The agreement also contains two supplementary agreements: one on environmental cooperation and the other, a Memorandum of Understanding (MOU) on labor cooperation. The two supplementary agreements

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are also binding on signatories; failure to fulfill the terms of the two agreements would require the offending nation to leave the P4 agreement. In addition, the reverse-list approach has been taken with regard to the liberalization of trade in services. The P4 agreement is a free-trade agreement within the APEC framework. Although it is a comprehensive and high-level free-trade arrangement it was not regarded highly due to the small size of its member economies. It was only with the participation and promotion of the U.S. the P4 received new attention. In February 2008, the U.S. announced its participation in the financial services and investment negotiations with the P4 nations, and subsequently held three rounds of negotiation in the area with the P4 in March, June, and September of that year. In September, the U.S. announced that it would join the P4 to form the TPP grouping. At the same time, it invited Australia, Peru, and Vietnam to join in the TPP negotiations. In November 2008, Peru and Australia announced that they would join TPP negotiations while Vietnam would have observer status at the negotiations. The first round of TPP negotiations had actually been scheduled to start in March 2009. However, the following month after Barack Obama’s inauguration as U.S. President in January 2009, fifty-four U.S. lawmakers wrote a letter to Obama opposing the TPP agreement. Obama had no choice but to announce a postponement in TPP negotiations. In March, the U.S. Trade Representative held a hearing on the TPP agreement where 45 lawmakers wrote in to support the TPP. However, the first round of talks slated for March was still delayed. In March 2010, the U.S. Congress approved the TPP agreement, and thereafter between March 15 and 19, 2010 the first round of TPP talks were held in Melbourne, Australia in what was the start of new TPP negotiations under the new framework. The first round of negotiations among the P8 was mainly concerned with rules of origin, agriculture, technical barriers and intellectual property rights. Malaysia then joined in subsequent negotiations. The second and third rounds of talks held in San Francisco and Brunei respectively among the P9 were mainly concerned with: industrial products, standards for agricultural and textile goods, services investment, financial services, intellectual property rights, government procurement, competition, labor, and the environment. Other issues discussed at the meetings include how to promote standardized regional management and to promote the development of small and medium enterprises. In November 2010, Vietnam officially became a member of the TPP although Malaysia was not yet an official member. Japan attended the TPP leaders’ meeting at this time as an observer. At the 2011 APEC summit in Hawaii, Japan’s premier Yoshihiko Noda announced that the country would join the TPP talks. Thus, the 12 rounds of TPP talks that had been held to date are still centered on the P9. However, Canada, the Philippines, South Korea and Taiwan Province have all expressed their interest in taking part in TPP negotiations. Currently, the outlines of the U.S.-led TPP talks are very clear. In 2011, the U.S. had made use of its position as APEC summit host to promote TPP talks. Not only did the U.S. exert pressure on Japan to join the talks, it had also expanded the terms of negotiations to areas such as green development, the reduction of regulatory barriers, and expanding trade opportunities for enterprises of all sizes, etc. Representatives from the nine TPP member nations engaged in group talks on almost every agreement

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area at the 12th round of TPP talks in Las Vegas that concluded on May 16, 2012. It was also decided at the meeting that the 13th round of talks would be held between July 2 and 10, 2012 at San Diego, California. America’s enthusiasm for the TPP can be seen from the high frequency of talks hosted by it. The U.S. has held several rounds of TPP talks since the 8th round. In terms of content, although we have already listed before the areas covered by the P4 agreement there has been major changes with the TPP agreement, the content of which can no longer be analyzed by means of the P4 agreement. As negotiations are ongoing not all details have been announced. America is using the U.S.-South Korea Free Trade Area Agreement as its benchmark. However, it will also establish some new standards. Specifically, apart from trade in goods and services, non-tax trade barriers, investment, and intellectual property rights, with the TPP agreement the U.S. is also concerned with the establishment of consistent regulatory rules to prevent unnecessary obstacles to trade between TPP members. Rules will also be established to address the market distortions caused by state-owned enterprises that do not abide by market rules of competition. In addition, TPP talks will also take into consideration the fact that the supply chain for U.S. enterprises exists across several Asia–Pacific nations and thus establish a standard set of rules of origin. At the same time, apart from seeking to lower the cost of goods circulation by making trade even easier another concern in TPP talks would be how to promote the free trans-boundary circulation of data.4 This way, in addition to the two supplementary agreements on cooperation in the areas of the environment and labor under the original P4 agreement, the above constitute the TPP agreement framework that the U.S. hopes to build. There are two different perspectives on the prospects of the TPP: one of these is the economics perspective. It is generally believed that as the size of the TPP member economies (with the exception of the U.S.) is not significant the economic impact of the grouping would not be significant. Indeed, given strong opposition to the TPP from its domestic agricultural sector, although the Japanese government announced its intentions to join the TPP at the 2011 APEC summit the Japanese government has not been able to meet the prerequisites set by the U.S. (to open up its agricultural sector), and can only thus attend the talks as an observer. For Japan, the TPP without Japan would simply be an agreement between the U.S. and the other nations, that is, one without any true influence. However, Japan’s participation in the TPP would extend the agreement’s economic influence. The second perspective is the strategic perspective. America’s intentions have been much more clearly expressed in this respect. The TPP is a means of countering China’s growing influence in East Asia by establishing the “rules of play” for the region. The U.S. believes that China would set the game rules if it does not. In this respect, the number of TPP members involved is even more significant than the economic scale of the partnership. As long as there is a sufficient number of nations that agree to abide by the rules of the TPP the U.S. would be able to claim that the rules of the TPP are the rules of APEC and thus plunge China into a dilemma. Hence, TPP would have different prospects according to the differences in strategic intentions. 4

Meltzer (2012).

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5.1.3 The Regional Comprehensive Economic Partnership (RCEP) The Regional Comprehensive Economic Partnership (RCEP) to be established between the ASEAN-10 nations, China, Japan, South Korea, India, Australia, and New Zealand is the latest regional partnership initiative. Although there has been little research done on the RCEP done at this point, in 2011 ASEAN mentioned in the ASEAN Regional Economic Partnership Framework that it would establish comprehensive economic partnerships in the region guided by principles laid out in the ASEAN Charter in order to maintain the core position and driving role of ASEAN and the regional cooperation framework. Based on this statement, at least part of ASEAN’s RCEP initiative is designed to counter the TPP and the CJSKFTA. The RCEP initiative was proposed by ASEAN by means of the ASEAN Regional Economic Partnership Framework. Two documents are needed to understand this initiative: the ASEAN Regional Economic Partnership Framework document and the Guiding Principles and Objectives for Negotiating the RCEP document. The RCEP framework provides the general principles for the establishment of the RCEP while the Guiding Principles and Objectives for Negotiating the RCEP document is a guideline document designed for reference during RCEP negotiations. An analysis of these two documents can give us a preliminary understanding of the content covered by the RCEP, which is to establish a “modern, comprehensive, high-quality and mutually-beneficial free-trade area” based on the existing five “10 + 1” free-trade areas in ASEAN. The 19th ASEAN Summit was held on the island of Bali in November 2011. The ASEAN Regional Economic Partnership Framework, the aim of which is to “establish a process guided by principles established by ASEAN”, was approved at the Summit. The general RCEP guidelines established in this document basically constitute the basic framework for this regional cooperation agreement. Specifically: it was a key step forward in making existing free-trade dialogue even more broadbased and in-depth, and for the free-trade arrangements/comprehensive economic partnerships (FTAs/CEP) between dialogue partners. Although plans are currently unclear the proposal already has a strong orientation as the framework for future regional cooperation. The Guiding Principles and Objectives for Negotiating the RCEP document is a guideline document, a key step for advancing the RCEP process, was passed at the 44th ASEAN Economic Ministers Meeting, in Siem Reap in August 2012. The introduction of this document signaled that the RCEP negotiations were about to kick off. When we look at the content of the document, we see that the negotiation principles designed by the economic ministers have not deviated from, or overstepped the boundaries of, the terms of the ASEAN Regional Economic Partnership Framework. What the document does is to provide further definitions in terms of the objectives of negotiation in preparation for the negotiation process.

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(1)

(2)

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Timeframe. The first step in the RCEP process—talks between ASEAN members and China, Japan, South Korea, India, Australia and New Zealand— was kicked off in early 2013 and is slated to be completed in the end of 2015. Objective framework. The objective of the RCEP negotiations is to establish a modern, comprehensive, high-quality, and mutually-beneficial economic partnership agreement between ASEAN members and its free-trade zone partners, an agreement that covers trade in goods and services, investment, economic and technical cooperation, intellectual property rights, competition, dispute resolution, and other issues. This is in fact a refined definition of the objective of the RCEP as laid out in the framework document. At the same time, the document also lays out guidelines for the specific areas involved. Specifically:

In terms of trade in goods, the aim is to abolish trade-related taxes and non-tax barriers over time with a free trade area to be formed among RCEP nations. In terms of trade in services, RCEP nations are to substantively abolish trade limitations and/or discriminative measures with each other. All agencies and supply methods fall within the ambit of negotiation. For investment, the aim is to establish an investment environment in the region that is free, convenient, and competitive. Negotiations on investment will be centered on four pillars: the promotion of investment, investment protections, making investment more convenient, and making the investment environment freer. For economic and technical cooperation, the terms of the RCEP agreement will be established on the existing economic partnership terms between ASEAN and its free-trade zone partners. Areas of cooperation will include e-commerce and other areas recognized by all RCEP nations. In terms of intellectual property rights (IPR), RCEP nations should seek to lower IPR-related trade barriers through the promotion of IPR use, IPR protection, and IPR execution within an integrated economic environment and through cooperation. As for the issue of competition, the document provides the basis for cooperation between RCEP nations in terms of promoting competition, economic benefits, and consumer benefits and in the reduction of anti-competitive behavior. However, the RCEP agreement should also account for the respective domestic competition systems of RCEP nations and differences in capacities in this area. In addition, the RCEP agreement will also have a dispute resolution clause and also take into consideration other issues related to the free-trade area between RCEP nations. Various parties to the RCEP agreement will reach consensus on these issues over the course of negotiation and at the same time also consider new issues that are related to commercial activity.5 According to the aforementioned framework document the objective of the RCEP is to establish a comprehensive economic partnership agreement that is beneficial to all parties. Specifically, ASEAN will begin with its existing six dialogue partners with whom it has already established free-trade agreements before extending 5

For more details, please refer to: “Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership,” http://www.asean.org.

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the partnership to external economic partners. The economic ministers of various ASEAN nations signed in Siem Reap the Guiding Principles and Objectives for Negotiating the RCEP document in August 2012 in order to place the negotiation process in motion as soon as possible. This proposal by ASEAN received support from its six dialogue partners at the East Asia summit held in November 2012. 16 nations began negotiations on the RCEP in 2013, and have reached consensus on the matter. The Joint Statement on the Commencement of the Regional Comprehensive Economic Partnership Negotiations released by the leaders of various participating nations stated the intention of such negotiations to be, with the Guiding Principles and Objectives for Negotiating the RCEP document as basis, “establish a modern, comprehensive, high-quality and mutually-beneficial economic partnership agreement that will built an open trade and investment environment for the region, facilitate the expansion of regional trade, and contribute to the growth and development of the global economy”. The establishment of the RCEP agreement as one that is modern, comprehensive, high-quality, and mutually-beneficial has tremendous potential benefits for all participating parties.6 However, to realize these benefits requires RCEP nations to put in significant amounts of effort, such as by significantly reducing tariffs,7 standardizing rules of origin and establishing common measures for the trade of goods and services and for investments. The first meeting of the RCEP trade negotiations committee came to a close on May 13, 2013. When we look at the joint statement released thereafter we see no major differences in terms of the negotiation schedule and objectives outlined compared to previous documents. There is a continued emphasis on the centrality of ASEAN’s position and sustained focus on in-depth advancement of the existing five “10 + 1” free-trade areas while accounting for the developmental differences between member nations.8 Although RCEP nations have yet to establish just how the existing five “10 + 1” free trade areas are to be advanced, it is very clear that the promotion of the RCEP will encounter limitations from the “bucket effect” on at least three levels: First, there are major differences between the five “10 + 1” free trade zones. A brief scan of the FTA agreement terms for the five areas will show that there are major differences between the five current “10 + 1” free trade areas centered on ASEAN in terms of scheduling, the extent and state of tariff reductions, and the application of rules of origin, etc.9 For the RCEP, the important aspects and tax reduction coverage in various free trade areas and the applicable rules of origin, etc. In particular, differences in rules of origin have been the key cause of the “spaghetti bowl effect” with Italy. 6

One study shows that the benefits from the ASEAN Economic Community alone can be as much as 5.3% of regional income. Benefits can also double if the ASEAN Economic Community is expanded to include its key external partners. Peter et al. (2012). 7 Japanese scholars have made a series of recommendations with regard to the RCEP. See: Fukunaga and Kuno (2012). 8 Regional Comprehensive Economic Partnership (RCEP) Joint Statement the First Meeting of Trade Negotiating Committee, 10 May 2013, Posted in 2013, Statement & Communiqués. 9 See: Fukunaga and Isono (2013).

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In terms of the average tariff reduction coverage among the five bilateral free trade areas, coverage is greatest in the ASEAN-Australia-New Zealand free trade area at 95.7% and smallest in the ASEAN-India free trade area at 79.6% (and only 78.8% in India), far lower than the four newest members of ASEAN. (See Table 5.1) Thus, even if a 90% target for tariff reduction is set, based on the current openness of the Indian economy it is unlikely that the country would be able to meet RCEP standards by end-2015. If the target is set even higher to 95% then only Singapore, Brunei, Malaysia and Thailand among the ASEAN nations, as well as Australia and New Zealand, would qualify. As the principle of flexibility has been emphasized repeatedly in the RCEP Framework and the guidelines and objectives for negotiations document, we have reason to worry about how once the RCEP agreement comes to fruition there will be a “race to the bottom”.10 Thus, we see that the RCEP negotiation process can only move forward by dismantling the “spaghetti bowl effect” caused by the multiple FTAs in play. However, such consolidation is being limited by the “bucket effect”. Second: a number of key bilateral FTAs are still missing among RCEP nations. The RCEP process also faces the challenge of the “bucket effect”. Based on the negotiation principles laid out by the various RCEP nations to date the RCEP process will be advanced with the five ASEAN-centered bilateral FTAs serving as the foundation. However, bilateral FTAs have yet to be signed between ASEAN’s FTA partners, such as between China and Japan, between China and India, between Japan and South Korea, and between India and New Zealand. Although negotiations for the CJSKFTA have already begun in 2013 and although the principles established are primarily aimed at establishing free trade between China-Japan, between China and South Korea, and between South Korea and Japan, the dispute over the Diaoyu Islands has created diplomatic stalemate just as trilateral contact on the issue was taking off. The first round of CJSKFTA talks shows that future negotiations will certainly be impacted by the diplomatic relations between the three nations. Considering current circumstances, it is not realistic to expect this three-way partnership to contribute to the RCEP process. Very clearly, the establishment of the RCEP is not simply a matter of binding the five “10 + 1” free trade areas together. Obviously, it would be as challenging as it is to merge the five free trade areas as it would be to have the members have yet to accede to bilateral FTAs accept the jointly-designed liberalization measures of the RCEP. Third: it is doubtful that the ASEAN Economic Community can be established on schedule. Capacity-building for ASEAN, the leading actor of the RCEP process, is highly important.11 However, the prospects for the building of the ASEAN Economic Community do not look good. A mid-term assessment of the ASEAN Economic Community building process shows that tax reduction measures for the community 10

Multilateral negotiations on tax reductions have led actors to accept the lowest bid in order to reach consensus. This is known as the “race to the bottom”. Vézina (2010). 11 Xu Ningning remarked when commenting on the establishment of the RCEP: “Whether the RCEP will succeed depends in large degree on whether ASEAN is able to realize its integration”. This comment is not unreasonable. See: Xu (2010).

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are unlikely to be completed on time.12 More importantly, further development of the ASEAN Economic Community process would require member nations to undertake key domestic structural adjustments.13 This requirement undoubtedly makes the establishment of the Community even more challenging.14 What this means is that ASEAN itself may become the Achilles heel to the RCEP process. In terms of development prospects, although various parties have clearly stated that RCEP negotiations would begin in 2013 and end in 2015, and although many are of the opinion that since ASEAN has already established bilateral FTAs/EPAs with dialogue partners who have been involved early on in the RCEP process the prospects for the RCEP process are better, when we consider that RCEP talks will also cover Sino-Japanese cooperation (an area that has not seen a breakthrough for some time) and India (whose economy is far less open) we see that RCEP negotiations may not proceed as smoothly as some expect.

5.2 Development Trends in Asia–Pacific Cooperation The end of the Cold War has been the starting point of cooperation in the Asia– Pacific region. The Asia–Pacific Economic Cooperation (APEC) forum was the first regional cooperation arrangement that China participated in. Now that we look back, we see that at that time APEC served to crystallize the desire to various national economies in the region, and many looked forward to the tremendous benefits that would be brought on by the liberalization on trade and investment by more advanced members in 2010. This made APEC a widely-accepted platform for integration in the Asia–Pacific. Following the 1997 Asian financial crisis ASEAN had mooted the “10 + 3” cooperation mechanism. However, at that time the potential impact of this East Asian cooperation framework on APEC was not very well-recognized. On hindsight: although the “10 + 3” originated in the desire for participating economies to save themselves the regional cooperation that it represented has been taken seriously by various parties as it is also related to the matter of regional leadership. For instance, since the early days of the “10 + 3” arrangement Japan has sought to establish its position as regional leader, especially since the blurry beginnings of the East Asian Community (EAC) in the East Asian Vision Group.15 China, encouraged by the success of the ASEAN-China Free Trade Area, has also tried to enhance its voice through the “10 + 3” platform. The EAC, described in tantalizing terms, became part 12

ERIA. (2012). Peter et al. (2012). 14 The negative public attitude towards the establishment of the ASEAN Economic Community also reflects, to a certain extent, the difficulties faced by the Community. See: Moorthy and Benny. (2012). 15 Japan has believed that China has been bidding for regional leadership since the mooting of the EAC concept. Some Japanese scholars thus believe that China should not be included in the building of the EAC, without which it would naturally lose the right to bid for regional leadership. See: Yu (2003). 13

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of the study agenda while APEC began to incorporate non-economic issues that East Asia was not interested in under the influence of the U.S. Thus, East Asian nations naturally turned to the ASEAN-centered “10 +” arrangements in order to realize their own interests. This led to East Asia paying much more attention to the “10 + 3” arrangement compared to APEC,16 draining APEC of its past vitality at a time when the U.S. has also been focused on its anti-terror efforts. Ever since the U.S. started promoting the TPP and subsequently proposed the strategy of the “rebalance to Asia”, at least China has felt that the U.S. has shifted towards the containment of the China in its strategy. Perhaps as the situation develops further we will find that America’s announcement of its entry into, and its promotion of, the TPP is actually a new starting point for cooperation in East Asia. Although to date the negative effects of the TPP, such as “upending the Asian political landscape, causing regional chaos, obstructing the course of regional economic cooperation, and changing the model of cooperation for free trade areas in East Asia”17 have yet to fully occur, we are already beginning to see its impact on cooperation in the Asia–Pacific/East Asia regions.

5.2.1 Asia–Pacific Cooperation to See a Period of Framework Ambiguity Aggressive promotion of the TPP by the U.S. has impacted APEC greatly. However, as to whether the TPP will develop to become the new platform of cooperation for the Asia–Pacific is unclear. First of all, APEC’s position as the platform for cooperation in the Asia–Pacific has been further weakened. The U.S. claims that the end-goal for the establishment of the TPP is an Asia–Pacific free trade area within APEC. However, the TPP has already divided APEC nations into two groups, the TPP group and the group outside of the TPP talk, due to its high standards and barriers of entry. For APEC, which has been declining in influence since the 1997 Asian financial crisis, on one hand this sort of internal split will have an effect on how various APEC parties work together to align their respective interests. On the other hand, the unbalanced attention given to APEC and the TPP by the U.S. signifies that the U.S. is no longer serious about promoting APEC. Currently, the U.S. has chosen to abandon the Bogor Goals and instead to work on the participation of certain APEC members in the TPP. This means that APEC has effectively lost its leader, with competition among APEC members to dictate items on the cooperation agenda. At the 2013 APEC informal leaders’ meeting held in Bali in October 2013, participants focused on three issues: the realization of the Bogor Goals, fairness and sustained growth, and regional interconnectedness and openness through the theme of “Resilient Asia–Pacific, Engine of Global Growth”. 16

Of course, East Asian nations were also directing their unhappiness towards the U.S.-led APEC following America’s choice to stand by and do nothing during the 1997 crisis. 17 Zhang and Li (2013).

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99

That APEC chose to focus on these three issues shows both the grouping’s continuity and its focus on development. However, compared to the 2011 meeting in Hawaii and the 2012 Vladivostok meeting the choice of topics actually also betrayed the ongoing competition for grouping leadership currently within APEC. For the Hawaii meeting, the U.S. placed its emphasis on the issue of the TPP. However, this was not echoed at the Vladivostok meeting. This time round in Bali, although there has been a continued focus on growth, there has also been a renewed emphasis on the Bogor Goals as well as a new emphasis on regional interconnectedness and openness. That a contestation for the APEC agenda has emerged tells us that the APEC consensus is coming apart. Thus, before the TPP achieves its expected effect and thus leads the U.S. to turn more of its attention towards the building of an Asia–Pacific free trade area we should not expect APEC to make significant contributions to cooperation in the Asia–Pacific. Second: in the short term the TPP is but a tool for the splitting of the Asia– Pacific region and not a platform for regional cooperation. The TPP, a strategic cornerstone of the Obama government’s strategy to dominate the Asia–Pacific in political and economic terms, has seen the completion of 17 rounds of negotiation to date. According to information released in 2012 the U.S. hopes to complete the TPP talks by end-2013. However, this is a goal that would be difficult to realize, based on information released by various parties. This is negotiating parties have been hard pressed in reaching consensus in a number of areas, especially on sensitive matters.18 Therefore, President Obama stated in a visit to Costa Rica in May 2013 that the current task for the TPP is to wrap up negotiations and not an expansion to include more members.19 Of course, after the U.S. compromised to allow Japan—which was facing tremendous challenges on the agricultural front—into the TPP negotiation process20 it is also no longer in a hurry to absorb more APEC members into the TPP. This is because without Japan’s participation the economic significance of the TPP would be negligible.21 However, if even more APEC members are introduced to the TPP process at one go the process will surely be slowed. The benefits of doing so may not be enough to make up for the setbacks. In addition, perspective key participants in East Asia cooperation like China and Indonesia have not been able to join the TPP process due to the high entry barriers in place. Thus, the TPP is unlikely to cover the Asia–Pacific in the short term and is thus unlikely to replace APEC as the new cooperation framework for the Asia–Pacific. The convergence of the interests of the TPP and non-TPP nations also means that one main effect of the TPP would be the weakening of cooperation across the Asia–Pacific region. Hence, while the role of APEC as regional cooperation platform was being undermined the TPP is being ‘soft-boycotted’ by certain APEC members because of its 18

Cai (2013). U.S. Now Focused On Concluding TPP, Not Adding Countries, Official Says. Inside U.S. Trade, May 10, 2013. Excerpted from: Cai (2013). 20 A joint Japan-U.S. statement revealed that the Japanese “did not have to undertake on a unilateral basis to abolish the corresponding tariffs prior to negotiations” and confirmed that both parties acknowledged the existence of so-called “sensitive products” to be taken into consideration. See: Zhang (2013). 21 Tian and Shao (2013). 19

100

5 Cooperation and Development in Asia

ability to accept what are traditionally Asia–Pacific partners and is thus unable to serve as the platform for Asia–Pacific cooperation. What this means is that Asia– Pacific cooperation is now lacking a platform that is accepted by everyone and thus it would be ambiguous as to which framework would apply for regional cooperation for some time.

5.2.2 East Asia Cooperation Undergoing Framework Reshaping and RCEP Emerging as a New Platform for Regional Cooperation The promotion of the TPP process has, to a certain extent, led to ASEAN’s proposal of the Regional Comprehensive Economic Partnership (RCEP). The emergence of the RCEP means the end of the “10 + 3” and “10 + 6” groupings’ (groupings that have already fallen into stalemate due to Sino-Japanese competition) functioning as cooperation platforms in East Asia. The RCEP may possibly develop into a new platform for regional cooperation in East Asia. First, the TPP process has led to the emergence of the RCEP. The U.S. believes that regional cooperation in East Asia will give rise to an East Asia order, and that this order will be headed by China. Therefore, the TPP serves to help the U.S. turn “East Asian cooperation” into “Asia–Pacific cooperation”.22 In reality, as the U.S. seeks to promote the coverage of East Asian cooperation by the TPP, regional organization ASEAN has felt the threats brought on by the TPP: on one hand, as certain members are already part of the TPP while certain other members are determined to boycott the TPP, ASEAN has in fact clearly felt the splitting effects of America’s efforts to promote the TPP. On the other hand, ASEAN is also worried about how the damage wrought by the TPP on East Asian cooperation will also threaten ASEAN’s central role in regional cooperation. The “centrality” of ASEAN gained following the 1997 Asian financial crisis is, objectively speaking, due to the “10 + 3” partnership platform. With the proposal of the “10 + 6” by Japan in 2006, competition emerged between the “10 + 3” and “10 + 6” in East Asia. This has caused East Asia—of which ASEAN is the center—to stagnate and is already threatening ASEAN’s central role. However, when the “10 + “ framework is facing the risk of eclipse by the TPP ASEAN is even more worried about the harm to its centrality caused by the TPP.23 As such, ASEAN has proposed the RCEP, which has been regarded by some researchers as a way of countering America’s TPP.24 Although ASEAN does not admit to this motive and claims that the RCEP and TPP can achieve the same objectives with the final objective also an Asia–Pacific free trade area the desire to protect ASEAN’s 22

Pang (2012). The TPP process is headed by the U.S.; further, the TPP is a partnership within the APEC framework while some members of ASEAN are not in APEC. What this means is that eventually ASEAN as a grouping will not play a role in the TPP, let alone a central role. 24 E.g.: Wang (2013). 23

5.2 Development Trends in Asia–Pacific Cooperation

101

centrality with the RCEP is clear.25 When we take a step back, we see that even if ASEAN really hopes that both the RCEP and the TPP can lead to an East Asian free trade zone,26 objectively speaking ASEAN is already facilitating the formation of an East Asian cooperation framework that does not include the U.S., at least for now. The RCEP proposal has received support from the corresponding parties. This means that the role of the “10 + 3” and “10 + 6” groupings as platforms for cooperation in East Asia has been severely weakened. Of course, at least to date the RCEP is still based on the cooperation of the “10 + 6”. In this sense, there is some logic to the claim that the RCEP is an extension of East Asian cooperation.27 Second, although there are a number of challenges that the RCEP process will have to surmount, it has the support of various parties and thus has the possibility of growing and becoming a new framework for East Asian cooperation opposite the TPP. Those mooting the RCEP hope to consolidate the existing five bilateral free trade areas that are centered on ASEAN as part of the first step to building a regional free trade area. However, there are at least three “bucket-effect” restrictions that may impede the realizing of this goal. It will not be easily to complete the design of the RCEP Framework by 2015.28 Nevertheless, the RCEP has received support from various parties against the backdrop of threats to East Asian cooperation. Most importantly, the RCEP has been recognized by the U.S. In August 2012, U.S. Trade Representative Ron Kirk said while commenting on the RCEP: “We believe that the two (the TPP and the RCEP) are complementary and not necessarily competitive”.29 This is a highly positive statement, because ASEAN does not wish to see the RCEP labeled as “anti-TPP”. On the other, America’s support for the RCEP also allows America’s allies to go ahead with efforts to realize RCEP without worry. We can foresee that ASEAN will hope to see the process for the RCEP—that would protect the organization’s central role) being facilitated seriously by various parties so that it may become a new framework for future cooperation in East Asia. Overall, although America’s “rebalance to Asia” strategy—brought with the TPP—is still being advanced and although in the future America may be confronted with issues of tension due to its strategic goal of maintaining its global hegemony and the strategic resources available to it,30 the advancement of the TPP has already caused the draining of vitality from existing Asia–Pacific and East Asian cooperation platforms.

25

Wang (2013). Many think-tank experts in ASEAN refuse to admit that the RCEP is a counter-measure to the TPP. In fact, they have explained that the end-goal of the RCEP to be also the Asia–Pacific free trade area. 27 Some Chinese scholars believe that the RCEP is an extension of East Asian cooperation. See: Ping and Chen (2013). 28 Wang (2013). 29 From: Xu (2012). 30 Wang (2013). 26

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5 Cooperation and Development in Asia

5.2.3 East Asia Cooperation Within the Frameworks of CJSKFTA, TPP and RCEP For a period in the future, the interaction between the CJSKFTA, the TPP and the RCEP will certainly become a key force in shaping the East Asian landscape of the future as these three partnerships include the key powers in the region. The CJSKFTA has its roots in attempts by China, Japan and South Korea to combat the uncertainties of the global economy. However, for ASEAN, the partnership between the three will threaten ASEAN’s leading position in East Asian cooperation. The TPP is a platform for the U.S. to reinforce and protect its interests in the Asia–Pacific and to counter Chinese influence in East Asia at a time as its economic strength is slipping. However, given the coverage of TPP, for ASEAN the TPP is also a threat to its core position in East Asia. Thus, although ASEAN claims that the aim of the RCEP is to provide a better cooperation and development platform for the region the grouping’s motives with regard to the CJSKFTA and the TPP are quite clear. China believes that the TPP is part of a strategy to contain China. Hence, it is necessary that China adopts effective counter-measures to the TPP, one of which may be the CJSKFTA. China has also expressed its support for the RCEP proposal, perhaps because it sees how ASEAN is seeking to counter-balance the TPP with the RCEP. Japan believes that the TPP and the CJSKFTA to be “two shots at the pot”. It has also expressed strong support for the RCEP as it is essentially based on the “10 + 6” framework that meets Japan’s needs in counter-balancing Chinese influence. The U.S. appears to be not too fond of the CJSKFTA, but is more tolerant of the RCEP although it has the potential to counter the TPP. The U.S. believes the RCEP can be complementary to the TPP and not necessarily a competitor. Indeed, ASEAN has also stated that the RCEP can be complementary to the TPP. For instance, Singapore Ambassador-at-large Tommy Koh believes that the RCEP is not a competitor to the TPP, and that efforts to advance the RCEP agreement are mainly due to the fact that it can be more easily realized than the TPP.31 No matter what, efforts to advance the TPP and the RCEP will certainly provide East Asian nations with two partnership frameworks in East Asia and in the Asia– Pacific. The CJSKFTA is an important variable in the interactions [between these partnership groupings]. This is because if the CJSKFTA is successful there will be strong support for the RCEP, meaning that how Sino-Japanese relations are handled will have a strong impact on future cooperation in East Asia.

31

Ad-hoc statement by Ambassador Tommy Koh at the inaugural China-ASEAN Forum held in Singapore in November 2012.

94.8

100

100

Vietnam

Australia

New Zealand

89.4

95.6

100

99.0

92.2

95.5

90.0

91.2

97.1

99.2

ASEAN-S Korea

89.5

92.6

100

93.1

87.3

92.0

89.3

83.4

90.0

95.9

Average

Note These numbers are based on the six-digit HS tariff codes. Vietnam data for the ASEAN-China free trade area was unavailable; data for HS codes 01-08 was also not available for Myanmar Source Kuno, Arata, “Revealing Tariff Structure under the ASEAN + 1 FTAs and ATIGA: implications for a possible ASEAN + + FTA,” in Chang et al. (2011).

90.5 92.8

91.9

94.4

96.8

100

97.4

85.2

94.1

86.9

91.2

85.7

97.7

ASEAN-Japan

94.5

79.6

78.8

79.5

78.1

100

80.9

76.6

79.8

80.1

48.7

88.4

85.3

ASEAN-India

Average

94.7

94.1

–

93.5

100

93.0

94.5

93.4

97.6

92.3

89.9

98.3

ASEAN-China

South Korea

Japan

India

95.7

98.9

Thailand

China

100

97.4

Malaysia

Singapore

91.9

Laos

88.1

93.7

Indonesia

95.1

89.1

Cambodia

The Philippines

99.2

Brunei

Myanmar

ASEAN-Australia-New Zealand

Country

Unit: %

Table 5.1 Tariff reductions in the “10 + 1” free trade areas

5.2 Development Trends in Asia–Pacific Cooperation 103

104

5 Cooperation and Development in Asia

References Cai, P. (2013). Transversal issues in the TPP process and next-generation trade rules, and their impact on China. World Economy Study. No. 7. Chang, J. L., Shujiro, U., & Ikumo, I. (Eds.). (2011). Comprehensive mapping of FTAs in ASEAN and East Asia phase II. http://www.eria.org. ERIA. (2012). Mid-term review of the implementation of AEC blueprint: Executive summary. Economic Research Institute for ASEAN and East Asia. http://www.eria.org Fukunaga, Y., & Isono, I. (2013). Taking ASEAN + 1 FTAs towards the RCEP: A mapping studies. ERIA discussion paper 2013. Fukunaga, Y., & Kuno, A. (2012). Towards a consolidated preferential tariff structure in East Asia: Going beyond ASEAN + 1 FTAs. ERIA Policy Brief . No. 2012-03. Li, X. Y. (2013). How would we understand the limitations placed on China’s peaceful development within the international economic system? Contemporary International Relations. No. 4. Meltzer, J. (2012). The significance of the Trans-Pacific Partnership for the United States. Testimony to the House Small Business Committee. Moorthy, R., Benny, G. (2012). Is an ‘ASEAN Community’ Achievable? A public perception Analysis in Indonesia, Malaysia and Singapore on the perceived obstacles to regional community. Asian Surrey, 52, 1043–1066. Pang, Z. (2012). Whither ‘East Asian cooperation? On issues of regional order in East Asia and China’s strategic choices. Frontiers. No. 6. Peter, P. A., Plummer, M. G., & Zhai, F. (2012). ASEAN Economic Community: A general equilibrium analysis. Asian Economic Journal, 26(2), 93–118 Ping, H., & Chen, S. (2013). The RCEP and China’s Asia-Pacific FTA strategy. China International Studies. No. 3. Tian, K., & Shao, J. (2013). The Japan factor in America’s TPP trade strategy. Pacific Journal. No. 1. Vézina, P.-L. (2010). Race-to-the-bottom tariff cutting (IHEID Working Papers 12–2010). Economics Section, The Graduate Institute of International Studies. http://ideas.repec.org/e/pvz5. html Wang, Y. (2013). The RCEP and the centrality of ASEAN. China International Studies. No. 5. Wang, J. (2013). The TPP vs. the RCEP: The political contestations behind cooperation in the Asia-Pacific region. Asia-Pacific Economic Review. No. 3 Wang, J. Q. (2013). TPP vs. RCEP: The political contestation behind partnerships in the Asia-Pacific region. Asia-Pacific Economic Review, 3. Wang, W. (2013). The implementation pathways of America’s ‘Back to the Asia-Pacific’ strategy and the factors that limit this strategy. Teaching and Research. No. 1. Xu, N. (2010). The RCEP: The regional comprehensive economic partnership led by ASEAN. Around Southeast Asia. No. 10. Xu, N. (2012). The RCEP: The regional comprehensive economic partnership led by ASEAN. Around Southeast Asia. No. 10. Yang, J. M. (2012). Changes in American power and the reconfiguration of the international system. Guoji Wenti Yanjiu, 2. Yu, X. (2003) Cooperation in early 21st-century East Asia. Journal of Contemporary Asia-Pacific Studies. No. 10. Zhang, J. (2013). The TPP: The U.S.-Japanese chess game. China Newsweek. No. 10. Zhang, R. Z. (2013). Changes in the international landscape and China’s positioning. Contemporary International Relations, 4. Zhang, H., & Li, G. (2013). Recommendations for Chinese participation in East Asian economic partnerships against the backdrop of the TPP. Journal of International Economic Cooperation. No. 3

Chapter 6

Changes in China’s Economic Relations in Asia

The Chinese and Asian economies in generally have long relied on external markets, especially on advanced economies in the course of their development. This dependence has been at the same time the basis or prerequisite for the development of bilateral trade relations between China and other Asian countries. With changes in the external environment and the rise of the Chinese economy, trade relations between China and Asian nations (which have relied on external markets for development) have begun to unravel. On the other hand, bilateral trade relations based on each other’s markets are becoming more foregrounded by the day. This new sort of bilateral trade relations has been proven effective following the “baptism of fire” that was the 2008 global financial crisis. Trade relations between China and other Asian countries have not only stood up to the shrinking of external needs but have also continued to develop strongly.

6.1 Main Characteristics of Changes in China’s Economic Relations with Other Asian Countries The changes in economic relations between China and other Asian nations are in the areas of trade, investment, etc.

6.1.1 Changes in China’s Trade Relations with Other Asian Countries Since the 1980s China has worked to accelerate her economic development by engaging in the regional division of labor. Although China entered the Asian division © Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_6

105

106

6 Changes in China’s Economic Relations in Asia

Fig. 6.1 Changes in China’s trade position in East Asia. Note “East Asia” here includes China, Japan, South Korea, Taiwan (China), Singapore, Indonesia, Malaysia, Thailand, the Philippines, and Vietnam. Source UN Comtrade Database and the Asian Development Bank (ADB)

of labor game fairly late in the game, she has gradually taken up one end of the regional processing chain by the 1990s thanks to her low labor costs, scale and amenable policies. In this process, China became an importer of parts and components, raw materials and capital goods from other Asian economies, and processed/assembled materials before re-exporting them to advanced economies such as America and Europe. China has integrated into the Asian economy on a large scale over a span of 30 years. As shown in Fig. 6.1, no matter it be exports or imports China’s share of regional trade has risen significantly since the 1990s. The following changes have occurred in China’s trade relations with the rest of Asia as she participated in the regional division of labor: First, Chinese goods replaced products from other Asian economies in external markets. Within Asia, China gradually took on a central role in the regional division of labor and has become the node connecting the regional and external economies. Looking at the Asian economy as a whole, in the U.S. import market China has gradually replaced the position of Japan and the “Four Asian Dragons”. However, as ASEAN’s labor costs and policy advantages are comparable to those of China’s, it has managed to maintain a comparatively stable if low share in the U.S. import market (see Fig. 6.2) and has not been completely replaced by China. As China replaces the other Asian economies in the U.S. market the economic relationship between Asia and the U.S. is gradually evolving to become a bilateral economic relationship between the U.S. and China and with China and Asia. China has become the node that connects the regional and external economies. As we can see from Table 6.1, on one hand China imports large amounts of intermediate products, especially parts and components, from Asia; on the other hand, China exports to the rest of the world large amounts of end-products. In terms of trade balances, more than half of America’s trade deficit with the world is with Asia, while Asia’s trade difference with China is rising by the year. In 2010, 70% of Asia’s trade difference is with China. At the same

6.1 Main Characteristics of Changes in China’s Economic …

107

Fig. 6.2 U.S. imports from Asia against total imports. Note “Asia” here refers to China, Japan, the “Four Asian Dragons” and ASEAN. The “Four Asian Dragons” here only include Taiwan Province, South Korea and Singapore, while “ASEAN” only includes Indonesia, Thailand, Malaysia, the Philippines and Vietnam. Source UN Comtrade Database

time, although China has a trade surplus with the rest of the world, her trade deficit with Asia is growing by the year, particularly in the trade of intermediate products (see Table 6.2). Second, China is transiting from the role of regional producer to regional consumer. Assume that Chinese trade with Asia is scored 100. Chinese imports of consumer goods from Asia form a very low proportion of this figure at 3%; on the other hand, although the proportion of Chinese exports of consumer goods to Asia is declining it is still comparatively high at 24.4% in 2010 (see Table 6.1). This indicates that although trade with China is a driver of regional economic growth China’s economic growth (i.e., domestic demand) has not become a driver of regional growth.1 At the same time, Asia has not been able to decouple itself from the global economic cycle.2 However, some writers believe that China is currently evolving from the role of regional producer to become regional consumer. For instance, a study finds that Chinese consumption has led Asia to emerge as an additional driver of growth in global demand.3 Chinese scholars have found that China is currently providing a market for the Asian economy, and that this role will be further amplified 1

The study conducted by Park and Shin states that following the 2008 global financial crisis the shrinking of markets in advanced economies like the U.S. have led many to look towards the major emerging market that is China to make up for the slack in U.S. demand. However, quantitative analysis shows that China’s positive role lies mainly in America’s demand for Asian goods and not from China per se. China has yet to become the driver of economic growth in Asia. See: Park and Shin (2009). 2 A 2007 report from the ADB states that the growth in trade within Asia is mainly due to the activities of multinational corporations (MNCs). These MNCs are closely linked to the global business cycle and thus Asia has been unable to decouple from the world and Asian exports still go mainly to the advanced economies. 3 For more details, refer to the ADB’s 2007 Asian Development Outlook report.

49.5

41.8

38.5

100.0

100.0

100.0

100.0

2010

2011

2000

2005

2010

2011

3.3

3.0

2.5

3.0

33.2

35.4

37.4

38.0

19.5

20.2

21.2

16.0

50.1

52.1

54.0

45.4

72.4

72.5

73.4

78.0

37.7

40.2

48.6

51.3

37.3

39.0

39.2

28.5

62.6

62.9

65.6

58.6

35.1

33.5

34.3

49.5

26.5

28.4

37.5

47.8

#Raw materials

100.0

100.0

100.0

100.0

22.5

22.3

24.9

29.9

24.2

24.4

26.5

40.6

19.3

19.0

20.2

27.8

Consumer goods

23.0

23.5

19.8

12.9

17.8

17.7

18.6

22.4

Capital goods

50.6

49.8

51.3

43.4

27.7

27.6

31.9

34.3

Intermediate products

18.9

20.4

20.7

15.0

24.2

24.9

30.5

35.0

#Parts & components

31.6

29.4

30.6

28.4

30.3

29.8

33.0

34.0

#Raw materials

Note Product classifications are based on the United Nations’ Broad Economic Categories. “All” products include consumer goods, capital goods, and intermediate goods. “Intermediate goods” include parts and components as well as raw materials Source UN Comtrade Database

49.8

2005

#Parts & components

All

Intermediate products

Chinese exports to Asia against exports to rest of the world

Capital goods

All

Consumer goods

Chinese imports from Asia against imports from rest of the world

Unit: %

2000

Year

Table 6.1 China’s trade relations with Asia

108 6 Changes in China’s Economic Relations in Asia

6.1 Main Characteristics of Changes in China’s Economic …

109

Table 6.2 China’s trade balances with Asia and the World Unit: USD100 million Region

Year

World

2000 1003

35

−763

−226

−537

−34

241

2005 2260

732

−1889

−664

−1225

−83

1020

2010 4029

2420

−4147

−729

−3419

−484

1818

2011 4691

2919

−5097

−647

−4450

−962

1550

2000 270

−83

−551

−208

−343

−20

−375

2005 420

−317

−1426

−886

−540

−47

−1370

2010 681

−351

−2476

−1555

−921

−153

−2312

2011 811

−326

−2701

−1695

−1006

−224

−2439

2000 218

−45

−169

−93

−76

−3

1

2005 313

−69

−391

−233

−157

−17

−164

2010 431

−196

−717

−393

−324

−74

−557

2011 519

−204

−701

−426

−275

−78

−463

−42

−291

−87

−204

−18

−317 −997

Asia

Japan

Consumer Capital Intermediate #Parts and #Raw Others All goods goods products components materials

Four 2000 33 Asian 2005 74 Dragons 2010 109

−229

−798

−474

−324

−45

−214

−1296

−842

−454

−80

−1480

2011 121

−215

−1368

−911

−457

−160

−1622

2000 18

4

−91

−28

−63

1

−60

2005 32

−19

−237

−178

−59

15

−208

2010 141

59

−462

−320

−143

1

−275

2011 171

92

−632

−358

−274

14

−355

ASEAN

Source UN Comtrade Database

with future economic growth in China and the rise of the renminbi. On one hand, China has not been able to segue fully into her new role as yet because China’s massive manufacturing scale and her status as processing center for end products mean that it is not possible for China to import large amounts of consumer goods from the region and thus become a major consumer market for other regional economies. On the other hand, Chinese per capita income remains in the low-to-mid range and China is unlikely to become a major mid-to-high-end consumer market in the short term. Third, China is leading Asia in what is an exports-driven development strategy that is extending from a single nation to the entire region, integrating China with the region in terms of interests in the process. The exports-driven development strategy is often regarded as a means to economic growth for a country. This includes Asia. In the past, various Asian economies have adopted the export-driven development strategy at one time or other in response to their development needs. Currently, the exports-driven development strategy that was originally centered on the individual national economy has now evolved to become a regional strategy with China at the

110

6 Changes in China’s Economic Relations in Asia

head. The key reason for this evolution is that there is limited room for growth in external markets. To take the U.S. market as an example: there have been a few phases to America’s demand for Asia’s goods, and today the demand has risen past the 35% mark (of total imports) and has stabilized at this level. This indicates that America’s demand for Asia’s goods has already stabilized. In addition to the limited room for growth in external markets, per capita income in the majority of Asian countries is still in the low-to-mid range and domestic or regional economies alone are not sufficient to drive further industrialization. Thus, the dilemma that Asia finds itself in is: on one hand it has to deal with the fact that the growth in regional production is outstripping growth in external consumption demand to ensure continued industrialization; on the other hand, it has to deal with the “fallacy of composition” issue.4 The processing and assembling of Asia’s exports of end products have been concentrated in China thanks to China’s advantages in terms of scale, costs and policy. China receives imports of parts and components as well as spare parts from other economies, which is then re-exported by China on behalf of the region to the rest of the world. This way, the growth in Chinese exports is also a growth in regional exports. China has already become one with the Asia region.

6.1.2 Capital Flows Between China and Other Asian Countries Asia became the focus of global investment thanks to the strength of its economic growth after the onset of the 2008 global financial crisis. In 2012, Asia attracted as much as USD2.1 trillion in direct investment from outside the region. This figure is 9.2% of the global total. The same year, Asia invested nearly USD2 trillion, or 8.5% of the global total, outside the region (see Fig. 6.3; Table 6.3). China has become the biggest destination for capital flows into Asia, followed by Singapore and India. Currently, China has also become the second largest provider of capital flows out of Asia, after Japan and ahead of Singapore. According to the World Investment Report 2013 released by the United Nations Conference on Trade and Development (UNCTAD), globally foreign direct investment (FDI) declined by 18% in 2012 to a total of USD1.35 trillion. At a time of slackening investment globally, China remained the second-biggest destination in the world for foreign capital inflow, although this flow had declined by 2%. At the same time, China also rose up the rankings to become the world’s third-largest foreign investor. In 2012, China set a new record in FDI with a total of USD84 billion invested in other countries. For the first time, China had become the world’s third-largest foreign investor after the U.S. and Japan. Furthermore, from the medium-term perspective, China will remain a prime investment destination for MNCs. A study has shown that for MNCs, China 4

The so-called “fallacy of composition” refers to the situation where multiple developing nations are using the same development strategy and when the nation(s) using this strategy fail to achieve economic growth due to limitations in market demand.

6.1 Main Characteristics of Changes in China’s Economic …

111

Fig. 6.3 Capital inflows and outflows in Asia as of 2012. Source World Investment Report 2013 by the United Nations

ranks as the top investment destination among the top five favored nations. The U.S. was close behind in second place. In terms of the direction of capital flow, investments in Asia by Japan, Singapore, and South Korea are concentrated on larger economies with higher per capita income such as South Korea, Singapore, India and China. Chinese investments tend to be in less developed nations in her neighborhood such as Vietnam, Laos, Myanmar, Cambodia, Pakistan, and Mongolia. Investment in these countries has already exceeded USD10 billion or greater than the scale of investment made in, or by, major regional economies and economies with comparatively higher per capita income (with the exception of Singapore). That is to say, Chinese investment in surrounding backward countries may be due to the resources in these countries or lower labor costs, factors that facilitate a shift in activity from China. As of end-2010, Chinese investment in foreign economies are centered on the following industries: business services, finance, mining, and the wholesale and retail business. These four industries account for 75.4% of all Chinese investment in foreign economies (see Table 6.4). According to the 2010 China Statistical Yearbook on Foreign Direct Investment released by the Ministry of Commerce, Chinese investment in ASEAN has been concentrated on the public infrastructure (such as electric power), finance, mining, the wholesale and retail, and manufacturing industries, and that together these five industries account for 70.8% of all Chinese investment in ASEAN. Chinese investment in the U.S. has been centered on the areas of business services, finance, wholesale and retail, and manufacturing. Together, these four industries account for 72.7% of all Chinese investment in the U.S. Chinese investment in Hong Kong is also centered on the business services, finance, mining and wholesale

4014.3 1964.11204.0 1181.7 5090.0

South Korea Malaysia

India

China

10,549.3

Singapore

Japan

725.3 8328.8

China

4.0

Singapore 2056.6

1591.3682

Thailand

Vietnam

2053.6

Japan

Indonesia

1324.0

Malaysia

2263.5

1472.3

South Korea

India

1069.2

World

Kazakhstan

585.8

932.1

5.5

China

13.7

55.1

693.0

Japan

15.8

255.9

477.3

25.1

South Korea

Note “ASEAN” here includes only Malaysia, Thailand, Indonesia, the Philippines, and Vietnam Source The World Investment Report 2013 and statistics for various nations

Out

In

Country/region

Unit: USD100 million

Table 6.3 Capital flows within the region as of 2012 (inventory)

106.0

360.6

153.8

Singapore

6.6

151.1

0.6

India

18.9

6.7

0.3

Mongolia

55.8

855.7

5.1

2.5

ASEAN

112 6 Changes in China’s Economic Relations in Asia

6.1 Main Characteristics of Changes in China’s Economic …

113

Table 6.4 Industry breakdown for Chinese FDI as of 2010 Unit: % Industry

Share Industry

Share Industry

Share Industry

Share

Business services

30.7

Manufacturing

5.6

Electric power and gas, etc

1.1

Culture and sports

0.1

Finance

17.4

Information 2.7 communications, software

Resident and other services

1.0

Health and 0.0 social security

Mining

14.1

Real estate

2.3

Forestry and fishing

0.8

Education

Wholesale and retail

13.2

Building and construction

1.9

Water environment and public facilities

0.4

Scientific geologic survey

1.3

Accommodation, 0.1 and food and beverage

Transport 7.3 and storage

0.0

Source 2010 China statistical yearbook on Foreign Direct Investment, Ministry of Commerce

and retail sectors, which together account for 81.7% of all Chinese investment in the territory. China may overtake Japan to become a major FDI player. Asian investment into China will decline in the next 10–15 years. On the one hand, FDI into China by developed countries will fall, and developing nations may increase their investments in China; on the other hand, Chinese investment in the rest of Asia will increase. The basis for this statement is as follows: (1)

(2) (3)

(4)

Developing nations in Asia have entered a phase of investment-driven growth, and the structure of their economies will also be changing significantly. From the medium-term perspective, developing nations would be more interested in attracting foreign investment rather than invest in other countries. For the long term, the rise in per capita income has also led to increased FDI by certain developing nations. Because China’s FDI requirements have risen in terms of quality and due to the weakening of the advanced economies, investment made by advanced economies for the purposes of shifting economic activity is on the decline. Investment made with obtaining/growing a share of the China market in mind will rise although the quantum of investment will not be very high. China will increase her investments in Asia. Since the very beginning, the key destinations for Chinese FDI have been resource-rich regions such as Latin America. Following the 2008 financial crisis Chinese investment with the aim of shifting economic activity has grown due to production over-capacity in China. Thus, a large part of Chinese FDI is in surrounding countries where per capita income is lower. In addition, investment activity aimed at obtaining the advanced technologies of the advanced economies is also on the rise. This is why Chinese investment in Japan, South Korea and Singapore will also be on

114

6 Changes in China’s Economic Relations in Asia

the rise for the foreseeable future. At the same time, as Asia is also a potential consumer market China will also made investments in the region aimed at winning market share.

6.2 Economic Interactions Between China and the Rest of Asia Economic relations between China and Asia are growing increasingly close following years of development. For China, the changes in Asia’s economic growth prospects and economic development strategies that have occurred mean that there are new changes in Asia’s “economic” environment. Post-2008, in particular, many Asian nations have focused on the enhancement of economic relations with other nations in the region as part of their development strategies. Naturally, this round of adjustments may create a spillover effect with other countries in the region and thus lead to changes in the regional economic landscape. Although China is an Asian power, the aforementioned “collective action” by Asian nations will certainly have an impact on China, economic or non-economic, positive or negative. Thus, we should make use of the opportunity presented to us by the adjustment to the economic development strategies of key Asian nations to establish new economic relations with Asia. This will help to stabilize the mid-to-late stages of China’s industrialization as well as China’s economic development.

6.2.1 Significance of Changes to Development Strategies in Asia to the Chinese Economy Since the 2008 global financial crisis various Asian nations have come out with new development strategies for their respective economies (Zhao, 2013) in the beginning of what is a wave of regional change in this area. This round of adjustments may have the following effects on China. In terms of positive effects: a developing Asia will become a key export destination for Chinese goods and services. As Asian economies become stronger, Asia is also growing as an importer of end products, including capital goods and consumer goods. On one hand, expansionary investment demand will lead to an increase in the import of capital goods. On the other hand, the rise in per capita income is changing the face of consumption in Asia as consumers shift towards mid-to-high end consumer goods. Therefore, Asia may replace traditional markets in developed countries as the main destination for Chinese exports in the future. China’s trade with the rest of Asia has grown quickly in recent years. Chinese exports to the rest of Asia has grown from USD81.5 billion in value in 2000 to USD575 billion in 2011 at an increasing rate of 19.4% per annum. The character of Chinese exports to the rest of Asia has also changed in the past 10-odd years

6.2 Economic Interactions Between China and the Rest of Asia

115

Fig. 6.4 Changes in the composition of Chinese exports to the rest of Asia. Source Calculated using UN Comtrade Database

(see Fig. 6.4). China’s exports of capital goods and intermediate goods are on the rise while her exports of consumer goods are on the decline. China appears to have maintained close production relations with Asia with no change on the market level. This is, however, not so. If we take a closer look we will see that Asian countries with mid-tier incomes are becoming the key destination for Chinese exports of end products. Asia, especially her emerging economies, has seen significant economic strengthening in recent years. 30 Asian nations can be classified as low-income, midincome and high-income economies based on standards announced by the World Bank in 2010.5 Apart from a handful of countries, as of 2011 income in the majority of developing nations has risen past the USD1000 mark and is entering the middleincome range. Changes in Asian economies have also led to significant changes in the profile of Chinese exports to the rest of Asia (see Fig. 6.5). Of Chinese exports to the rest of Asia, the proportion of products exported to countries with mid-tier incomes has risen from 20.8% in 2000 to 43.6% in 2011. At the same time, the proportion of end products (including capital goods and consumer goods) exported to these countries has risen from 9.3% in 2000 to 20.5% in 2011, while the proportion of intermediate goods exported has risen from 11.6% in 2000 to 23.1% in 2011. A reverse set of changes has occurred with high-income Asian countries in the meantime: the proportion of Chinese exports to these nations fell from 76.9% in 2000 to 53.2% in 2011, with the proportion of end products exported to these countries falling from 46.0% in 2000 to 28.3% in 2011. The proportion of intermediate goods exported has fallen from 30.9% in 2000 to 24.9% in 2011. There has not been much change in terms of the profile of exports to countries in the low-income range. 5

The number of Asian nations in the high-income group has not changed. The six are: Japan, South Korea, Brunei, New Zealand, Singapore and Australia. However, the low-income group (income 10

26.2

9.7

67.3

11.4

10.8

14.5

Total

100.0

100.0

100.0

100.0

100.0

100.0

2012

Capital goods

Consumer goods

Intermediate products

#Raw materials

#Parts and components

Others

Tax rate =0

97.2

87.6

93.3

94.7

84.9

57.1

0 < Tax rate < 5

0.5

0.2

1.4

1.6

0.2

0.0

5 < Tax rate < 10

0.8

1.8

4.3

3.4

9.8

21.4

Tax rate > 10

1.4

10.4

1.0

0.3

5.2

21.4

Total

100.0

100.0

100.0

100.0

100.0

100.0

ASEAN

2007

Capital goods

Consumer goods

Intermediate products

#Raw materials

#Parts and components

Others

Sensitive products

0 < Tax rate < 5

23.3

25.8

3.2

5 < Tax rate < 10

62.9

36.1

56.6

52.4

90.3

18.5

10 < Tax rate < 20

14.3

18.0

6.5

6.9

3.2

0.0

20 < Tax rate < 40

22.9

29.5

6.1

6.5

3.2

81.5

16.4

7.5

8.5

100.0

100.0

100.0

100.0

100.0

Tax rate > 40 Total

100.0

Note The United Nations’ BEC classification method classifies goods into: finished goods/end products, and intermediate products and others. End products can be further classified into: capital goods and consumer goods, while intermediate products can be further classified into raw materials, and parts and components Source Ministry of Commerce web site

128

(4)

6 Changes in China’s Economic Relations in Asia

A number of Memoranda of Understanding (MOUs) were signed (China– ASEAN Joint Statement, 2006), and in 2007 environmental issues were added to the existing list of priority areas. Following the 2006 summit, the number of meetings held in 2007 on the matter of promoting cooperation in these priority areas increased significantly together with the number of related agreements signed. Such activity includes: the holding of a meeting to promote port trade; the signing of agreements pertaining to food safety and consumer rights; MoU signed on cooperation in the area of [border] inspection and quarantine; and the establishment of a new research center working on trade promotion, investment and the development of travel and tourism. All these signaled what was the rapid development of bilateral trade relations. Both parties later confirmed a list of fourteen items of cooperation at a leaders’ meeting held in November 2007. This was a period of high frequency for the establishing and building of economic arrangements between both parties. Following the 1997 Asian financial crisis China and ASEAN sought to reinforce bilateral trade relations through the building of such arrangements in order to build a united front against a shrinking external market. In fact, the limitations placed on market growth in East Asia by the developed countries were already long in evidence prior to the 1997 crisis. To still take the U.S. market as an example (see Fig. 6.11): imports from Asia as a proportion of total U.S. imports has been on a constant rise. By the mid-1980s this proportion had stabilized at the 40% level, and after the 1997 Asian financial crisis this figure fell to the 35%

Fig. 6.11 Changes in per capita income in China and ASEAN. Source IMF

6.3 Changes in China’s Economic Relations with Other Asian …

129

level and has hovered there ever since. As China is the biggest economy in East Asia’s export-oriented economy in order to maintain the region’s export competitiveness there have been efforts to create closer China–ASEAN trade ties. In 2000, at the fourth China–ASEAN leaders’ meeting, China proposed for the first time the establishment of a bilateral free trade area, and subsequently China–ASEAN trade relations entered a period of high-frequency partnershipbuilding. In 2002 China and ASEAN established a comprehensive economic partnership with the signing of the Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China. In 2004, both parties signed the Trade in Goods Agreement, and in 2007, they signed the Service Trade Agreement.

6.3.3 Intertwined Markets: New Developments in China–ASEAN Trade Relations in the Post-crisis Era The eruption of the global financial crisis in 2008 have a grave impact on China– ASEAN trade relations. The most salient effect is that of a major dip in trade growth between the two parties in what was a reversal of preceding trends. As China and many members of ASEAN were still in the early stages of industrialization and were essentially depending on exports for economic development and growth, their dependence on external markets led to an almost-simultaneous impact on the economic growth of both parties, which in 2009 experienced slowed growth including in the area of trade. If we are to say that the financial crisis brought upon a short-term impact on China–ASEAN trade relations, then the limiting effect of the external market— comprised mainly of the developed countries—on trade relations between the two may become a “new normal”. With the eruption of the global financial crisis, the advanced economies were badly hit, and were saddled with issues (especially debt problems triggered by the crisis). Consumption demand in advanced economies became unstable as a result, creating fairly significant pressures on Asian economies that had been relying on the markets in these advanced economies for a long time. Such pressures have also become long-term pressures due to the inability of these advanced economies to resolve their domestic economic issues within a short period of time. The common challenge for China and ASEAN here is to seek out alternative markets to ensure continued and stable economic growth. As such, the strengthening of bilateral relations and the facilitating of an integration of internal markets have become policy foci for both sides. In fact, after years of development trade relations based on the internal markets of both parties are already backed by a number of conditions on the ground. The first is the growth in consumption power in both China and ASEAN. Continued economic growth over the years has raised per capita income substantially. Statistics from the International Monetary Fund (IMF) tell us that between

130

6 Changes in China’s Economic Relations in Asia

Table 6.8 Personal consumption in China, ASEAN and developed countries, 2005–2010 Country/region

Scale (USD100 million)

Compared to developed countries (%)

Personal consumption as percent of GDP

2005

2010

2005

2005

2010

China

887

1969

39.3

33.5

ASEAN

521

1017

58.1

55.5

Total for China and ASEAN

1407

2986

44.6

38.7

Japan

2595

3198

54.2

93.4

57.0

58.6

U.S.A.

7691

8727

18.1

34.2

59.5

58.4

E.U. (15 nations)

8798

10,241

16.0

29.2

69.7

70.5

2010

Source ADB, U.S. Bureau of Economic Analysis (BEA), web site of the European Union

2001 and 2011 per capita GDP grew at a rapid clip—at more than 100%—in China and in ASEAN nations (except Brunei). At the same time, as China and ASEAN nations are basically all home to large populations, the rise in per capita income also means stronger consumption power. According to data from the Asian Development Bank (ADB), between 2000 and 2010 private consumption grew swiftly in ASEAN at a rate that even outstripped the growth in GDP. In particular, the growth rates in Malaysia, Vietnam, the Philippines, Cambodia and Myanmar were especially significant (see Fig. 6.11). Currently, compared to the U.S., Japan, and the advanced economies in Europe, private consumption is on the rise in China and ASEAN (see Table 6.8). Generally speaking, in developing nations, private consumption as a proportion of GDP is not as high as in advanced economies. However, the scale of consumption is actually in a state of expansion. In 2005, the scale of private consumption in China and ASEAN was only about 20% of the scale in the U.S. and Europe, and 50% of Japan’s. In 2010, this proportion has risen to around 30 and 100% respectively. Second, significant changes have occurred in the trade dependency between both parties. The relationship is moving towards one of mutual dependency. When we compare data from before and after the 2008 global financial crisis, we see that trade dependency has developed at a fairly fast clip between China and ASEAN, from trade to investment and other areas. To take trade for example: from 2000 to date, both Chinese exports to ASEAN and ASEAN exports to China have been on the rise compared to their total exports. Specifically, quicker growth has been seen with end products, and in particular the proportion of ASEAN exports to China has been growing more quickly in this area. This indicates that both sides are gradually becoming export destinations for each other (see Table 6.9). At the same time, the scale of bilateral investment has also been growing continually and the relationship between the two is becoming more symmetrical. Prior to 2000, the bulk of bilateral investment was made up by ASEAN investments in

6.3 Changes in China’s Economic Relations with Other Asian …

131

Table 6.9 Trade dependence between China and ASEAN Unit: % Chinese All exports to ASEAN as percent of total exports

Final #Capital #Consumer Intermediate #Raw #Parts and Others products goods goods goods materials components

2000

7.0

10.6

7.2

3.4

10.2

9.2

12.3

31.3

2005

7.3

9.2

6.0

3.2

10.6

10.1

11.4

35.6

2010

8.8

13.7

8.2

5.5

10.7

12.4

8.7

32.9

2011

9.0

14.2

8.4

5.8

11.0

12.9

8.4

25.0

ASEAN All exports to China as percent of total exports

Final #Capital #Consumer Intermediate #Raw #Parts and Others products goods goods goods materials components

2000

3.9

3.6

1.9

1.7

5.0

7.8

3.0

4.3

2005

8.1

10.4

7.5

2.9

10.1

11.2

9.1

4.5

2010

10.8 16

11.7

4.3

12.9

13.6

12.1

6.4

2011

11.5 16.4

11.1

5.3

14.1

15.2

12.3

6.6

Source UN Comtrade Database

China. On the other hand, Chinese investment in ASEAN was negligible. After 2000, however, this relationship has gradually shifted to become a two-way relationship. As of 2010, ASEAN has invested over USD52 billion in China. It is China’s fifthlargest foreign investor. Chinese investment in ASEAN has also grown swiftly. As of 2010, Chinese investors have placed a total of USD14.35 billion in ASEAN. The ratio of Chinese investment in ASEAN to ASEAN investment in China has risen from around 5% before 2003 to above 60% in 2010 (see Fig. 6.12). Third is the factor of positive policy changes made by the government on both sides. Following the 2008 global financial crisis China and ASEAN made the necessary policy changes and moves in order to accelerate the integration of their internal markets. These policy changes and moves include: The signing of the Investment Agreement and the establishment of the China– ASEAN Investment Cooperation Fund (CAIF). China and ASEAN signed the Investment Agreement in 2009. This signing provided investors from both sides with greater openness, transparency, and fairness in the investment environment, and more importantly, laid the foundation for the restructuring of domestic structures of production and the fulfillment of regional consumers’ needs for both parties. To promote Chinese

132

6 Changes in China’s Economic Relations in Asia

Fig. 6.12 Investments between China and ASEAN and their growth. Source Ministry of Commerce web site

investment in ASEAN, in 2009 China announced the establishment of a USD10billion China–ASEAN investment fund to be used on major investment projects such as infrastructural, energy and resource, and information and communications projects in China and ASEAN. China would provide ASEAN nations with USD15 billion of credit, including preferential loans worth USD1.7 billion, in the following 3–5 years as a means of encouraging Chinese enterprises to develop their businesses in Southeast Asia. We can say that efforts to promote the integration of China’s and ASEAN’s internal markets had begun before the signing of the bilateral Trade in Goods Agreement. However, tax cuts are not sufficient; they must be accompanied by large-scale capital flows before the regional industrial structure can be improved to adapt to consumption changes in the region. Thus, the signing of the Investment Agreement and the establishment of the CAIF may lead to a new round of adjustments to the regional industrial structure and promote the transformation of bilateral trade relations. These moves can also help to establish even more long-term trade partnerships between the two. Vigorous efforts to promote financial cooperation and currency exchangeability between China and ASEAN. ASEAN is China’s third-largest trading partner and also one of the pilot regions for cross-border RMB settlement. Since the 2008 decision by the Chinese government to allow renminbi settlement for trade in goods between Guangdong/Yangtze River Delta and Hong Kong/Macau, and between Guangxi/Yunnan and ASEAN, the renminbi settlement pilot scheme now covers all ten member-states of ASEAN. Mutual currency exchangeability is another major measure that has been taken to counter financial risks. China and Malaysia signed a bilateral currency swap agreement in 2009, with the scale of currency swap at RMB80 billion. In 2009, China also signed a RMB100-billion bilateral currency swap agreement with Indonesia. In addition, China has also signed bilateral currency swap agreements with countries such as Vietnam and Myanmar.

6.3 Changes in China’s Economic Relations with Other Asian …

133

Efforts to promote the establishment of the free trade area as scheduled and major cuts to tariffs on consumer goods. As early as in 2001, an expert team responsible for the issue of China–ASEAN integration had stated in a report that over-dependence on external markets by China and ASEAN could easily lead to an unstable internal economy, and that efforts to establish a common market can help to enhance the selfsufficiency of the regional economy and thus benefit both parties. The ASEAN–China Free Trade Area (ACFTA) was officially established on Jan 1, 2010 after efforts by both parties. The establishment of ACFTA at a time when most of the key economies in the world were still recovering from the crisis is highly significant: the total value of bilateral trade in had grown 23.9% to more than USD360 billion in 2011. In 2012, China also implemented zero-tariff on so-called “Track Two Products” from ASEAN and at the same time reduced the quantum of tariffs on general sensitive products. As shown in Table 6.7, compared to China’s preferential tax structure for ASEAN in 2005, the new structure implemented on Jan 1, 2012 has included tax reductions on the majority of consumer goods, meaning that consumers on both sides were henceforth able to have access to more value-for-money products. Intertwined market is a key developmental target for China–ASEAN trade relations henceforth. The consolidation of internal markets on both sides can help China and ASEAN to better withstand various external risks and promote autonomous growth as well as change the traditional export-oriented division of labor in East Asia and promote the consolidation of the East Asia market, and thus facilitate non-economic cooperation between the two. In order to further promote the development of China–ASEAN trade relations, in 2010 China proposed the new objectives of USD500 billion worth of trade and a two-way people flow of 15 million visits within the following 5 years as well as the building of surface transport interconnectivity within ten to fifteen years and the enrollment of 100,000 ASEAN and Chinese students in each other’s educational institutions by 2020, etc.

References Li, X. (2002). A relook at non-traditional security issues in China’s surrounding economic environment. Inquiry into Economic Issues. No. 9. Park, D., & Shin, K. (2009). The People’s Republic of China as an engine of growth for developing Asia: Evidence from vector auto regression models. ADB Economics Working Paper Series No. 175. Wu, Q., & Zhou, S. (2008). The impact of a rising Indian economy on China and the Asia region: a perspective based on CGE. Asia-Pacific Economic Review. No. 2. Zhao, J. (2013). Current changes to national economic development strategies in Asia: The background, trajectories, and impact. Asia-Pacific Economic Review. No. 3. Zhou, X. (2006). Looking at the development of Asian trade through trade balances. 2006 Report on Development in the Asia-Pacific. Beijing: Social Science Academic Press.

Chapter 7

Impact of China’s Rise on the Regional Market

According to Kaname Akamatsu’s flying geese paradigm (FGP), a similar “flying geese” formation has formed in East Asia in terms of development, with Japan at the head of the formation and Asia’s newly industrialized economies (NIEs) following close behind (i.e., the two “wings” of the formation) and China and ASEAN following right behind (i.e., the tail goose). In this model that involves the shifting of economic activity to other countries and industry upgrading, Japan manufactured goods technology-intensive products, while the NIEs manufacture capital-intensive and low-end technology-intensive goods. On the other hand, China and ASEAN nations produce the labor-intensive products. The various economies of East Asia have mostly abided by a basic division of labor in terms of industry to form a “flying geese” structure with Japan at the head, followed by the Four Asian Dragons, and finally, China and ASEAN. With greater economic globalization and regional integration, after the 1990s the Japanese economy became mired in stagnation and recession, and the flying geese formation began to fall apart. In May 2001, Japan’s Ministry of Economy, Trade and Industry stated for the first time in its White Paper on International Economy and Trade for the year that the era of the “East Asian flying geese formation” headed by Japan had come to an end. The development of the flying geese formation had undoubtedly enhanced economic ties and integration between various East Asian nations/regions, thus laying the foundation for the formation of a regional production network in East Asia. The economic model for the East Asia region gradually shifted from one where the division of labor occurred vertically between industries to one where the division of labor occurred within industries and for various products. Division of labor between industries retained the previous “complex-form” network system, thus creating an East Asian production network with multiple intertwining value chains (Lin et al., 2012a).

© Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_7

135

136

7 Impact of China’s Rise on the Regional Market

7.1 New Trends in Trade Development in East Asia With continued economic development and falling costs of service and contact, goods production has been broken down into various value-chain components and split across various countries and regions in order to harness the strengths of various locales for the best-possible production costs. This fragmentation of production has given rise to an international production network (An & Yang, 2012). The rise of the value of the Japanese yen in the later part of the 1980s led Japanese enterprises to establish production bases elsewhere in East Asia by means of direct investment for goods destined for the U.S. market. Many developing nations in Asia also implemented economic policies designed to encourage the processing of goods meant for export, such as various measures to facilitate and attract investments by foreign enterprises. These measures include the relaxing of restrictions on foreign ownership and on capital inflows, the encouraging of foreign investment, and efforts to attract multinational companies (MNCs) to establish their production networks in their respective countries. In terms of customs taxation, these nations adopted a two-track approach, that is, the imposition of higher tariffs on ordinary imported goods in order to protect domestic industry while at the same time using tax refund measures for exports as well as monetary incentives such as tax cuts or waivers for [goods] meant for export processing and imports of intermediate goods and parts and components. Export processing zones of various types were established to promote the country’s participation in the processing trade and the product division of labor, thus also facilitating the integration of the country into the regional production network. Thus, the export-oriented development strategy and the investment and trade policies of East Asian economies became the institutional foundation for the formation of East Asia’s regional production network. After the 1990s, the Japanese economy became mired in stagnation and recession, and changes began to occur with what was previously a clear division of labor. China’s imports from the region steadily increased, while Japan’s imports from the region showed a clear pattern of decline (Li & Fu, 2010). Tables 7.1, 7.2 and 7.3 show the changes in the proportions of exports sold to Japan, China and the U.S. by other Asian economies between 1995 and 2012. As of 2012, although Japan and the U.S. continue to account for much of the exports from East Asian economies (South Korea and the six ASEAN economies), their respective shares have been on a significant decline in the last 10 years. For the six ASEAN nations, apart from the Philippines that saw their proportion of exports (total Filipino exports) to the Japan rise, the remaining five nations and South Korea saw their exports (as a proportion of their respective total national exports) to Japan shrink. For the six ASEAN nations, apart from Vietnam that saw their proportion of exports to the U.S. (as a proportion of total Vietnamese exports) rise, the remaining five nations as well as Japan and South Korea all saw their exports (as a proportion of their respective total national exports) to the U.S. shrink. At the same time, China’s share of exports from other Asian economies has risen dramatically. Important changes have occurred in China’s and

7.1 New Trends in Trade Development in East Asia

137

Table 7.1 Changes in east Asian exports to Japan Unit: % Year

1995

2000

2005

2008

2009

2010

2011

2012

South Korea

12.98

11.85

8.42

6.62

5.83

5.98

7.06

7.03

Indonesia

27.02

23.20

21.07

20.25

15.94

16.34

16.57

15.86

Malaysia

12.48

13.02

9.35

10.76

9.65

10.46

11.65

11.81

Singapore

7.80

7.53

5.46

4.92

4.54

4.64

4.47

4.57

Thailand

15.74

14.74

13.60

11.30

10.31

10.51

10.72

10.23

The Philippines

15.76

14.67

17.47

15.68

16.17

15.16

18.40

19.00

Vietnam

25.99

17.78

13.38

13.51

11.00

11.07

11.61

12.04

ASEAN-6

13.84

13.32

10.98

10.58

9.38

9.64

10.12

10.03

2011

2012

Source ADB, key indicators for Asia and the Pacific, 2013

Table 7.2 Changes in east Asian exports to China Unit: % To China

1995

2000

2005

2008

2009

2010

Japan

4.95

6.34

13.44

15.96

18.85

19.39

19.63

18.02

South Korea

6.96

10.69

21.69

21.41

23.23

24.80

23.86

24.34

Indonesia

3.83

4.45

7.78

8.49

9.87

9.95

11.27

11.40

Malaysia

2.56

3.09

6.60

9.55

12.20

12.53

13.12

12.64

Singapore

2.33

3.89

8.60

9.17

9.73

10.32

10.37

10.69

Thailand

2.73

4.07

8.27

9.11

10.58

11.11

11.79

11.72

The Philippines

1.20

1.74

9.89

11.13

7.55

11.04

12.66

11.84

Vietnam

6.44

10.61

9.95

7.74

8.58

10.47

11.98

12.95

ASEAN-6

2.68

3.85

8.14

9.15

10.21

10.89

11.52

11.61

Source ADB, key indicators for Asia and the Pacific, 2013

Japan’s positions in East Asian regional trade, and [these changes] are a reflection of changes in the two nations’ positions in the regional division of trade labor. There is a substantial amount of trade in parts in East Asia trade, and the growth in this area has been greater than growth in the trade of end products. As the advanced economies possess technological and capital advantages, they typically engage in the design and development of products as well in the manufacturing of key components. On the other hand, developing nations tend to engage in labor-intensive processing and assembly work due to their lower labor costs (Lin et al., 2012b). Assembly work is now shifting towards low-wage Asian countries, the product division of labor that this involves is what is driving the development of the East Asian production network. In Table 7.4, we see the changes in East Asian economies’ export structure between 2000 and 2012 based on the BEC classification. There has been no much change in Japanese exports of parts and components between 2006 and 2012 at around the

138

7 Impact of China’s Rise on the Regional Market

Table 7.3 Changes in east Asian exports to the U.S. Unit: % To the U.S.

1995

2000

2005

2008

2009

2010

2011

2012

China

16.61

20.93

21.42

17.69

18.40

17.95

17.08

17.18

Japan

27.51

30.09

22.85

17.75

16.39

15.61

15.50

17.74

South Korea

18.53

21.89

14.54

10.90

10.13

10.61

10.03

10.66

Indonesia

13.90

13.66

11.54

9.55

9.35

9.06

8.11

7.85

Malaysia

20.77

20.54

19.69

12.50

11.01

9.55

8.28

8.67

Singapore

18.25

17.29

10.40

7.13

6.55

6.51

5.43

5.51

Thailand

16.74

21.32

15.39

11.42

10.95

10.47

9.80

9.94

The Philippines

35.75

29.84

18.02

16.72

17.52

14.65

14.75

14.24

3.02

5.06

18.26

18.96

19.85

20.39

18.23

17.05

18.61

18.90

14.35

10.63

10.19

9.59

8.58

8.73

Vietnam ASEAN-6

28% level (of total exports). Similarly, there has not been much change in Japanese exports of capital goods, which account for 22% of all exports. Therefore, the export of parts and components together with capital goods makes up over half of Japan’s total exports. Japan exports fairly little consumer goods compared to other types of products, and the proportion of such exports has also been on the decline, from 6.5% in 2005 to 4.7% in 2012. South Korea has seen changes similar to Japan’s in terms of the proportion of parts and components, capital goods, and consumer goods exported. The export of parts and components together with capital goods makes up around 50% of all exports by South Korea. South Korea also exports fairly little consumer goods compared to other types of products, and the proportion of such exports has also been on the decline, from 6.7% in 2005 to 4.1% in 2012. Parts and components are also a highly significant export for ASEAN nations. Apart from Indonesia and Vietnam, although Malaysia has seen the share of parts and components in total exports slide in recent years the share is still as high as 29% in 2010 and 25.3% in 2012. The share of such exports was greater than 40% of total exports for Singapore between 2000 and 2006, and fell below the 36% level after 2011. Exports of parts and components made up more than 50% of the Philippines’ total exports between 2000 and 2006, and declined to 31% in 2010 but rebounded to 41.3% in 2012; in Thailand, such exports made up more than 20% of all exports prior to 2007 and fell to 17.4% in 2012. The export of parts and components by the six ASEAN nations made up as much as more than 30% of all exports between 2000 and 2006. This figure fell to 26.3% by 2010 and further to 24.9% in 2012. The export of consumer goods is not a highly significant sector for the six ASEAN nations except for Thailand and Vietnam. There has not been significant changes in this area either. Consumer goods make up a very large part of Vietnam’s exports at nearly 50% of total exports; Thai exports of consumer goods have hovered at the 23% level, while in Indonesia exports of consumer goods (as a percentage of total imports) have been

7.1 New Trends in Trade Development in East Asia

139

Table 7.4 Changes in exports by east Asian economies according to the BEC classification, 2000– 2012 Unit: % Country

Product

2000 2005 2006 2007 2008 2009 2010 2011 2012

Japan

Raw materials

19.4

22.8

23.4

23.8

24.4

26.8

26.3

27.1

26.6

Parts and 31.7 components

29.6

28.5

27.7

26.6

28.7

28.5

27.9

28.3

Capital goods

26.5

22.6

22.1

21.5

21.8

20.5

21.9

23.2

22.3

Consumer goods

6.8

6.5

6.1

5.8

5.5

5.7

4.9

4.7

4.7

Raw materials

27.2

25.2

25.5

25.8

26.4

26.2

26.3

27.7

27.9

Parts and 27.7 components

26.9

25.9

26.4

24.0

24.4

26.9

24.8

25.7

Capital goods

21.6

26.3

27.6

27.5

29.1

32.4

29.2

27.0

24.5

Consumer goods

11.3

6.7

5.4

4.7

4.3

4.7

4.3

4.1

4.1

Raw materials

58.1

64.8

67.3

69.7

72.1

69.6

72.0

74.6

71.7

Parts and components

8.7

8.4

7.1

6.7

6.3

6.3

6.0

5.5

6.0

Capital goods

8.1

6.4

5.8

5.1

4.7

6.2

4.7

4.1

4.2

Consumer goods

22.4

18.0

16.7

16.0

15.2

16.7

15.2

13.8

15.2

Raw materials

26.0

32.4

33.7

36.9

41.8

38.5

40.6

45.1

43.2

Parts and 40.0 components

32.3

30.9

30.1

18.1

30.4

29.0

26.1

25.3

Capital goods

18.9

19.8

20.4

18.0

14.2

14.8

13.5

11.6

12.5

Consumer goods

12.3

11.2

10.5

10.6

10.0

12.3

12.5

11.9

11.6

Raw materials

13.4

17.4

16.7

16.4

15.0

16.3

16.5

17.4

18.0

Parts and 44.2 components 24.1 Capital goods

42.9

44.4

42.7

39.8

41.5

41.3

35.9

35.7

16.9

14.4

12.8

11.9

11.7

11.1

11.4

11.6

7.2

7.6

8.5

7.6

8.7

8.4

8.0

8.5

South Korea

Indonesia

Malaysia

Singapore

Consumer goods

8.2

(continued)

140

7 Impact of China’s Rise on the Regional Market

Table 7.4 (continued) Unit: % Country

Product

2000 2005 2006 2007 2008 2009 2010 2011 2012

Thailand

Raw materials

23.2

28.3

29.2

30.2

30.3

31.2

31.9

36.0

33.0

Parts and 27.0 components 13.2 Capital goods

21.3

21.3

21.7

19.1

18.8

19.2

18.0

17.4

17.8

17.9

18.3

18.1

16.9

17.5

15.2

18.7

Consumer goods

31.6

26.8

25.0

23.4

24.4

26.3

23.8

23.6

23.4

8.4

11.0

15.1

15.6

17.5

16.2

17.3

24.6

23.5

Parts and 60.3 components

56.1

53.7

49.3

47.2

46.3

31.0

30.9

41.3

Capital goods

15.7

18.1

15.6

20.6

20.3

23.4

13.7

11.4

19.8

Consumer goods

14.4

13.0

13.0

12.1

12.2

13.1

7.9

10.4

14.3

Raw materials

38.1

39.7

41.0

39.0

39.8

33.3

31.5

32.3

5.9

4.9

5.5

5.8

5.7

5.9

6.6

6.6

2.2

3.5

4.3

4.7

5.4

7.2

8.6

12.2

Consumer goods

49.1

50.3

47.6

48.6

47.1

51.3

50.9

46.1

Raw materials

25.0

29.7

30.5

31.7

33.2

32.6

33.7

37.1

35.8

Parts and 35.3 components

31.2

31.0

29.6

24.9

27.4

26.3

23.1

24.9

Capital goods

17.2

15.7

14.7

13.9

12.5

12.8

11.7

11.0

12.4

Consumer goods

17.1

15.4

14.9

15.2

15.1

17.2

16.1

15.8

13.6

The Philippines Raw materials

Vietnam

Parts and components Capital goods

ASEAN-6

Note Classified according to the UN’s BEC product classification codes. Raw materials are 111 + 121 + 2 + 31 + 322; parts and components, 42 + 53; capital goods, 41 + 521; and consumer goods, 112 + 122 + 522 + 6. The table shows the export quantum of various product categories expressed as a percentage of the country’s total exports Source Table created using UN Comtrade Database

7.1 New Trends in Trade Development in East Asia

141

on the decline, falling from 22.4% in 2000 to 16.0% in 2007 and then to 15.2% in 2012. Tables 7.5 and 7.6 show the changes in East Asian economies’ exports to China and Japan respectively between 2000 and 2012 based on BEC product classification codes. The percentages shown for each product type is based on the total exports made by the country to China and Japan respectively. Japan’s exports of raw materials, parts and components, and capital goods to China as a proportion of its total exports in these categories have been on the rise over the years. In 2000, the percentages were 13.7, 6.2, and 4.9% respectively, and these figures rose to 23.2, 18.0, and 13.0% in 2007 and further to 23.7, 20.2, and 16.8% in 2012. South Korea’s exports of raw materials, parts and components, and capital goods to China as a proportion of its total exports in these categories have also been on the rise over the years. In 2000, the percentages were 22.3, 7.6, and 4.9% respectively, and these figures rose to 31.2, 30.0, and 15.1% in 2007 and further to 30.2, 31.4, and 23.7% in 2012. We also see similar changes in the proportion of raw materials, parts and components, and capital goods exported to China by the six ASEAN nations. In 2000, exports of raw materials, parts and components, and capital goods by the six ASEAN nations to China made up 7.8, 3.0, and 1.9% of their total exports for each category respectively. By 2007, these figures had risen to 11.7, 11.4, and 8.5%, and they rose further to 15.4, 13.0, and 10.8% in 2012. In particular, the proportion of Malaysian exports of parts and components to China to total exports in this category rose from 2.4% of total exports in 2000 to 11.7% in 2007 and 18.4% in 2012; Singapore’s exports of parts and components to China rose from 3.7% of total exports in this category in 2000 to 12.5% in 2007 and 13.6% in 2012. Filipino exports of parts and components to China rose from 1.5% of total exports in this category in 2000 to 13.9% in 2007 and then declined to 10.9% in 2012; Vietnam’s exports of parts and components to China rose from 0.8% of all exports in this category in 2000 to 1.9% in 2007 and 12.2% in 2011. East Asian exports to Japan between 2000 and 2012 have seen the opposite trend, however. South Korea’s exports of raw materials, parts and components, and capital goods to Japan as a proportion of its total exports in these categories have been on the decline over the years. In 2000, the percentages were 9.0, 11.4, 7.1% respectively, and these figures fell to 8.6, 7.3, 4.8% in 2007 and further to 9.7, 4.6, and 4.6% in 2012. Exports of raw materials, parts and components, and capital goods by the six ASEAN nations to Japan as a proportion of its total exports in these categories have been on the decline over the years. In 2000, the percentages were 19.6, 10.3, and 10.6% respectively, and these figures fell to 15.3, 8.1, and 7.9% in 2007 and further to 14.3, 7.5, and 7.0% in 2012. China has, after more than 30 years of development and thanks to its labor advantages and potential market size, become the node for trade and investment as well as for an East Asian production network. The economic interdependency between East Asian economies is now centered on China instead on Japan, and has formed a three-way production and trade relationship between China, other East Asian nations, and the U.S (Ahn, 2004). That is, other East Asian nations and regions export intermediate goods to China and treat China as a platform of production for exports

142

7 Impact of China’s Rise on the Regional Market

Table 7.5 Changes in east Asian exports to China by category, 2000–2012 Unit: % Country

Product

2000 2005 2006 2007 2008 2009 2010 2011 2012

Japan

Raw materials

13.7

21.6

22.2

23.2

22.9

25.6

24.4

24.1

23.7

Parts and components

6.2

14.8

16.7

18.0

18.8

21.6

21.9

22.5

20.2

Capital goods

4.9

12.2

13.1

13.0

13.3

15.2

18.7

19.7

16.8

22.3

32.6

31.3

31.2

29.4

32.8

31.3

29.9

30.2

Parts and components

7.6

32.4

29.6

30.0

31.2

31.7

32.2

29.6

31.4

Capital goods

4.9

11.6

12.9

15.1

13.4

17.7

21.0

21.6

23.7

Raw materials

7.1

10.8

11.0

11.0

10.9

12.9

12.8

14.0

14.6

Parts and components

1.1

2.0

2.5

2.4

2.0

2.0

2.8

2.9

3.1

Capital goods

0.4

3.6

4.7

5.9

5.1

7.0

3.8

3.6

3.1

Raw materials

6.2

9.1

9.3

10.8

10.4

12.4

12.9

14.0

13.1

Parts and components

2.4

7.3

8.7

11.7

7.9

18.8

17.8

17.9

18.4

Capital goods

2.0

4.3

4.6

5.1

7.5

8.8

12.8

14.6

12.9

Raw materials

7.5

9.8

10.1

10.4

10.4

12.2

13.7

14.3

14.4

Parts and components

3.7

10.4

12.4

12.5

12.0

11.5

12.2

12.1

13.6

Capital goods

2.6

7.6

7.4

7.2

7.1

7.6

6.7

7.3

8.5

Raw materials

8.9

14.0

15.8

14.6

12.3

14.4

16.8

20.3

21.3

Parts and components

4.5

6.8

7.4

7.8

7.6

8.9

8.3

8.3

7.3

Capital goods

1.5

11.8

10.1

13.6

15.0

17.2

14.9

12.6

10.9

6.0

7.2

6.6

11.7

6.2

11.1

13.6

12.2

12.1

1.5

12.1

13.4

13.9

15.8

7.4

9.3

9.7

10.9

South Korea

Indonesia

Malaysia

Singapore

Thailand

Raw materials

The Philippines Raw materials Parts and components

(continued)

7.1 New Trends in Trade Development in East Asia

143

Table 7.5 (continued) Unit: % Country

Product Capital goods

Vietnam

ASEAN-6

2000 2005 2006 2007 2008 2009 2010 2011 2012 0.4

10.5

7.8

11.4

11.2

9.4

19.3

29.7

18.2

19.2

14.9

13.6

13.7

18.0

21.1

21.6

Parts and components

0.8

2.9

2.1

1.9

3.0

5.6

9.3

12.2

Capital goods

1.4

5.9

4.8

6.4

9.0

6.8

9.1

6.0

Raw materials

7.8

11.2

11.4

11.7

11.0

13.3

14.3

15.7

15.4

Parts and components

3.0

9.1

10.7

11.4

10.7

12.0

12.3

12.3

13.0

Capital goods

1.9

7.5

7.0

8.5

9.6

10.4

11.1

10.7

10.8

Raw materials

20.8

Source Table created using UN Comtrade Database

destined for the U.S. Clearly, the original three-way trade model in East Asia has undergone major changes. Previously, East Asian had economies received capital and imported capital goods from Japan, with the main market for their products being the U.S. In this old “triangle”, trade surpluses from trade with the U.S. made up for the trade deficits incurred with Japan. There has been a shift over time towards a new model where East Asian economies supply China with capital goods, and end products are exported by China to advanced economies such as the U.S. after assembly/processing. Although the East Asian production network has an important place in regional trade growth, and although the division of labor in this network has created a fairly complete system of production, the East Asian production network is highly export-oriented and the main driver for the development of this network is the demand for end products by advanced economies such as the U.S. and Europe.

7.2 China’s Position as Market for the Region 7.2.1 Trade Combination Degree (TCD) Between China and Other East Asian Countries The Trade Combination Degree (TCD) indicator is usually used to measure how close two economies are. In this volume, we will measure this indicator between Japan/China/the U.S., and other East Asian countries in order to understand how closely linked these three economies are with other Asian nations. The formula is as

144

7 Impact of China’s Rise on the Regional Market

Table 7.6 Changes in east Asian exports to Japan by category, 2000–2012 Unit: % Country

Product

South Korea

Raw materials

Indonesia

Malaysia

9.0

9.9

9.1

8.6

9.3

7.9

8.6

9.9

9.7

Parts and 11.4 components

7.1

6.5

7.3

6.7

5.8

5.1

4.9

4.6

Capital goods

7.1

6.2

7.4

4.8

3.7

3.2

3.1

3.7

4.6

29.8

24.9

25.4

24.5

24.0

18.8

19.2

19.2

18.4

Parts and 19.5 components

14.8

16.3

17.2

16.5

15.0

14.4

13.2

14.0

Capital goods

9.3

11.9

9.5

11.2

12.8

8.6

9.7

10.5

11.1

19.2

15.2

14.5

14.4

16.3

15.2

15.4

17.0

18.8

9.0

6.0

6.1

6.4

7.4

5.7

5.2

5.3

5.3

11.5

6.1

5.5

5.7

6.3

7.6

7.3

7.6

9.0

Raw materials

5.6

4.7

4.7

4.2

4.4

3.6

4.0

3.6

3.4

Parts and components

8.1

6.9

6.8

5.3

6.2

5.6

5.6

6.0

5.9

Capital goods

7.4

4.3

4.0

5.0

5.7

5.1

5.2

4.8

4.4

14.3

12.7

12.1

11.3

11.6

9.4

10.0

10.0

9.2

Parts and 14.5 components

16.8

15.8

15.1

14.4

12.6

12.5

11.3

11.1

Capital goods

13.3

10.8

10.0

8.7

7.8

7.7

6.9

7.6

6.7

21.5

18.9

29.0

27.6

26.1

28.3

25.2

27.7

28.8

Parts and 12.2 components

12.3

11.3

9.9

11.4

11.9

13.8

20.0

14.2

Capital goods

21.8

38.3

29.2

19.5

20.7

18.5

14.3

7.4

11.8

Raw materials

15.6

12.0

12.0

13.2

15.8

10.2

9.4

13.5

Parts and 14.4 components

36.9

42.4

41.7

45.9

42.8

39.5

33.8

Raw materials

Raw materials Parts and components Capital goods

Singapore

Thailand

Raw materials

The Philippines Raw materials

Vietnam

2000 2005 2006 2007 2008 2009 2010 2011 2012

(continued)

7.2 China’s Position as Market for the Region

145

Table 7.6 (continued) Unit: % Country

ASEAN-6

Product

2000 2005 2006 2007 2008 2009 2010 2011 2012

Capital goods

25.9

18.0

18.1

12.5

12.0

9.2

9.0

4.6

Raw materials

19.6

15.3

15.7

15.3

16.2

13.2

13.6

14.4

14.3

Parts and 10.3 components

9.0

8.8

8.1

9.0

8.0

7.9

8.3

7.5

Capital goods

9.2

7.9

7.9

8.2

8.0

7.1

6.5

7.0

10.6

Source Table created using UN Comtrade Database

follows: T C Ditc =

 X itc X it  Mct Mwt

Here, T C Ditc is the Trade Combination Degree between Country i and Country c in year t. (In this volume, i refers to Japan, China and the U.S.) X itc and X it stand for CountryI’s exports to Country c and Country I’s total exports in year t respectively, and X itc X it stands for exports by Country i to Country c as a proportion of Country I’s total exports. M ct and Mwt M  wt stand for Country c’s and the world’s total imports in year t respectively, and Mct Mwt stands for Country c’s imports as a share of total world imports in year t. If T C Ditc < 1, then trade relations between Country i and Country c are distant in the corresponding year; if T C Ditc = 1, then TCD between Country i and Country c match the world average in year t; if T C Ditc > 1, trade relations between Country i and Country c are close in year t. Tables 7.7, 7.8 and 7.9 show the TCD values for Japan, China and the U.S. vis-àTable 7.7 Trade combination degree (TCD) between Japan and other east Asian countries Country

1995

2000

2005

2008

2009

2010

2011

2012

South Korea

2.02

2.08

1.76

1.43

1.34

1.33

1.52

1.47

Indonesia

4.21

4.07

4.40

4.37

3.67

3.63

3.57

3.31

Malaysia

1.94

2.28

1.95

2.32

2.22

2.32

2.51

2.47

Singapore

1.21

1.32

1.14

1.06

1.04

1.03

0.96

0.95

Thailand

2.45

2.59

2.84

2.44

2.37

2.33

2.31

2.14

The Philippines

2.46

2.57

3.65

3.39

3.72

3.37

3.96

3.97

Vietnam

4.05

3.12

2.79

2.92

2.53

2.46

2.50

2.52

ASEAN-6

2.16

2.34

2.29

2.29

2.16

2.14

2.18

2.10

Source ADB, key indicators for Asia and the Pacific, 2013; UN Comtrade Database

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7 Impact of China’s Rise on the Regional Market

Table 7.8 Trade combination degree (TCD) between China and other east Asian countries Country

1995

2000

2005

2008

2009

2010

2011

2012

Japan

1.96

1.88

2.20

2.32

2.38

2.14

2.07

1.83

South Korea

2.76

3.16

3.54

3.11

2.93

2.74

2.52

2.48

Indonesia

1.52

1.32

1.27

1.23

1.25

1.10

1.19

1.16

Malaysia

1.02

0.91

1.08

1.39

1.54

1.38

1.39

1.29

Singapore

0.92

1.15

1.40

1.33

1.23

1.14

1.10

1.09

Thailand

1.08

1.20

1.35

1.32

1.33

1.23

1.25

1.19

The Philippines

0.48

0.51

1.61

1.62

0.95

1.22

1.34

1.21

Vietnam

2.55

3.14

1.62

1.12

1.08

1.16

1.27

1.32

ASEAN-6

1.06

1.14

1.33

1.33

1.29

1.20

1.22

1.18

Source ADB, key indicators for Asia and the Pacific, 2013; UN Comtrade Database

Table 7.9 Trade combination degree (TCD) between the U.S. and east Asian countries Country

1995

2000

2005

2008

2009

2010

2011

2012

China

1.13

1.11

1.33

1.34

1.45

1.41

1.39

1.36

Japan

1.87

1.59

1.42

1.35

1.30

1.22

1.26

1.41

South Korea

1.26

1.16

0.90

0.83

0.80

0.83

0.82

0.84

Indonesia

0.94

0.72

0.72

0.72

0.74

0.71

0.66

0.62

Malaysia

1.41

1.09

1.22

0.95

0.87

0.75

0.67

0.69

Singapore

1.24

0.91

0.65

0.54

0.52

0.51

0.44

0.44

Thailand

1.14

1.13

0.96

0.87

0.87

0.82

0.80

0.79

The Philippines

2.43

1.58

1.12

1.27

1.38

1.15

1.20

1.13

Vietnam

0.21

0.27

1.14

1.44

1.57

1.60

1.48

1.35

ASEAN-6

1.26

1.00

0.89

0.81

0.81

0.75

0.70

0.69

Source ADB, key indicators for Asia and the Pacific, 2013; UN Comtrade Database

vis the other East Asian economies. TCD between Japan and South Korea and the six ASEAN nations (with the exception of Singapore) are all greater than 1. This indicates that Japan has close trade ties with ASEAN. TCD for Japan–Indonesia, Japan– Philippines, and Japan–Vietnam are relatively high. However, the Japan–Indonesia and Japan–Vietnam TCD values have been declining over the years, while TCD between Japan and the Philippines has been on the rise. TCD between China and Japan and with South Korea and the six ASEAN nations (with the exception of Singapore and also the Philippines in a number of years) has been greater than 1. This indicates that Chinese enjoys close trade relations with Japan, South Korea, and ASEAN. However, TCD with the latter two is comparatively low compared to Japan, and TCD with South Korea is only higher than TCD between South Korea and Japan. This indicates that there is still room for development in terms of trade relations between China and these East Asian nations. With the exception if the

7.2 China’s Position as Market for the Region

147

China–Indonesia TCD that has been on the decline over the years, TCD between China and other ASEAN nations have essentially shown an upside-down “U-shaped” pattern over time. That is, TCD rose and peaked around the 2008 financial crisis and then subsequently declined. In the case of the U.S., TCD is only greater than 1 in the cases of China, Japan, the Philippines, and Vietnam in East Asia. TCD between the U.S. and the six ASEAN nations fell below 1 after 2005, indicating that trade relations between the U.S. and East Asian nations have been mainly strengthened through three-way trade with China and Japan. On the one hand, the results above show that ASEAN’s dependence on the China market has grown and indicate that China’s position as market for East Asian economies is growing. However, on the other hand, developing nations in East Asia are relying on both the import of parts and components and the export of end products. This sort of heavy production and trade dependence on external markets have made these developing economies particularly vulnerable in the face of external supply and demand shocks. Over-dependence on U.S. consumer demand has made East Asia ever more open to swings in Western economies. Fluctuations in demand from external nations and regions will also have a direct impact on demand for finished goods from East Asia, while the impact of changes in monetary, currency and fiscal policies implemented by external nations will also be transmitted to East Asia by means of the international market in goods and the global finance markets.

7.2.2 Trade Complementarity Between China and Other East Asian Countries We say that two countries enjoy trade complementarity when one country imports in great quantities a certain good that the other nation specializes in exporting. When two economies are highly complementary, the dismantling of trade barriers as well as large-scale production can bring significant benefits to both parties. Conversely, there is low trade complementarity between two countries when one country imports in great quantities a certain good that the other nation does not specialize in exporting. In such cases, there is limited room for developing trade between the two nations. Trade complementarity has been examined in some studies. For instance, Yu (2003) has selected specific goods within a country as a means of measuring comparative advantage, and multiplied this by another country’s import of the same goods (used to measure the country’s import disadvantage) in order to measure trade complementarity between the two. The greater the value of the result, the greater the trade complementarity between the two economies and the more room for trade partnership (which in turn drives even greater complementarity) between the two. Lu and Wang (2011) analyzed the points of competition and complementarity between China and Japan using indicators such as the TCD, market share, the Revealed Comparative Advantage (RCA) index, and the Grubel–Lloyd index. They found that China–Japan free trade is a kind of complementary trade relationship,

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7 Impact of China’s Rise on the Regional Market

where China’s exports are dominated by labor-intensive goods and Japan’s exports are dominated by capital- and technology-intensive goods. The potential for the optimization of bilateral trade structure between China and Japan is great, and the trade complementarities present are greater than trade competitiveness between the two. Lai et al. (2010) analyzed the structure of the electronic communications industry trade between two countries by calculating the trade competitiveness, trade complementarity, the intra-industry trade index and technological complexity of exports in industry trade between China and South Korea from 1992 to 2007, and found that China has become more competitive in the area of electronic communications products over time, and its exports have become more high-tech. The technological gap between China and South Korea has gradually narrowed, and in fact for some products China is already more competitive than South Korea. There is little overlap between the two countries’ stronger industries is low, and trade complementarity between the two is (a) greater than competition, and (b) becoming greater. Complementarity is also shifting from one-way complementarity to a two-way relationship. In this section, we will use the import complementary index to assess the potential for trade complementarity and mutual promotion between China and other East Asian economies in the global context. The formula for the index, a measure of the degree of trade complementarity between China and other East Asian economies, is as follows:  1   m ic − xi j  2 i=1 n

T C I cj = 1 −

TCI cj stands for the import complementarity index value, with m ic being import i as a proportion of total Chinese imports and xi j being the export i as a proportion of total East Asian economy j’s exports. If imports of Chinese product i equal East Asian economy j’s product i, then the result will be 1, indicating that China’s imports and the East Asian economy j’s exports are perfectly complementary. If imports of Chinese product i and exports of the East Asian economy j’s product i do not match at all, then the value will be 0. In Table 7.10, we see the degrees of trade complementarity between Chinese imports and other East Asian nations between 1995 and 2012. In terms of absolute trade complementarity index values, trade complementarity is strongest between Chinese imports and trade with Japan and South Korea at above 0.5. This indicates that there is stronger complementarity between Chinese imports and Japan and Korea. Compared to Japan and South Korea, there is a lower degree of trade complementarity between Chinese imports and other ASEAN nations. However, trade complementarity is rising in this area, particularly in the cases of Malaysia and Singapore. The trade complementarity indices for these two countries have risen from 0.39 and 0.42 respectively in 1995 to 0.59 and 0.55 in 2006. These values have also been maintained at above the 0.5 level (except in 2008 with Malaysia). In addition, the trade complementarity index with Thailand also reached 0.51 in 2000 but later dipped to 0.45 in 2010 and further to 0.43 in 2012.

7.2 China’s Position as Market for the Region

149

Table 7.10 Trade complementarity between Chinese and other east Asian countries (1995–2012) Country

1995

2000

2005

2006

2007

2008

2009

2010

2011

2012

Japan

0.51

0.57

0.54

0.53

0.52

0.50

0.53

0.52

0.52

0.50

South Korea

0.50

0.57

0.59

0.59

0.57

0.53

0.54

0.55

0.51

0.51

Indonesia

0.30

0.43

0.40

0.40

0.41

0.38

0.37

0.36

0.36

0.36

Malaysia

0.39

0.50

0.58

0.59

0.58

0.48

0.54

0.54

0.52

0.53

Singapore

0.42

0.48

0.55

0.55

0.54

0.51

0.51

0.51

0.50

0.51

Thailand

0.38

0.51

0.51

0.50

0.48

0.45

0.45

0.45

0.44

0.43

The Philippines

0.25

0.33

0.41

0.44

0.42

0.41

0.42

0.40

0.40

0.43

Vietnam

0.18

0.25

0.25

0.29

0.30

0.31

0.31

0.31

0.32

0.35

Source UN Comtrade Database

7.2.3 Trade Competitiveness Between China and Other East Asian Countries Scholars have had varying definitions for international industry competition, and have thus designed different indicators for the assessment of such competition. Examples include the Revealed Comparative Advantage (RCA) coefficient that refers to the ratio of the share of a country’s specific industry in the total export volume of the country to global industry share as a proportion of total world exports. Using the RCA value, one can identify the industries within a country with stronger export competitiveness and thus better understand a certain country’s comparative advantages in international trade. The Competitive Advantage (CA) coefficient refers to the remainder from deducting a certain industry’s import disadvantages from its export advantages within a certain country. This value is regarded as indicative of the industry’s true competitive advantage. The Trade Specialization Coefficient (TSC), which can also be called the Comparative Net Exports Coefficient, is the ratio of the difference between a country’s imports and exports to total imports and exports. The range of this coefficient is −1 to 1. The closer the coefficient is to 0, the closer the country’s competitiveness to the average level. The closer it is to −1, the weaker its competitiveness, and the closer the value is to 1, the more competitive the country is. The Trade Specialization Index (TSI) refers to the ratio of a specific industry’s exports to another country to the sum total of trade between the two countries. It uses the Trade Competitiveness coefficient to measure the trade division of labor and relative trade competitiveness between two trade partners. Some studies have used other indicators to measure export competitiveness between two countries in the global context, such as the coefficient of specialization (CS) or the coefficient of conformity (CC) (Qureshi & Wan, 2008). The formula is:  1   xic − xi j  2 i=1 n

C S cj = 1 −

(7.1)

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7 Impact of China’s Rise on the Regional Market

 CC cj = 

xic × xi j

i

(xic )2 ×

i





xi j

(7.2)

2

i

Here, C Scj and CCcj stand for CS and CC respectively, and xic and xi j stand for the share of export i in economy c’s total exports and in economy j’s total exports. If economy c and economy j have the same export structure then the resulting coefficient value will be 1, indicating that economy c and economy j are intensely competitive in terms of exports. If economy c and economy j have completely dissimilar export structures, then the resulting coefficient value will be 0. In this section, we use the three-digit Standard International Trade Classification (SITC) codes to calculate CS and CC. In Table 7.11, we look at the various degrees of trade competitiveness between China and other East Asian countries in 2000–2012. No matter it be the CS or the CC, we see that among the East Asian nations there is a greater degree of trade competitiveness in exports between China and the following countries: South Korea, Thailand, and Malaysia. Trade competition with exports from Indonesia and Singapore is on the decline, while trade competition with exports from Japan, South Korea, and Vietnam is on the rise. Table 7.11 Trade competitiveness between China and other east Asian countries (2000–2012) Year

2000 2005 2006 2007 2008 2009 2010 2011 2012

Specialization Japan coefficient South Korea

0.41

0.41

0.42

0.44

0.44

0.46

0.46

0.46

0.46

0.46

0.50

0.50

0.51

0.50

0.50

0.51

0.50

0.49

Indonesia

0.50

0.44

0.43

0.41

0.38

0.36

0.37

0.35

0.32

Malaysia

0.43

0.50

0.51

0.51

0.49

0.44

0.47

0.45

0.43

Singapore

0.40

0.46

0.44

0.42

0.41

0.39

0.39

0.37

0.37

Thailand

0.54

0.57

0.58

0.58

0.57

0.54

0.54

0.54

0.52

The Philippines 0.36

0.44

0.43

0.44

0.40

0.40

0.43

0.42

0.37

Vietnam

0.38

0.39

0.38

0.39

0.41

0.41

0.42

Japan

0.39

0.36

0.35

0.34

0.32

0.33

0.37

0.35

0.36

South Korea

0.50

0.60

0.59

0.58

0.58

0.57

0.59

0.57

0.53

Indonesia

0.46

0.33

0.31

0.26

0.22

0.18

0.19

0.16

0.13

Malaysia

0.49

0.61

0.63

0.66

0.62

0.47

0.52

0.53

0.46

Singapore

0.45

0.52

0.49

0.46

0.43

0.39

0.39

0.40

0.37

Thailand

0.60

0.72

0.74

0.71

0.71

0.65

0.66

0.65

0.58

The Philippines 0.35

0.45

0.44

0.44

0.49

0.49

0.55

0.56

0.37

Vietnam

0.25

0.24

0.25

0.29

0.28

0.35

Consistency coefficient

0.34

Source Table created using UN Comtrade Database

7.2 China’s Position as Market for the Region

151

7.2.4 China’s Role in East Asia as a Market from the Angle of End Products If we wish to examine China’s true capacity in absorbing products from the region we must examine in close detail whether China is capable of being a market for end products in East Asia. That is, we must examine China’s domestic demand. Li and Fu (2010) are of the opinion that the dependence on external markets for economic growth in East Asia is a key challenge for the region. Whether East Asian economies will be able to sustain stable levels of growth will be in very large part determined by whether there is a market for the region’s goods internally, one that is capable of replacing the U.S. Although China is currently serving as a market for the East Asia market at the current stage there is still a significant gap between China’s share of East Asian exports and the share taken up by the U.S. It is not yet ready to replace the U.S. as the largest market for end products from East Asia. China will need to, while maintaining stable and high economic growth, make adjustments to its economic structure and growth model and work actively to grow domestic demand. This will be a long-term and challenging process. Table 7.12 shows the changes in the quantities of final consumer products exported by various East Asian economies (as a proportion of total exports in the same categories) to China, Japan and the U.S. between 2000 and 2012. We can see that in absolute terms the proportion of end products exported by East Asian economies to China is generally lower than the proportion exported to Japan and the U.S. However, in terms of changes, the proportion of end consumer products exported by East Asian economies to China is on the rise. Source Table created using UN Comtrade Database East Asian exports of end products to Japan and the U.S. as a proportion of total exports have been on a decline. South Korea’s exports of consumer products to China, Japan and the U.S. as a proportion of total exports for the category shifted from 4.35, 23.17, and 28.92% respectively in 2000 to 9.75, 15.42, and 22.00% in 2006 and then to 12.56, 18.61, and 15.70% in 2012. China is significantly closing in on the gap with Japan and the U.S. Exports of consumer products by the six ASEAN nations to China, Japan and the U.S. as a proportion of total exports for the category shifted from 1.71, 14.70, and 29.32% respectively in 2000 to 3.44, 9.79, and 28.86% in 2006 and then to 5.02, 12.05, and 17.50% in 2012. The proportion of ASEAN consumer goods exported to the U.S. is on a visible decline.

7.3 Interplay Between China and the U.S. in the Asian Export Market To examine the two-way impact exports by East Asian and South Asian nations (hereafter: “Asian countries”, including: Japan, South Korea, Malaysia, Indonesia, Thailand, the Philippines, Singapore, India, and Pakistan) to the U.S. and to China,

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7 Impact of China’s Rise on the Regional Market

Table 7.12 Changes in the proportion of consumer goods exported by east Asian economies to China, Japan and the U.S. Unit: % Year

2000

2005

2006

2007

2008

2009

2010

2011

2012

South Korea

China

4.35

7.77

9.75

10.83

10.53

9.78

11.78

12.86

12.56

Japan

23.17

16.66

15.42

14.17

15.16

17.83

17.16

17.57

18.61

U.S.

28.92

23.63

22.00

20.61

19.96

17.69

16.61

15.48

15.70

Indonesia

China

0.61

1.05

1.07

1.80

1.94

1.80

2.13

3.38

3.61

Japan

12.44

9.33

8.83

7.96

7.52

7.94

7.24

7.49

8.41

U.S. Malaysia

Singapore

Thailand

32.32

35.69

37.03

35.15

33.12

32.65

32.14

30.17

28.33

China

0.56

1.90

2.36

1.87

1.93

1.91

1.96

2.04

2.63

Japan

15.17

8.21

6.68

6.01

6.52

8.32

10.80

11.54

7.56

U.S.

14.45

29.07

26.53

24.56

19.08

17.60

15.79

14.81

13.79

China

2.56

6.71

8.04

9.49

9.43

8.57

8.90

10.68

8.56

Japan

10.26

6.81

6.10

8.65

6.28

6.49

9.31

9.41

10.77

U.S.

18.61

17.17

20.74

16.63

10.10

8.01

9.66

8.64

9.18

China

1.25

2.66

3.20

2.99

2.40

3.79

4.21

4.75

5.01

Japan

17.04

15.34

13.82

12.89

12.68

13.56

14.15

14.24

14.76

U.S.

16.77

33.20

27.32

26.82

23.07

19.90

19.31

18.60

17.23

The Philippines

China

1.03

1.11

1.00

0.97

1.09

1.05

1.92

3.09

2.57

Japan

12.90

11.35

8.72

10.11

12.02

13.03

12.06

14.25

28.32

U.S.

57.16

50.25

49.53

44.36

37.91

36.30

37.40

35.85

30.20

Vietnam

China

6.42

2.94

2.72

2.88

2.59

3.50

3.16

4.83

Japan

19.59

12.21

10.78

8.89

8.41

8.85

8.52

9.29

U.S.

7.49

29.86

30.99

33.83

30.99

31.04

31.13

29.54

China

1.71

2.93

3.44

3.83

3.50

3.90

4.11

5.16

Japan

14.70

11.10

9.79

9.47

9.06

9.78

10.49

10.89

12.05

U.S.

29.32

28.45

28.86

25.94

22.75

21.92

21.66

20.52

17.50

ASEAN-6

5.02

Note The end products included here only refer to consumer goods, with BEC codes 112 + 122 + 522 + 6. The table shows the proportion of final consumer products exported by various East Asian economies to China, Japan and the U.S. compared to total exports in the same categories

we have established the following regression equation: ex2ch it = γ0 + γ1 ex2usit + γ2 gdpit + εit

(7.3)

Here, i stands for the aforementioned nine Asian countries, with i standing for time. The period used here is 1992–2012, and ex2ch and ex2us stand for Asian exports to China and the U.S. (log value) respectively, adjusted using the GDP deflator (2005 = 100). gdP stands for the Asian nations’ actual GDP (2005 = 100) (log value).

7.3 Interplay Between China and the U.S. in the Asian Export Market

153

As the aforementioned variables use panel data from a comparatively long period of time, in this section for our estimates of Eq. (7.3) we have used the “Dynamic Heteroscedastic Panel Model” to obtain the pooled mean group (PMG) (Pesarnn, Shin and Smith) or MG value (Pesarnn and Smith). In calculating the PMG and MG values, we have also considered the fact that the variables are non-stationary as well as the fact that there may be cointegration relationships present. Below is our Autoregressive Distributive Lag (ARDL(p; q1 , …, qk ) dynamic panel model: yit =

p 

λis yit−s +

s=1

q 



δis xit−s + μi + εit

(7.4)

s=0

Here, i = 1, 2, …, N being the members of the group; t = 1, 2, …, with T being the time period; x it stands for K× first-order explanatory variables, with δit standing for the corresponding K× first-order coefficient; λis stands for the scalar coefficient variable; μi stands for the individual effect terms; and εit stands for the error term. If the variable in Eq. (7.4) is I (1) process and a cointegration relationship exists, when calculating Eq. (7.4) we would typically first rewrite the equation into the corrected equation below: yit = αi (yit−1 − θi xit ) +

p−1 

∗ λis yit−s +

q−1 

s=1

δis∗ xit−s + μi + εit

(7.5)

s=0

Here, αi = − 1 −

p  s=1

q 



δis

s=0

, λis , θi =  p  1− λis

∗ λis

=−

p 

λim

m=s+1

s=1

 p

s = 1, δis = −

δim

m=s+1

The estimate of the parameter αi reflects the correction speed of the item corrected. If αi = 0, it means that there is no long-term relationship between the variables. When the parameter is a negative figure, it means that the variable is regressing towards long-term equilibrium. The parameter θi includes the information about the long-term relationship between variables. When using PMG with Eq. (7.5), differing intercepts, short-term coefficients and error variances are allowed with various sections. However, the long-term coefficient for the various sections have to be the same. This way we will be able to obtain the PMG and the average short-term coefficient value. If we are to use the MG method, then we are allowed to use different parameters for various sections with no limitations. Under the null hypothesis where PMG and MG are both consistent

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7 Impact of China’s Rise on the Regional Market

estimators, if the long-term coefficients of each section are indeed equal then the PMG estimator is an even more effective estimate. Pesarnn, Shin and Smith have stated that the Hausman statistic can be used as test for the consistency of the PMG estimate:

−1 ˆ qˆ ∼ x 2 (k) H = qˆ  V ar (q) Here, qˆ = θ M G − θ P M G indicates the difference between PMG and MG; and V ar (q) ˆ indicates the corresponding covariance matrix. If the null hypothesis is rejected, it means that the PMG estimator is not a consistent estimator. Before conducting cointegration analysis of the panel, we have to test for the stationarity of the data. That is, we must first conduct a unit root test. Table 7.13 shows the unit root test results for various variable panels. The null hypothesis for the LLC, IPS, and ADF tests is that the variable is a unit root process, and the levelvalue LLC, IPS, and ADF tests do not reject the hypothesis that the ex2ch, ex2us, and gdp sequences are unit root processes. On the other hand, the first-order-difference LLC, IPS, and ADF tests all reject at 1% significance the null hypothesis that the ex2ch, ex2us, and gdp sequences are non-stationary. Thus, the ex2ch, ex2us, and gdp sequences are 1 (1) processes. We can conduct cointegration tests on 1 (1) sequences. Table 7.14 shows the results of the Johansen Fisher test between the ex2ch, ex2us, and gdp sequences. The Johansen Fisher trace test and largest eigenvalue test values all indicate that there is one cointegration relationship between the ex2ch, ex2us, and gdp sequences. Table 7.13 Results of panel data unit-root test for variables Level value LLC

First-order difference LLC

IPS

ADF

ex2ch

0.19

1.69

7.84

−7.66***

−6.26***

66.18***

ex2us

−1.15

−1.12

25.33

−6.82***

−6.80***

72.04***

0.16

−0.32

18.31

−7.68***

−5.36***

58.16***

gdP

IPS

ADF

Note *** indicate the significance levels of 1% respectively. The body-intercept and time-trend terms were included in the test. LLC stands for the W-value of Levin, Lin and Chu, while IPS stands for the W-value of Im, Pesaran and Shin; ADF stands for Fisher’s chi-square test. The null hypothesis for the LLC, IPS, and ADF tests is that the variables are non-stationary

Table 7.14 Co-integration test results between the variables ex2ch, ex2us, and gdp Trace test

Maximum eigenvalue test

Fisher statistic

Probability

Fisher statistic

Probability

None

52.66

0.00

47.40

0.00

At least one

20.75

0.29

21.57

0.25

At least two

14.67

0.68

14.67

0.68

7.3 Interplay Between China and the U.S. in the Asian Export Market

155

Below, first we use the PMG and MG calculation methods to calculate the longterm co-integration relationship between ex2ch, ex2us, and gdp. The results are shown in Table 7.15. Series (1) shows the results for ex2ch as explained variable for nine Asian countries. The Hausman statistic does not reject the hypothesis that there is a long-term co-integration homogeneity between ex2ch, ex2us, and gdp for Asian countries. At this point, the PMG values will be even more accurate. Here, the long-term coefficient for ex2us, the variable for exports to the U.S., is positive and significant. This indicates that Asian countries’ exports to the U.S. will promote export growth to China in the long run. The speed for the adjustment item is −0.194 and statistically significant, meaning that there is a long-term relationship between the variables in the co-integration equation and that the variables regress to equilibrium in the long term. The gdp coefficient for East Asian countries is positive and significant. Table 7.15 Interplay between Asian exports to the U.S. and exports to China (PMG and MG estimates) Variable

(1)

(2)

0.753***

0.785***

(9.15)

(8.86)

(3)

(4)

−0.469*

0.0853**

EC ex2us ex2ch

(−1.69)

(2.09)

2.237***

2.320***

−0.443

0.347*

(14.04)

(12.80)

(−0.64)

(1.90)

ec

−0.194***

−0.199**

−0.0667*

−0.256*

(−2.66)

(−2.35)

(−1.81)

(−1.86)

D.ex2us

0.109

0.169

(0.75)

(0.97) 0.114**

0.143***

gdp SR

D.ex2ch 2.344**

(2.57)

(2.86)

2.027***

1.826***

D.gdp

2.714*** (3.00)

(2.06)

(4.08)

(4.01)

Constant

−10.60***

−11.26**

2.814*

3.219*

(−2.65)

(−2.34)

(1.79)

(1.80)

Sample size

180

140

180

140

Dependent variable

D.ex2ch

D.ex2ch

D.ex2us

D.ex2us

Hausman statistic

2.10

2.79

1.18

0.48

Probability

0.35

0.25

0.55

0.78

Model selection

PMG

PMG

PMG

PMG

Note the value in brackets is the Z-value, and ***, **, and * stand for 1%, 5% statistical significance respectively

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7 Impact of China’s Rise on the Regional Market

This is in line with our theoretical assumptions. As domestic economies grow in East Asia, their exports to China will increase as well. In the short term, although the coefficient for D.ex2us is positive, it is not statistically significant. This indicates that East Asian nations’ exports to the U.S. will not have a significant effect in terms of promoting their exports to China in the short run. Series (2) does not include results from South Asian countries (i.e., India and Pakistan). The results of this calculation are similar to those of Series (1), indicating that East Asian countries’ exports to the U.S. will promote the growth of their exports to China in the long term. Series (3) shows the result when ex2us is used as the explained variable for nine Asian countries. Here, the long-term effect coefficient for the variable for exports to China, ex2ch, is statistically significant (at the 10% level) and is negative in value. This indicates that exports by Asian countries to China will lower exports growth to the U.S. in the long term. In the short term, the coefficient for D.ex2ch is positive and statistically significant, meaning that exports by Asian countries to China in the short term will promote the growth of their exports to the U.S. in the long term. Series (4) contains the results for Asian countries excluding South Asia (i.e., India and Pakistan). The results are different from those in Series (3): the long-term effect coefficient for the ex2ch variable is positive and statistically significant. This indicates that East Asian nations’ exports to China will promote their exports to the U.S. in the long run. The results above indicate that the impact of countries outside of Asia may have a different mutual impact with exports to China in the long term compared to exports to the U.S. To better understand this difference, in this section we have adopted Dumitrescu and Christophe’s (2011) method to conduct the Granger causality test on the corresponding panel variables as well as added Vietnam and Bangladesh to the sample. The formula for the Granger causality test is as follows (the following linear relationship model has been considered): yit = αi +

p 

γi(k) yi, t−k +

k=1

p 

βi(k) xi, t−k + εit

(7.6)

k=1

Here, x and y stand for the observed sample values for N individuals in period T,  p  with i = 1, 2 …, N, t = 1, 2, …, T; p stands for the lag level; γi = γi1 , ri2 , . . . , γi ;  1 2 p  βi = βi , βi , . . . , βi ; εit stands for random disturbance subject to normal distribution. Under the null hypothesis of homogeneous non-causality (Granger non-causality), the opposite hypothesis allows for the existence of instances where x is not y (not HNC) in individual groups. Further, there are also some instances where x is y (HNC). Thus, the HNC null hypothesis is defined as H0 : βi = 0 ∀i = 1, 2, . . . , N Its opposite hypothesis is defined as

(7.7)

7.3 Interplay Between China and the U.S. in the Asian Export Market

157

H1 : βi = 0 ∀i = 1, 2, . . . , N1 β = 0 ∀i = N1 + 1, 2, . . . , N

(7.8)

 Here, N 1 is unknown but satisfies 0 ≤ N1 N < 1. Per the null hypothesis above, Dumitrescu and Hurlin prove that:  Z NHTN C

=

 N  H NC W N T − p d N (0, 1), T, N → ∞ − → 2p

W NHTN C is average Wald statistic, i.e., W NHTN C =

1 N

N 

(7.9)

Wi,r ; W i,r is the Wald

i=1

statistic for the corresponding individual i under the null hypothesis H0 : βi = 0; T, N → ∞ indicates that first of all T → ∞, then N → ∞. When T is fixed and T > 5 + 2p:  Z˜ NHTN C

=

 T − 2 p − 5 T − 2 p − 3 H NC N × W N T − p d N (0, 1), N → ∞ − → 2p T − p − 3 T − 2p − 1 (7.10)

 In this section, we use the Z NHTN C  and Z˜ NHTN C statistics to conduct the Granger causality test on the panel sample.

Table 7.16 Results of the Granger causality test on Asian exports to China and to the U.S. Country

TUS − TCH P=1

TCH − TUS P=2

P=1 6.3755***

P=2

The Philippines

0.0627

5.2859*

36.1375***

South Korea

1.9659

26.2777***

2.2213

6.9859**

Malaysia

5.5082**

6.7072**

1.1504

3.926 5.4179*

Japan

8.3321

7.3197**

2.2277

Thailand

1.6099

4.2118

0.0802

0.777

Indonesia

4.5753**

9.5217***

2.2469

9.877***

Vietnam

0.9658

4.2925

Pakistan

1.2807

1.2344

Bangladesh

0.0068

2.3345

India

0.0466

0.7702

3.7605***

5.0714*

Z-value

1.8570*

3.8719***

3.4488***

5.0425***

H NC

0.1439 15.6157*** 0.9312

0.4443 10.9466*** 1.1429

Note the Z-value is derived by using Z N T . ***, **, * indicate the significance levels of 1%, 5% and 10% respectively. The “TUS − TCH” in the table indicates the test for the null hypothesis that TUS is not TCH (i.e., Granger causality)

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7 Impact of China’s Rise on the Regional Market

In Table 7.16, we see the results of the Granger causality test on Asian nations’ exports to China and their exports to the U.S. the Z-statistic in the table is the result of calculations. In the Granger causality test on the relationship between Asian countries’ exports to the United States and their exports to China, regardless of whether lag 1 or lag 2 is selected, all results reject the null hypothesis that Asian exports to the U.S. are not exports to China (i.e., the Granger causality hypothesis). However, there are obvious heterogeneities for the East Asian countries and South Asian countries. The results for all the East Asian countries in the sample, with the exception of Thailand and Vietnam, rejected the null hypothesis that their exports to the U.S. are not their exports to China, but data for the South Asian nations cannot be used to reject the same hypothesis. In the Granger causality test for the relationship between Asian nations’ exports to China and their exports to the U.S., we found that no matter if we selected lag 1 or lag 2 the results all rejected the null hypothesis that Asian nations’ exports to China are not their exports to the U.S. This was especially true for the South Asian countries, i.e., India and Pakistan. The results above indicate that in the long run Asian nations’ exports to the U.S. will boost their exports to China. In particular, exports by East Asian countries to the U.S. will boost their exports to China in the long term. However, Asian nations’ exports to China will lower the growth of their exports to the U.S. Nevertheless, exports by East Asian nations to China will promote their exports to the U.S. in the long run. In terms of causality, [although] Asian exports to the U.S. are the Granger cause for their Asian exports to China, there is significant heterogeneity for both East Asian and South Asian countries. With the exception of Thailand and Vietnam, the data shows that East Asian nations’ exports to the U.S. are the Granger cause for their exports to China. However, for South Asian nations their exports to the U.S. are not the Granger cause of their exports to China. Thus, the aforementioned finding that Asian nations’ exports to the U.S. will promote growth in their exports to China is only valid for the East Asian market and not for the South Asian countries. In addition, the Granger cause of Asian nations’ exports to China is their exports to the U.S. In particular, for the South Asian nations, the test results indicate that India’s and Pakistan’s exports to China are the Granger cause of their exports to the U.S. Therefore, South Asian nations’ exports to China may be substitutable for their exports to the U.S.

7.4 Interplay Between China and the U.S. in the Consumer Goods Market How much of a market for end products a country can provide determines whether said country can become a trade power and how much it would benefit from trade. A country’s import numbers, especially for consumer goods, are a direct reflection of the scale of its market. The U.S. has always been a major importer of consumer goods from the world, and accounts for a major share of the world’s imports. We

7.4 Interplay Between China and the U.S. in the Consumer Goods Market

159

Fig. 7.1 Consume goods imports by China and the U.S. as a proportion of world total. Source UN Comtrade Database

see from Fig. 7.1 that around the year 2000 consumer goods imports by the U.S. accounted for around 20% of total consumer goods imports around the world, and from 1999 onwards its share went on a decline all the way to 14.3% in 2011. The figure then rebounded in 2012 to 16.4%. On the other hand, China’s share of the global consumer-good import market is still comparatively low, rising from a mere 0.5% in 1998 to 2.7% in 2012. As America’s ability to provide an import market for consumer goods shrinks, whether China can become a key market for consumer-good imports will be a key factor in determining whether China can change its position in the international trade landscape. It is also a key factor in determining whether China’s import model can be transformed.

7.4.1 The Model and Calculation Methods America’s and China’s consumer-good imports from the world are a reflection of the two’s potential as market for consumer goods from other world economies. In Fig. 7.2, we see the growth rates for consumer-good imports by China and the U.S. Between 1999 and 2012, the growth rate for imports by China has been consistently higher than the growth rate for the U.S., with an average rate of 20.2% for the former and 6.5% for the latter. In a globalized world, there may be a two-way relationship between U.S. imports Chinese imports of consumer goods from around the world. In this section, we have considered the followed dynamic panel model in order to test for the effect of the former on the latter: lncchit = αi +

p  k=1

ρk lncchi,t−k +

q  k=0

γk lncusi,t−k +β  Z + εit

(7.11)

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7 Impact of China’s Rise on the Regional Market

Fig. 7.2 Growth rates of consumer goods imports by China and the U.S. Source UN Comtrade Database

Here, lncch and Incus stand for Chinese and U.S. imports of consumer goods respectively (log value), while p and q stand for the respective lag values. Z stands for the control variable, including the scale of various world economies (log value of respective GDP values, lngdp), the scale of the Chinese economy (log value of China’s GDP, lngdpch). To control for the impact of factors such as the economic cycle, we can also include a year dummy variable in Eq. (7.11). αi For the individual effect items, ρ, γ and β stand for parameters to be calculated while εit stands for random disturbance subject to normal distribution. In order to further examine the dynamic impact of U.S. consumer-good imports on Chinese consumer-good imports, in this volume we make use of the panel data vector autoregression (PVAR) method proposed by Douglas et al. (1988) The method brings together the VAR and panel models and the advantages of both methods. Like the VAR model, it regards all variables in the system as endogenous variables and determines the extent of impact of one endogenous variable on other endogenous impact by orthogonalizing the impulse response function. At the same time, it also controls for unobservable individual heterogeneity through the introduction of individual effect items. Only +3 is needed with the model (r being the duration and m being the length of the lag) for model parameter calculations. The PVAR model used in this section is as follows: yit = αi + β0 +

p 

βk yi,t−k + εit

(7.12)

k=1

Here, yit stands for the vector that includes the variable {lncch, lngdp, lncus}, while αi reflects the heterogeneity of the individual; εit stands for random disturbance that is subject to normal distribution. When working with panel data, we usually need to first eliminate the fixed effect in the model. However, the structure of the VAR

7.4 Interplay Between China and the U.S. in the Consumer Goods Market

161

model means that the independent variables and fixed effect are related. thus, we have used the Helmert procedure proposed by Arellano and Bover (1995) to eliminate the fixed effect from the model. The use of this model ensures that the lagged variable is orthogonal to the transformed variable and thus we will be able to use the lagged variable as our working variable, and use the GMM method to work with the model. Data for Chinese and U.S. imports come from the United Nations’ COMTRADE database, while GDP data for various countries were obtained from the World Bank’s WDI database. There are 78 countries in the sample, with the time period captured being the period 1998–2012.

7.4.2 Results and Analysis 1. The system GMM estimate In Table 7.17, we see the results of system GMM calculations for Eq. (7.11). For the explained variable added to the equation, lncch, the lag order is 3 (or 2). The variable for U.S. consumer-good imports includes the current value Incus and its lag-1 value L1.Incus and lag-2 value L2.Incus. The variables Incus, LI.Incus, and L2.Incus have all been set as endogenous variables. Among the statistics set within the model, none of the Sargan values rejected the null hypothesis that the working variables are valid. The m1 value, which is a test for whether the residual in the difference equation has first-order autocorrelation, is statistically significant at the 1% level. The m2 value, which is a test for whether the residual in the difference equation has second-order autocorrelation, is not statistically-significant even at the 10% level. Thus, the model is a reasonable one. The coefficients for the lag items for the explained variables in Series (1) in Table 7.17, Ll.lncch, L2.lncch and L3.lncch, are all statistically-significant at the 1% level. This indicates that China’s imports of consumer goods from all over the world has been on a constant rise. The coefficient for the current value for U.S. imports of consumer goods from all over the world, Incus, is positive and statistically-significant at the 1%. This indicates that any increase in the current value of U.S. imports of consumer goods will also increase Chinese imports of consumer goods. However, the coefficients for the lag-1 variable for U.S. imports of consumer goods, L1.Incus, and the lag-2 value L2.Incus are negative and statistically-significant at the 1% level. This indicates that in the long run U.S. imports of consumer goods and Chinese imports of consumer goods are substitutable for each other. That is, an increase in U.S. imports of consumer goods will lower Chinese imports of consumer goods in the long run. The overall impact of U.S. imports of consumer goods on Chinese imports of consumer goods is still negative (0.187 − 0.0795 − 0.121 = − 0.0135), and thus an increase in U.S. imports of consumer goods will lead to lower volumes of Chinese imports of consumer goods. This means that the coefficient for [the relationship between the] variable for GDP of various world economies, lngdp, and the variable for China’s GDP scale lngdpch is positive and statistically-significant, meaning that growth in

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7 Impact of China’s Rise on the Regional Market

Table 7.17 Impact of U.S. consumer goods imports from the rest of the world on chinese consumer goods imports (system GMM values) (1)

(2)

(3)

(4)

(5)

(6)

LI.lncch

0.702*** (119.07)

0.693*** (72.12)

0.664*** (132.16)

0.676*** (118.98)

0713*** (114.96)

0.740*** (114.24)

L2.lncch

0.105*** (24.51)

0.112*** (17.87)

0.0817*** (34.88)

0.0880*** (22.81)

0.128*** (24.32)

0.116*** (18.50)

L3.lncch

0.0595*** (14.44)

0.0314*** (5.04)

0.0779*** (17.36)

0.0752*** (10.28)

Incus

0.187*** (10.11)

0.188*** (7.62)

0.322*** (36.96)

0.258*** (25.50)

0.0666*** (8.68)

0.0717*** (11.65)

LI.Incus

− 0.0795*** (−6.82)

−0.0657*** (−3.80)

−0.112*** (−13.28)

−0.0722*** −0.0186* (−6.91) (−2.17)

L2.Incus

−0.121*** −0.123*** (−2.49) (−13.40)

−0.116*** (−25.46)

− 0.129*** (−14.71)

−0.135*** − 0.126*** (−30.84) (−20.95)

lngdp

0.274*** (20.13)

0.232*** (25.29)

0.272*** (44.57)

0.298*** (27.00)

lngdpch

0.0908*** (5.49)

Constant

−1230*** (−8.60)

−0.647*** (−5.53)

−3.346*** (−70.46)

−0.640*** (−13.56)

0.146 (1.28)

−0.364*** (−10.60)

Sampling interval

Y98-12

Y98-12

Y07-12

Y07-12

Y98-06

Y98-06

Sample size

934

934

468

468

466

466

Year dummy variable

Does not include

Includes

Does not include

Includes

Does not include

Includes

percent

−3.69

−3.56

−2.96

−2.95

−3.06

−3.25

P-value

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

[0.00]

0.265*** (13.23)

−0.0243*** (−4.21)

0.275*** (16.34)

− 0.0635*** (−4.08)

0.335*** (50.92)

m2

−0.49

−0.58

−0.71

−0.60

−1.08

−1.00

P-value

[0.62]

[0.56]

[0.48]

[0.55]

[0.28]

[0.32]

Sargan statistic

73.64

64.50

74.11

71.78

61.88

63.15

P-value

[1.00]

[1.00]

[1.00]

[1.00]

[0.65]

[0.61]

Note The values in parentheses are the Z-values. ***, * indicate the significance levels of 1% and 10% respectively. The values in brackets ([]) are the P-values for various figures. The global consumer good import variable for the U.S. includes the current value; its lag-1 and lag-2 values are set as endogenous variables

7.4 Interplay Between China and the U.S. in the Consumer Goods Market

163

various world economies and the growth of the Chinese economy will both increase Chinese imports of consumer goods. Series (2) in Table 7.17 incorporates the year dummy variable. To avoid multiple collinearity, we did not include the variable for China’s GDP scale, lngdpch, when regressing the model. The regression results for Series (2) are generally similar to the results for Series (1). To examine the impact of the global financial crisis triggered by the U.S. subprime loan crisis on the two-way relationship between U.S. and Chinese imports of consumer goods, we created Series (3) and (4) for GMM system analysis of the sample for the period 2007–2012 using Eq. (7.11), with Series (4) containing the regression results following incorporation of the dummy variable. The results in Series (3) and (4) are generally similar. Below, we conduct our explanation using the results in Series (3). The lag order for the explained variable lncch added to the equation is 2, and the coefficients for both L1.lncch and L2.lncch positive and statisticallysignificant at the 1% level. This indicates that Chinese imports of consumer goods have been on a constant growth trajectory. The coefficient for the current value for U.S. imports of consumer goods, lncus, is positive and statistically-significant at the 1% level. Moreover, the coefficient is far higher than the corresponding coefficient from Series (1). This indicates an increase in the current value of the U.S. imports of consumer goods will also mean an increase in Chinese imports of consumer goods. The coefficients for the lag-1 value for U.S. imports of consumer goods, L1.lncus, and the lag-2 value L2.lncus are negative and statistically-significant at the 1% level, meaning that any increase in U.S. imports of consumer goods will mean lesser Chinese imports of consumer goods in the long run. However, one major difference from the results in Series (1) is that the overall impact of U.S. imports of consumer goods on Chinese imports of consumer goods in this time period is already positive (0.322 − 0.112 − 0.116 = 0.094), indicating that an increase in U.S. imports of consumer goods will also lead to an increase in Chinese imports of consumer goods. Thus, as various economies around the world become more reliant on the U.S. consumer-good import market they will also become more reliant on the Chinese market at the same time. In Table 7.17, we see the system GMM analysis results for Series (5) and (6) for the period 1998–2006 using Eq. (7.1). Here, Series (6) contains the regression results after incorporation of the year dummy variable; the regression results in Series (5) and (6) are generally similar. Below, we use the regression results in Series (5) to conduct our explanation: the coefficients for L1.lncch, L2.lncch and L3.lncch are all positive and statistically-significant at the 1% level, meaning that Chinese imports of consumer goods have been constantly growing. The coefficient for the current value for U.S. imports of consumer goods, lncus, is positive and statistically-significant at the 1% level. The coefficient is far lower than the corresponding coefficient from Series (1). This indicates an increase in the U.S. imports of consumer goods will also mean an increase in Chinese imports of consumer goods. The coefficients for the lag1 value for U.S. imports of consumer goods, L1.lncus, and the lag-2 value L2.lncus are negative and statistically-significant at the 1% level, meaning that any increase in U.S. imports of consumer goods will mean lesser Chinese imports of consumer goods in the long run. However, the overall impact of U.S. consumer-good imports

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7 Impact of China’s Rise on the Regional Market

on Chinese consumer-good imports in this period is negative (0.0666 − 0.0186 − 0.135 = −0.087), meaning that an increase in U.S. imports of consumer goods will lower Chinese imports of consumer goods. Therefore, as various world economies’ dependence on the U.S. consumer-good import market grows their dependence on the Chinese market will decrease. In summary: the above regression results show that Chinese imports of consumer goods have been on a constant growth path and that in the short run U.S. imports of consumer goods will increase Chinese imports of consumer goods. That is, in the short run, as world economies become more reliant on the U.S. consumer-good import market they will also become more reliant on the Chinese market. However, in the long run, as world economies become more reliant on the U.S. consumergood import market they will become less reliant on the Chinese market. The overall impact of U.S. consumer-good imports on Chinese consumer-good imports has changed significantly since the onset of the global financial crisis. Pre-crisis, increased dependence on the U.S. consumer-good import market would lower their dependence on the Chinese market; however, post-crisis, increased dependence on the U.S. consumer-good import market would increase their dependence on the Chinese market. 2. Impulse response analysis The impulse response function (IRF) is used to measure the impact of a standard deviation of the random perturbation term on the current and future trajectory of other variables. It can be used to describe more directly the dynamic interaction and effect between variables and to determine the time-lag relationship among the variables based on the dynamic response. In Fig. 7.3, we see the results of impulse response analysis on the PVAR model formed by the variables lncch, lngdp, and Incus for the period 1998–2012. Lag-2 was selected after some comparison. Then the variable was given a standard-deviation impact. Monte Carlo simulation was conducted 500 times to obtain the impulse response coefficient diagram. In Fig. 7.3. the horizontal axis standards for the response time with lag order of 6. The vertical axis indicates the response of endogenous variables to the impact and a 95% confidence interval. From Fig. 7.3 we can see that when we give Incus a standard-deviation impact lncch will at first have a small positive effect but in the subsequent 2nd to 6th periods it will see a significant negative effect that increases as time goes by. The rise does not appear to abate by the 6th period. Thus, in general Incus has a negative effect on the economy vis-à-vis the Chinese market for imported consumer goods. This indicates that increased dependence by various world economies on the U.S. consumer-good import market will lower their dependence on the Chinese market, and that this effect is long-term. This is also consistent with the system GMM regression results found in Series (1), Table 7.17. When lncch is given a standard-deviation impact, Incus will respond swiftly in the current period and then produce a small positive response that is maintained in the subsequent 2nd to 6th periods. This indicates that greater dependence by various world economies on the Chinese consumer-good import market will also increase their dependence on the U.S. market. Although the impact is mild, it is also sustained.

7.4 Interplay Between China and the U.S. in the Consumer Goods Market

IRF for Lncch impacted by lncch

IRF for Lncch impacted by lngdp

IRF for Lncch impacted by lncus

IRF for Lngdp impacted by lncch

IRF for Lngdp impacted by lngdp

IRF for Lngdp impacted by lncus

165

Fig. 7.3 IRFs for the lncch, lngdp, and Incus variables, 1998–2012 (second-order lag)

3. Variance decomposition In this section, in order for us to better understand the mutual impact that lncch, lngdp, and Incus have on each other, we conducted variance decomposition to obtain the contribution of various VAR impact responses to changes in endogenous variables. Table 7.18 shows the variance analysis results for lncch, lngdp, and Incusin the 10th and 20th forecast periods for the period 1998–2012. From Table 7.18 we see that there is greater difference in the impact of lncch and Incus on lncch when we

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7 Impact of China’s Rise on the Regional Market

IRF for Lncch impacted by lncch

IRF for Lncch impacted by lngdp

IRF for Lncch impacted by lncus

Fig. 7.3 (continued)

Table 7.18 Variance decomposition lncch

s

lncch

lngdp

lncus

10

0.398

0.389

0.213

lngdp

10

0.005

0.576

0.419

lncus

10

0.013

0.103

0.884

lncch

20

0.141

0.349

0.509

lngdp

20

0.006

0.388

0.606

lncus

20

0.012

0.168

0.821

conduct variance decomposition with the 10th and 20th forecast periods. This means that after the 10th forecast period the impact of lncch and Incus on lncch is not yet stable. However, the impact of lngdp on lncch is generally the same for 10 and 20 forecast periods, meaning that after the 10th forecast period the impact of lngdp on lncch is generally stable. Here, the impact of lncch on itself in 10 forecast periods and from lngdpare comparatively greater at around 40%, while the impact from lncus is around 20%. In the 20 forecast periods, lncch declined to 14% due to its own impact,

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declined to 35% due to the impact of lngdp, and rose to 61% due to the impact of lncus. Therefore, the dependence by various world economies’ dependence on the U.S. consumer-good import market has a significant impact on their dependence on the Chinese market. The variance decomposition results for lncus following selection of 10 and 20 forecast periods with the VAR equation do not show much difference. This indicates that after the 10th forecast period the impact of lncch, lngdp and lncus on lncus has more or less stabilized. Here, the impact on lncus due to its own influence is the greatest at around 88%, followed by the impact of lngdp at around 10%. The impact of lncch is comparatively weaker, almost at the negligible level. Therefore, for the period 1998–2012 the dependence by various world economies’ dependence on the U.S. consumer-good import market is mainly due to its own influence, while the extent of dependence by world economies on the Chinese market has no impact on the Chinese market. From the analysis in this section, we can arrive at the following conclusions: (1)

(2)

(3)

(4)

The U.S. has always been a major importer of consumer goods from around the world, and U.S. imports of consumer goods as a proportion of total consumergood imports around the world has always been very high. However, America’s share has declined since 1999, falling from around 20% in 2000 to 14.3% in 2011. However, this figure rebounded in 2012 to 16.4%. On the other hand, China’s share of the global consumer-good import market is still comparatively low. However, it has been on the rise, and reached 2.7% in 2012. The system GMM results show that Chinese imports of consumer goods have been on a constant growth path and that in the short run U.S. imports of consumer goods will increase Chinese imports of consumer goods. That is, in the short run, as world economies become more reliant on the U.S. consumergood import market they will also become more reliant on the Chinese market. However, in the long run, as world economies become more reliant on the U.S. consumer-good import market they will become less reliant on the Chinese market. The overall impact of U.S. consumer-good imports on Chinese consumergood imports has changed significantly since the onset of the global financial crisis. Pre-crisis, increased dependence on the U.S. consumer-good import market would lower their dependence on the Chinese market; however, postcrisis, increased dependence on the U.S. consumer-good import market would increase their dependence on the Chinese market. The results of the impulse response analysis show that when the dependence by various world economies on the U.S. consumer-good import market increases, their dependence on the Chinese market will decrease, and that this is a longterm effect. However, when dependence by various world economies on the Chinese consumer-good import market increases their dependence on the U.S. market will also increase, albeit to a mild degree. However, this impact is a sustained one. With the variance decomposition, we also see that the degree of dependence by various world economies on the U.S. consumer-good import

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market has a significant impact on their dependence on the Chinese market, and that their dependence on the U.S. market is mainly influenced by themselves while though this does not affect their dependence on the Chinese market. The results above show that dependence by various world economies on the Chinese consumer-good import market and dependence by various world economies on the U.S. consumer-good import market are not substitutable for each other. The dependence by various world economies on the U.S. consumer-good import market is still mainly affected by the U.S. economic situation. However, the state of the U.S. economy does have an impact on dependence by various world economies on the Chinese consumer-good import market.

7.5 Main Conclusions After more than 30 years of development, China has become the East Asian hub for trade, investment and production thanks to its labor advantage and the potential size of its market. The center of the intertwined East Asian economic relationship has shifted from Japan to China, and major changes have occurred in the existing three-way trade model in East Asia: while in the past East Asian economies would receive capital and import capital goods from Japan and sell most of their exports to the U.S. (a relationship where the trade surpluses with the U.S. would offset the deficits with Japan), the model is gradually changing to a new three-way model where other East Asian economies are exporting their capital goods to China, and where China would conduct assembly and processing work before the final products are exported to advanced economies like the U.S. and those in Europe. Complementarity is stronger between Chinese imports and exports by Japan and South Korea. Trade complementarity between China and other ASEAN countries is lower but is growing each year. However, there is a fair bit of trade competition between Chinese exports and exports from South Korea, Thailand and Malaysia. Trade competition between Chinese exports and exports from Indonesia and Singapore is on the decline, while trade competition with exports from Japan, South Korea, and Vietnam is on the rise. In the East Asia market, ASEAN’s dependence on the Chinese market has increased while China’s position as market provider for East Asia is being strengthened. Although the East Asian regional transnational production network has an important place in trade growth in the region and although a fairly complete system of production has been established through the division of labor within the production network, the East Asian production network is strongly exports-led with the main driving force for this network being demand from advanced economies like America and those in Europe. This sort of severe production and trade dependence on external markets has made developing economies in East Asia especially vulnerable to external demand and supply shocks; the impact of changes made to budgetary, currency, and monetary policies by countries outside of the region will also spread to East Asia by means of the international goods and financial markets.

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Whether East Asian economies can maintain sustained and steady growth in the future will be determined in large degree by whether a market provider for consumer goods, one that can replace America, can emerge in the region. The volume of consumer goods exported to China by East Asian economies as a proportion of their total consumer-good exports is growing by the year, while the shares accounted for by Japan and the U.S. are on the decline. China is playing the role of market provider in the East Asia region, although the exports of consumer goods to China by East Asian economics as a proportion of their total consumer-good exports is still lower than the proportions of their exports to Japan and the U.S. At the current stage, there is a significant gap between the proportion of exports to China and the proportion of exports to the U.S., and China is not yet able to replace America as the largest market for East Asia as of yet. China will need to, while maintaining stable and high economic growth, make adjustments to its economic structure and growth model and work actively to grow domestic demand. This will be a long-term and challenging process. In this chapter, we have made use of panel adjustment analysis and the Granger causality test on panel data and found that in the long run, the statement that growth in Asian exports to the U.S. and growth in Asian exports to China will mutually reinforce each other is probably only valid for the East Asia market. On the other hand, exports by South Asian nations to China may be substitutable for their exports to the U.S. System GMM estimation with the dynamic panel shows that the overall impact of U.S. consumer-good imports on Chinese consumer-good imports has changed significantly since the onset of the global financial crisis. Precrisis, increased dependence on the U.S. consumer-good import market would lower their dependence on the Chinese market; however, post-crisis, increased dependence on the U.S. consumer-good import market would increase their dependence on the Chinese market. The dependence on the Chinese consumer-good market by various world economies is beginning to grow. However, the degree to which various world economies are reliant on the U.S. consumer-good import market is largely determined by the state of the U.S. economy but this dependence is not linked to the degree to which these economies are reliant on the China market. The dependence by various world economies on the Chinese consumer-good import market is not yet substitutable for their dependence on the U.S. market.

References Ahn, B. J. (2004). The rise of China and the future of east Asian integration. Asia-Pacific Review, 11(2), 18–35. An, L., & Yang, X. (2012). The impact of the three-way trade model on Chinese exports to America. International Economics and Trade Review, No. 4. Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error component models. Journal of Econometrics, 68, 29–51. Douglas, H. Z., Whitney, N., & Harvey, S. R. (1988). Estimating vector autoregressions with panel data. The Econometric Society, 56(6), 1371–1395.

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Dumitrescu, E.-I., & Christophe, H. (2011). Testing for granger non-causality in heterogeneous panels. University of Orleans and Maastricht University. Lai, M., Zhong, W., & Xie, Y. (2010). Sino-Korean electronic communications trade under the post-flying Geese Model: Cooperation or competition? World Economy Study, No. 5. Li, X., & Fu, J. (2010). The current state and prospects of China qua market for East Asia. Jilin University Journal Social Sciences Edition, No. 2. Lin, G., Tang, B., & Shen, Q. (2012a). East Asian production network. Questions of International Trade, (11). Lin, G., Tang, B., & Shen, Q. (2012b). The development of an East Asian production network and the deepening of regional economic cooperation in East Asia. Journal of International Trade, No. 11. Lu, G., & Wang, X. (2011). The competitive and complementary aspects of Sino-Japanese free trade. Journal of International Trade. No. 11. Qureshi, M. S., & Wan, G. (2008). Trade expansion of China and India: Threat or opportunity? The World Economy., 31(10), 1327–1350. Yu, J. (2003). China’s comparative advantages and trade complementarities vis-à-vis key countries and regions in East Asia. The Journal of World Economy, No. 5.

Chapter 8

China’s Participation in Asian Cooperation

China’s participation in regional cooperation in Asia is in service of China’s future economic growth. However, as China’s economy rises it also has an endogenous effect on regional cooperation in Asia. For a certain period into the future, during which it is unlikely to see much headway in the area of multilateral cooperation, China has no choice but to pay more attention to developments in regional cooperation. However, in terms of Asia–Pacific cooperation the uncertainty brought on by the restructuring of partnership frameworks and developments in the TPP process are all issues that China has to grapple with.

8.1 China’s Participation in Regional Cooperation in Asia 8.1.1 “Upgrading” the ASEAN–China Free Trade Area (ACFTA) Just how to further enhance China–ASEAN cooperation has been an issue for both parties since the announcement of the full establishment of the ACFTA in 2010. In September 2013, at the occasion of 10 years of China–ASEAN relations, Premier Li Keqiang proposed a new direction for such relations, the so-called “Diamond Decade”, with the new central government in place. In October 2013, General Secretary Xi Jinping further proposed the specific objective of USD1 trillion in China– ASEAN bilateral trade by the year 2020. This was a clear objective for China– ASEAN relations in the post-ACFTA period. Against a backdrop of multiple factors like a changing understanding of China due to her swift economic development, territorial disputes with certain ASEAN members in the South China Sea, and the incomplete state of the ASEAN Community, the practical option for China is to enhance China–ASEAN cooperation through the enhancement of bilateral FTA arrangements. © Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_8

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i. Enhancing FTA arrangements is the basis of “Diamond Decade” partnership Bilateral cooperation between China and ASEAN has taken off since the establishment of official relations between the two in 1991. In particular, spectacular achievements have been made in the area of economic partnership. Bilateral trade between China and ASEAN was worth USD54.8 billion in 2002, when ACFTA was first established. This figure has grown 7.3 times to over USD400 billion by 2012, marking an average growth rate of 22% per annum. Currently, China has already become ASEAN’s largest trading partner. ASEAN has also surpassed Japan to become China’s third-largest trading partner. At the same time, ASEAN is also China’s fourth-largest export market and second-largest source of imports. China– ASEAN cooperation is changing China’s traditional trade structure, and the swift growth in China–ASEAN trade is especially important at a time when traditional export markets like the U.S. and Europe are weak. The experience of China–ASEAN cooperation proves that on the one hand China– ASEAN economic cooperation centered on the ACFTA has served as a gel that has brought the two closer together and created a win–win atmosphere for both parties. Thus, such cooperation has also helped to ensure the steady development of China– ASEAN relations. On the other hand, shared interests are bringing the fates of the peoples of China and ASEAN closer together. This means that FTA arrangements must go beyond traditional areas of cooperation for those with shared interests, such as in trade and investment. China–ASEAN “Diamond Decade” relations that can serve the establishment of an entity with a shared destiny must be established. At present, the East Asian cooperation framework is facing the prospect of restructuring due to pressures from a FTA with high entry requirements that is the TPP. The enhancement of existing China–ASEAN FTA arrangements can help to entrench and broaden China–ASEAN relations. The advancement of the RCEP process can also strengthen bilateral relations and may lead to a new regional cooperation model for the future. ii. An enhanced FTA arrangement beyond traditional concepts The establishment of ACFTA arrangements is guided by the ASEAN–China Framework Agreement on Comprehensive Economic Cooperation. For the past dozen years or so, the focus of the Free Trade Area has been on institutional arrangements for the trade of goods and services and for investment. As China and ASEAN become more integrated and as the next-generation trade rules exemplified by the TPP emerge, China–ASEAN will need to enhance their bilateral relations and the level of their partnership on the basis of a comprehensive strategic partnership. First, China–ASEAN economic cooperation is past the initial stage where the focus has been on tax reductions. The focus for the next stage is to gradually expand the scope of cooperation in terms of trade in services and to promote intra-regional investment partnerships. These partnerships will involve the building of a regional production network and more frequent movement of peoples and materiel within the region. The issue of interconnectivity, which is receiving a lot of attention right now, will certainly become an area of focus in the next stage of FTA-building. On the one

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hand, physical interconnections—with infrastructure at the top of the list—provide the physical basis for the integration of the regional economy. Currently, infrastructure in certain ASEAN countries is still rather backward, and this has kept them from participating fully in regional cooperation. At the same time, strong regional interconnectivity will promote the building of a regional production network through by making connections shorter and logistics costs lower and by promoting international trade, etc. On the other hand, the building of infrastructure to connect regional countries involves investment, and can thus be regarded as an area of focus in efforts to enhance investment cooperation. Currently, China–ASEAN direct investment is growing swiftly both in terms of annual quantum and total investment to date. Moreover, the relationship is shifting from one where most investments are flowing from ASEAN to China to a more balanced relationship. As of end-June 2013, Chinese direct investment in ASEAN to-date totals nearly USD30 billion while ASEAN investments in China in the same period total more than USD80 billion. Incorporating investment in efforts to establish regional interconnectedness can produce direct economic benefits as well as create a positive spillover effect for bilateral cooperation. Second: a new area of cooperation between China and ASEAN is in the area of next-generation trade and investment rules. As economies around the world become more liberalized the utility of tax reductions as a means of international trade promotion will shrink over time. The marginal utility of such policies on bilateral trade will also decrease. Under such circumstances, the new trade rules mooted by the TPP process, which places an emphasis on “post-border” issues, will certainly become a key area of concern for FTA-building in the future. ACFTA will have to adapt to this development on the international scene and draw the requisite lessons from the TPP, and expand the Free Trade Area. Judging from the current situation, it would be highly challenging for China and the majority of ASEAN countries to meet the entry requirements for the TPP. However, the trajectory of the TPP rule-establishment process suggests that once the next-generation TPP trade rules are established, members and non-members alike will have to deal with a set of brand-new rules for international trade. Thus, China–ASEAN should incorporate certain rules mooted by the TPP into their FTA arrangements after due consideration of the specific circumstances of East Asian nations. On the one hand, doing so can help these countries accrue experience with these new rules, and on the other hand a better understanding of these rules can also lead to new rules for regional cooperation in Asia. Third: from China–ASEAN to the RCEP. In 2011, ASEAN proposed the RCEP arrangement that would consolidate the five existing bilateral FTAs with ASEAN nations. Similarly, it is hoped that the RCEP—for which negotiations have commenced—will result in a regional free trade area with standards higher than current ones. ACFTA should abide by the requirements of the RCEP, such as expanding its area of coverage and enhancing its standards. In general, the “Diamond Decade” objective has been established as the objective for China–ASEAN relations in the future. Any “upgrading” of the ACFTA should serve this objective. First of all, the enhanced ACFTA must be oriented towards the

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establishment of a regional production network, while the formation and development of this network will provide fuel for the further advancement of the free trade area. Second, the ACFTA must be oriented towards next-generation trade rules and enhance the capabilities of China and ASEAN nations to respond to changes in international economic rules. As far as possible, a new model that incorporates regional characteristics and which nurtures the building of a free trade area in East Asia should be established. Finally, the ACFTA should be oriented towards the RCEP process and enhance the ASEAN–China free trade area in line with the requirements set out in RCEP negotiations. This “upgraded” form of the ACFTA can in turn support the RCEP process. iii. Overcoming obstacles to create the China–ASEAN “Diamond Decade” In practical terms, the enhancement of the ACFTA involves laying down the foundation for the next step, which is the building of a China–ASEAN Community, in a time when changes in regional relations and economic partnerships are occurring. Such an enhancement should contribute to the building of a new regional cooperation framework for East Asia by means of the RCEP and provide the conditions that would make the formation and development of a regional production network possible. However, there are some challenges to be tackled along the way to enhancing China–ASEAN relations. First of all, the impact of the rise of the Chinese economy on the international landscape has already caused ASEAN to adopt “strategic distancing” from China. That is, ASEAN nations are keeping a distance from China in terms of politics and security while enhancing their economic partnerships with China. This affects to a certain extent any efforts to enhance the ACFTA, especially with areas of cooperation that may be deemed by some to be politically-sensitive or security-related. Take for instance the management of railway and highway development and the management of such infrastructure with China–Vietnam overland links. We should treat this matter like it is any other and seek to eliminate differences through the deepening of areas of common understanding. Second: the lack of balance in regional economic development is an issue that cooperation will have to tackle and also a factor that would limit any efforts to enhance the ACFTA. Despite efforts made over a few decades ASEAN has yet to be able to eliminate the developmental gap between its members. Differing national circumstances have also resulted in wildly different interests in free-trade-area building as well as varying levels of ability to participate in this process. Objectively speaking, this limits the room for further enhancement of the ACFTA. Therefore, the elimination of the gap between the rich and the poor should be regarded as a key prerequisite to further FTA development and the enhancement of China–ASEAN. Finally, although the territorial disputes in the South China Sea are a form of conflict of interest between China and a small number of ASEAN nations, at a time when China’s power is growing and when ASEAN hopes to enhance its internal cohesion these disputes have already become an issue between China and ASEAN affecting cooperation between the two. Recently, Chairman Xi Jinping proposed enhancements to maritime cooperation with ASEAN nations and the establishment

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of a maritime Silk Road. It is hoped that shared benefits from maritime cooperation can help to mitigate the negative impact of conflicts. In terms of execution, China should try to separate South China claimants and non-claimants within ASEAN, as well as separate economic cooperation from territorial disputes. China should emphasize its interest in cooperation and foster an atmosphere that is amenable to the deepening of bilateral economic partnerships. On this way will we be able to achieve the China–ASEAN “Diamond Decade” under the banner of mutual benefit.

8.1.2 East Asian Cooperation: Advancing the CJSKFTA The first round of negotiations for the CKSKFTA was held in Seoul on March 26, 2013. The diplomatic statements made prior to the start of the meeting indicated that the Seoul negotiations would focus mainly on preparations for the FTA negotiations to be held within the year. Observers familiar with regional cooperation in East Asia understood that the holding of the meeting had great symbolic meaning for East Asian regional cooperation given the uncertainty surrounding the latter, even if the expected results were not achieved. As we all know, East Asian regional cooperation was kickstarted by the 1997 Asian financial crisis. Although certain advances have been made in regional cooperation under ASEAN’s “10+” framework, contestation between regional powers for leadership/influence has in fact prevented meaningful development of institutional arrangements for regional cooperation. The CJSKFTA proposal, first made in 2008, provided rays of hope for institutionally-grounded cooperation between China and Japan. However, the conflict over the Diaoyu islands issue had a negative impact on bilateral relations from the second half of 2012 on, and invariably cast a shadow over the CJSKFTA process. It was in such challenging circumstances that China, Japan and South Korea announced at the East Asia Summit in end-2012 that CJSKFTA negotiations would commence in early 2013. However, the conflict over the Diaoyu islands continued to rage between China and Japan. The comparatively non-compromising policies implemented by the Shinz¯o Abe administration have in particular made many pessimistic about the future prospects of cooperation between China, Japan and South Korea. This was the reason that the first round of CJSKFTA negotiations bore so much symbolic meaning. The holding of these talks indicated that all three nations shared an understanding of the importance of cooperation and mutual benefit, and that the belief in cooperation was still alive despite challenging political conditions. If we are to look at the domestic situation in various East Asian nations, we will find that the beggar-thy-neighbor approach is not in line with the interests of countries in the region. For China, promoting regional cooperation in East Asia is something that our development requires. China’s new-generation leaders have already clearly outlined the “China Dream”, and the realization of this dream is inextricably linked to the continued and stable growth of the Chinese economy. For the current period and for a period of time into the future, China’s economic growth will be constricted

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by factors such as limitations in terms of energy resources, the loss of the population dividend due to changes in the population structure, and greater pressures in terms of environmental protection. What we foresee is that China will have no choice but to transform its economic structure over time to one that is driven by domestic demand. This transformation will definitely be a long-term and arduous process and stable support from the international market is a key condition for a stable economic transition for China. East Asia being an important driver of economic growth for the world at present also has critical meaning for further development of the Chinese economy, both in terms of its massive internal trade and in terms of its mature regional production network fed by direct investment from overseas. Of course, as Western economies become mired in developmental issues of various kinds the promotion of regional cooperation in East Asia is something that both China and other Asian nations need. The U.S. subprime loan crisis, the Europe debt crisis and the slowing global economy have foregrounded the need for Asian nations to enhance their cooperation and to seek out mutually-beneficial arrangements. Even though Japan, a U.S. ally, says it may join TPP talks at any time, it cannot possibly abandon East Asia entirely, particularly a China where its enterprises have made the most profits from their investments. Currently, Japanese investment in China accounts for around 13% of the country’s total overseas investments. Japan’s trade with China has an even more heavyweight role within its overall international trade. Similarly, although another U.S. ally, South Korea, has stated that it would seek to reduce its dependence on the Chinese economy, the only options open to it are the strengthening of economic partnerships with the U.S. and Europe, and the diversification of its markets. It is clear that ASEAN has benefited from East Asian regional cooperation in recent years. The dramatic growth in the quantum of China–ASEAN two-way investment is a good enough reason for ASEAN to maintain and strengthen its East Asian partnerships. Although the motivation for strengthening cooperation between various parties still exists, we must also admit that at present East Asian regional cooperation is facing great challenges. Some even say that East Asian regional cooperation is standing at a crossroads. There are many reasons for such pessimism, but without a doubt, the rise of China is a key factor. This is not a value judgment on the rise of China but a statement of its impact on regional cooperation in East Asia. China is a relative latecomer to regional cooperation. China had joined APEC after the Cold War with the intention of learning more. Little did the industrious and thrifty Chinese imagine that they were able to achieve a spectacular increase in national strength in a shockingly short span of time, an increase that has been termed by the world as “the rise of China”. To be sure, the rise of China and changed the balance of power in Asia–Pacific and in East Asian cooperation as China’s demands and influence cannot be ignored no matter which cooperation framework we are looking at. The rejection of China due to reasons such as its political system has made this sudden change particularly unpalatable. Thus, we see how Japan has proposed the “10 + 6” cooperation framework in a bid to mitigate possible leadership by China while the U.S. is strongly promoting the TPP as a way of countering Chinese influence in East Asia. However, many neglect the fact that the “rise of China” is actually an introspective one. In fact, clear signals

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that China is committed to the path of peaceful development were already sent out at the 18th National Congress of the Communist Party of China that concluded in end-2013. It was determined at the 18th National Congress that the coming period remains an important strategic window for China’s economic development. This is not only a positive judgment on future international and regional developments but also an expression of China’s commitment to peace and cooperation. This judgment tells us once again that China’s regional cooperation strategy serves the key objective that is ensuring the long-term and stable growth of the Chinese economy rather than the establishment of Chinese dominance or influence in East Asia. Of course, to transform the common need for strengthened cooperation into united efforts for regional cooperation requires communication by various parties and the cultivation of mutual trust. At present, ASEAN has already proposed the RCEP, a cooperation framework that will strengthen regional cooperation in East Asia. Talks on the RCEP between ASEAN and six of its FTA partners (including China) will soon commence. The RCEP and the CJSKFTA are synergistic and will create a new cooperation framework for East Asia. The various parties involved have given warm support to the RCEP proposal and have acted to advance the RCEP process. As for the TPP, we should set aside any desire to counter the arrangement and instead regard it as an external driver of regional cooperation in East Asia. In practical terms, we should learn from the TPP’s plus points as part of efforts to improve regional cooperation.

8.2 Impact of Major Asian Economies’ Cooperation Strategies on China’s Efforts to Establish a Regional Cooperation System In summarizing East Asian regional cooperation that commenced after 1997, Yu Xintian quoted the four factors listed by Takatoshi Ito, commissar for international affairs at Japan’s Ministry of Finance: “The first is that while there are difficulties in promoting trade liberalization in the global context the promotion of regional trade liberalization is comparatively easy; second are the lessons from the Asian financial crisis; third is that the economic consolidation by Europe and North America have created a sense of rejection in East Asia; and the fourth, which is the most important, is that Asians are now aware of their many commonalities (Yu, 2003).” This viewpoint emphasizes the international context behind the rise of Asian regionalism and more importantly foregrounds the fundamental role of Asian countries’ recognition of the importance of cooperative development in East Asia. The last point is an accepted viewpoint in the early twenty-first century.1 As China’s rise becomes reality (Wu, 2011) the potential impact of such a rise on the balance of power in the Asia–Pacific region is also naturally recognized by various parties. The rise of China 1

For instance, Sun Cheng is also of the opinion that the strengthening of cooperation in the present time is a common view shared by various nations in East Asia. See: Sun (2001).

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has also changed how various parties seek their interests when promoting cooperation in the Asia–Pacific/East Asia. In particular, with regard to dominant countries like the U.S. these parties will invariably pay more attention to the relative benefits of cooperation. This means that “gaming” between international actors will gradually surpass considerations of economic interests as the main force behind regional cooperation in the Asia–Pacific. As major powers fight for dominance, room for maneuver is also created for the “minor players” in the region. ASEAN, which is a group of such players, has major leverage in East Asian regional cooperation. Although ASEAN appears to be weak due to limitations in its strength, it is not content with being the “weak player”. Indeed, it seeks a more favorable international position with a firm grasp of the international situation and through the exercise of its advantages and initiative. For ASEAN, the CJSKFTA has its roots in attempts by China, Japan and South Korea to combat the uncertainties of the global economy, and the partnership between the three will threaten ASEAN’s leading position in East Asian cooperation. As the TPP talks include many countries in East and South Asia, for ASEAN the TPP threatens its core position in East Asia. Hence, ASEAN has proposed the RCEP in what is clearly an achievement by the “minor players” in the region.

8.2.1 Competition Between Major Players Driving Regional Cooperation in Asia–Pacific i. America’s response to the rise of China As to whether China can become the world’s largest economy by GDP and when it can achieve this are matters for speculation. However, the rise of the Chinese economy in the first two decades of the twenty-first century is already a reality. No one can ignore the fact that China became the second-largest economy in the world by GDP in the year 2010. If the current situation continues, in the next 10–20 years the Chinese economy may surpass the U.S. economy to become the largest in the world.2 Then, there will be major changes in the global economy, from comparative economic strength to the state of the international division of labor and the global economic order (Chen et al., 2013). We can imagine the significance of the fact that Chinese manufacturing creates 19.8% of all value produced in the world, a figure higher than America’s 19.4%. The U.S., which has been the global hegemon all along, must feel this fact differently from the others. In the face of China’s rise, one of America’s natural Asia-Pac objectives is to maintain its position as global hegemon. This is because America has sufficient interests to want to prevent the emergence of a challenger to American hegemony in 2

Optimistic forecasters of China’s economic development project that China will become the largest economy in the world by GDP by 2025, while more conservative forecasters believe that China’s GDP will surpass that of America’s latest by 2030.

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East Asia (Yang, 2013). The title of a strategic guide issued by the U.S. Department of Defense in 2012, Sustaining U.S. Global Leadership: Priorities for 21st Century Defense, alone makes clear the objective of the U.S. “rebalance to Asia” strategy. That is to say, unlike other nations that have to weigh the pros and cons of the rise of China, America’s understanding of this rise is clear. Perhaps the U.S. believes that the rise of China has not yet fully changed the power structure of the Asia–Pacific region.3 Thus, “the U.S. has a strong desire to continue to maintain its economic and strategic leadership in the Asia–Pacific region” (Clinton, 2010). This statement by Hillary Clinton indicates that there is little room for China to create positive interaction with the U.S. in the Asia–Pacific through changing America’s mind,4 even if China expresses goodwill towards the American “rebalance to Asia” strategy. America may also have a stronger sense of urgency with regard to the rise of China. For instance, some Chinese scholars believe that the rise of China has already caused the collapse of the international landscape (Jin & Duan, 2013) or led to the appearance of a diverse and non-polar world (Ye, 2013). Scholars also believe that U.S. policies in response to this rise are antagonistic, and that a China that is stronger than the U.S. economically, in military terms, and in terms of her currency will become the sources of Sino-American conflict (Wang, 2013). With the rise of Chinese economy the Chinese people feel that they should have an international status that is different from what they have at present (Liu, 2013a). At the same time, the rise of China has also led China to look closely at issues of fairness in the international order and to call for improvements to the international system.5 As China begins to consider a new international role for herself the U.S. has chosen not to be a bystander but to active participate in the shaping and limiting of China’s role. As China begins to talk about changes to the international system the U.S. has chosen to strengthen this system. These changes are reshaping the drive behind regional cooperation in East Asia. On one hand, the U.S. has become a direct player in regional cooperation in the Asia–Pacific, and especially in East Asia; on the other hand, it is also paying unprecedented attention to the establishment of rules due to its considerations of relative benefits. ii. The transformation of player roles in cooperation in the Asia–Pacific Contestation between the major powers has become the key driving force behind regional cooperation in the Asia–Pacific. The key characteristic of such contestation is that the key players have begun to engage in contestation in the cooperation arena. After the Second World War, Japan had become the de facto leader in East Asia thanks to its economic and technological strengths, as well as its favorable position within the regional production network. Japan’s leadership in East Asia has 3

Feng Yujun believes that there has been no change to the international landscape that is dominated by one superpower and populated by many other powers despite the rise of China. See: Feng (2013) 4 Some scholars believe that positive interactions between China and the U.S. can be effected through persuasion or the changing of minds about China. See: Wu (2011). 5 Related studies on this subject include: Liu (2013b), He (2013), Song and Ma (2013).

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been encouraged and supported by the U.S. In East Asian cooperation efforts that commenced after 1997, the U.S. began to be wary about Japan’s rising influence in East Asia and quashed Japan’s proposal of the Asian Monetary Fund (AMF) mercilessly. China’s position within East Asian cooperation began to improve following the proposal of a bilateral free trade area between China and ASEAN in 2001. To Japan, China is becoming an usurper to its leadership position in the region. Perhaps the U.S. believes that China is not yet a real threat to its leadership position in the Asia–Pacific region, which is why it has chosen to take a wait-and-see approach to the contestation between Japan and China for leadership of East Asian cooperation efforts and has not really become a direct player in this contest. When we look back, we see that Japan’s efforts to lead the East Asian Community that one time may be the last time Japan has actively sought leadership of East Asian cooperation efforts. Since then the Chinese economy has grown strongly and caught up quickly with Japan with her “lost 20 years”. In 2006, Japan proposed the “10 + 6” arrangement. At this point, Japan was no longer confident of its leadership in the “10 + 3” arrangement and sought to balance China’s influence with the aid of new actors. While China should have been happy about this outcome, the flip side of the coin soon emerged. As Japan retreated to the sidelines America stepped in as a direct actor in regional cooperation in East Asia.6 America, an even stronger player, had no choice but to step up given the appearance of a potential challenger to its hegemon status. Here, the TPP is a move to counter China’s growing economic dominance in the Asia–Pacific region (Friedberg, 2011). Direct contestation between China and America within the realm of East Asian regional cooperation has foregrounded such cooperation as a stage for contestation between major powers. iii. Ramped up competition in terms of rule-making One effect of contestation between major powers in the area of Asia–Pacific cooperation is that competition for short-term benefits has given way to competition for long-term benefits. Specially, this is expressed by the intensification of competition in terms of rule-making. In a departure from the past, this time around American efforts to promote the TPP stems from both concern about Japan’s role as well as consideration of Europe’s influence. Thus, while promoting the TPP the U.S. also re-commenced the Transatlantic Trade and Investment Partnership (TTIP) process with Europe in the first half of 2013. Although the economic motives of America’s “two-ocean strategy” are clear (Chen, 2013) it is believed that the strategy is really a result of concern about the international economic system of the future.7 This move by the U.S. is in essence a move to pull Europe back into East Asia. At the beginning of the twenty-first century, C. Fred Bergsten noted that a united East Asia may be highly damaging as a united East Asia would be able to implement 6

Hillary Clinton has stated that the shift in America’s strategic focus to Asia includes six areas, including participation in regional multilateral mechanisms. Clinton (2011). 7 In the opinion of Spaniard Ana Palacio, Senior Vice President of the World Bank, the new round of regional trade talks has in effect paved the way towards the establishment of a global trade system. See page 18, China Newsweek, Aug 12, 2013 issue.

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its own development strategies and not abide by the recommendations of international monetary organizations as well as the rules of the World Trade Organization. This would in turn create the momentum for isolation by America or even joint U.S.– Europe resistance against Asia (Bergsten, 2000; Yu, 2003). Indeed, in the twentyfirst century a number of developing nations have broken free of the control of the Western nation system (Pieterse, 2013) and the U.S. has also indeed adopted a more intimate approach with Europe. Although the TTIP process would allow both the U.S. and Europe to tackle their respective economic difficulties and promote the growth of their domestic economies, more important is the impetus to join hands in countering the rise of the emerging economies and in maintaining their leadership in international trade (European Economic and Trade Relations Task Force, 2013). The U.S. believes that “America’s global leadership position may be weakened; however, the international order that it leads remains the mainstream order in the twenty-first century” (Ikenberry, 2008). Of course, the U.S. has not stuck to the original systems. The TPP strategy tells us that the U.S. wishes to build a future multilateral trade framework for the Asia–Pacific region (Cai, 2013) with a focus on certain transversal issues in the area of next-generation trade rules, including rule consistency, state-owned enterprises, e-commerce, competition and the supply chain, and small and medium sized enterprises, etc. At the same time, [the U.S.] seeks to incorporate the main advanced economies of the world into this framework in order to keep the developing nations in check, in particular the future economic growth of China). Thus, we see that contestation between the major powers has become the key driving force behind regional cooperation. And we are beginning to pay more attention to the limitation issue with rules in this area, while the traditional welfare effect that is sought after through regional cooperation is now regarded as an indirect objective and has thus been neglected. For a period in the future, the interaction between the CJSKFTA, the TPP and the RCEP will certainly become a key force in shaping the East Asian landscape of the future as these three partnerships include the key powers in the region.

8.2.2 RCEP and ASEAN’s “Core Position” i. Why ASEAN is promoting the RCEP ASEAN is currently working towards the establishment of the ASEAN Community. In the face of obstacles to achieving their set objectives the regional grouping proposed the RCEP arrangement in 2011. As the RCEP process is being limited due to the “bucket effect”, ASEAN’s motives in promoting the RCEP lie not in the economic benefits of the arrangement but as a counter to the stagnation of East Asian cooperation—in which it is a central player—as a result of Sino-Japanese competition. This has challenged ASEAN’s “centrality”. The RCEP will create a brand-new platform for cooperation that is centered on ASEAN. However, at the same time, it will also have a certain impact on the cooperation framework in the Asia–Pacific

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region, as the RCEP together with the TPP will become part of a dual-framework structure for regional cooperation in the Asia–Pacific. Since the ASEAN Framework for Regional Comprehensive Economic Partnership was proposed at the 19th ASEAN leader’s meeting this proposal has received much attention from various parties. Like with the initial reactions to APEC and the ACFTA, initial discussions on RCEP centered on the potential impact of this free-trade-area arrangement (that involves around half the world’s population and one-third of the world’s GDP) on the regional economy.8 Of course, the potential impact of this new proposal for cooperation on the structure of cooperation in East Asia/the Asia–Pacific region has also been a matter of significant concern. One of the key foci for concern is how the RCEP would interact with the America-backed TPP.9 Compared to the aforementioned issue, the true motive behind ASEAN’s proposal of the RCEP arrangement is an even more critical matter that relates to what extent ASEAN will work to realize the objectives that it has set for the RCEP. Given that efforts to establish an ASEAN Community are still in the “castle-breaching” stage, the suggestion to establish a high-quality free trade area with the RCEP agreement does not really hold water in economic terms. Considering that ASEAN is known to hide its true intentions at times10 we should also conduct an all-round analysis of the motivations behind this proposal. ASEAN has, during a certain period in the past, repeatedly emphasized its “centrality”. This, rather than the desire to deepen regional cooperation, should be the more direct objective for ASEAN with regard to the RCEP. What this means is that ASEAN’s attitudes regarding the RCEP process may be “process-heavy, advancement-light” (Jones & Smith, 2007) and that any benefits from the RCEP and impact on regional impact will also come gradually. Singaporean scholar Sanchita Das has provided three possible reasons for ASEAN’s RCEP proposal: the first is to transcend the competition associated with the “10 + 3” and “10 + 6” groupings in order to provide a “braking effect” to the course of regional cooperation in East Asia; the second is to resolve the “spaghetti bowl” issue plaguing East Asian regional cooperation through the consolidation of the existing five “10 + 1” free trade areas; and the third is to further strengthen ASEAN’s “centrality” (Das, 2012). The first and third reasons are actually the same thing, that is, the intent to strengthen ASEAN’s centrality. It is just that ASEAN has chosen to realize this objective by seeking to deepen regional cooperation, something that is related to various nations’ interests. ii. ASEAN’s “centrality” within regional cooperation and its conditional nature 8

Some scholars have already tried to simulate the benefits of the RCEP for ASEAN nations. See: Itakura (2013). 9 Japanese scholars believe that the TPP has posed a threat to the “centrality” of ASEAN. On the other hand, if the RCEP process proceeds smoothly it can become ASEAN’s answer to the challenges posed by the TPP. See: Fukunaga and Ikumo (2013). 10 For instance, according to a study by Narine, ASEAN had formed the ASEAN Intergovernmental Commission on Human Rights (AICHR) not to promote human rights within the grouping but mainly to enhance the international image of ASEAN and enhance its international credibility as human rights and politics are interlinked within dominant Western values. See: Narine (2012).

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Wh en we look at the overall course of regional cooperation in East Asia following the 1997 financial crisis we will find that ASEAN, which had been committed to the strategy of playing off the major powers since the end of the Cold War, has won for itself a centrality within regional cooperation in East Asia through the establishment of ASEAN-centered multilateral cooperation frameworks following the mooting of the ACFTA by China. When we examine the issue in greater detail, we will also find that the centrality that ASEAN had won for itself is a functional role. That is, ASEAN serves primarily as a platform for cooperation within East Asian regional cooperation. This stands in opposition to a kind of functional power. Thus, ASEAN is not the true power center of East Asian regional cooperation. This has been made clear by numerous studies on the competition for leadership in regional cooperation.11 The existence of this sort of situation has led some scholars who study ASEAN to question ASEAN’s claim to a centrality.12 The separation of the center of power from the functional center has alienated ASEAN within the context of East Asian regional cooperation and forced ASEAN to seek to extend the longevity of its role as functional center by protecting its role as platform. ASEAN has been able to occupy this favorable central position within East Asian regional cooperation for two reasons: first, the peculiar power structure in East Asia means that the formation of a center of power akin to the French–German axis in Europe was not possible (Kim, 2012). ASEAN, which is a conglomerate of minor nations, has been able to occupy its centrality due to the situation where the two East Asian powers, China and Japan, and in a state of both competition and cooperation. With this power structure, ASEAN has been able to create its centrality within the cooperation framework through the diplomatic strategy of playing off the major powers against each other. In this regard, although the swift rise of the Chinese economy is reshaping the power structure in East Asia and even in the Asia–Pacific region, the state of both competition and cooperation between China and Japan should not change in the short term.13 We have reason to believe that the conditions for ASEAN to exercise its role as functional center in regional relations have not yet been lost. Second: since 1967 ASEAN has been working to promote regional cooperation and its membership has been growing alongside the scope of cooperation. Thus, the grouping has accrued experience in the promotion of cooperation. Although this “ASEAN Way” has been faulted by many14 it is a cooperation model that is

11

Studies on the issue of leadership within East Asian regional cooperation have focused mainly on the competition between Japan and China. Of course, when we expand the scope of studies in this area we will also invariably look at the important influence of the U.S. in this region. Numerous Chinese-language studies have been conducted on the subject, such as: Qi (2011). 12 E.g.: Amador (2010). 13 It is indeed risky to make this call when we consider the state of Sino-Japanese relations today. 14 There is plenty of literature on this subject. However, the understanding of former ASEAN secretary-general Severino C.R. someone who had worked for the advancement of ASEAN, on how the ASEAN Way had come about and on the strengths and flaws of this approach, is especially valuable. See: Severino (2012).

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suitable for East Asia.15 ASEAN has become the functional center of East Asian regional cooperation also because of the acceptance of the ASEAN Way by various East Asian nations. The “10 + 3” arrangement is a useful example in this regard. Following the eruption of the Asian financial crisis in 1997 as part of its efforts to enhance the establishment of a domestic market ASEAN proposed the strengthening of cooperation with Japan, China, and South Korea. This proposal was received enthusiastically and has developed into a new platform for regional cooperation. The aforementioned two reasons are in fact a reflection of the conditions upon which ASEAN’s centrality can exist. In practice, although in the short term there should not be a challenger for ASEAN’s leading position within East Asian regional cooperation due to considerations of pathway dependence, ASEAN will have to continue its integration process in order to be able to continue to lead the process of East Asian cooperation forward. This need has given rise to the ASEAN Community plan that is supported by further integration in economic, politics-and-security, and cultural terms. ASEAN knows full well that as the favorable position it occupies within East Asian cooperation is due to the ASEAN Way that has been developed over long-term internal cooperation, in order to further entrench this position and to exercise its role as functional center for regional cooperation ASEAN will have to engage in capacity-building through greater integration (Das, 2012). Thus, the building of the ASEAN Community was set as the foremost task at the 22nd ASEAN leaders’ meeting that concluded in 2013.16 The two conditions for ASEAN’s centrality in East Asian cooperation described above are also the conditions for ASEAN to exercise its leading role within the regional cooperation framework. Clearly, it was only since the 1997 financial crisis that ASEAN had begun to establish its centrality over time, beginning with the “10 + 3” arrangement. In the three decades before that, there was never talk of ASEAN being the center of East Asian cooperation. The reason is simple: at that time, no effective East Asian cooperation framework had yet been formed. Here, there is an issue that is frequently ignored in analysis, which is the fact that ASEAN’s serving as the functional center of regional cooperation must rely on a regional cooperation framework. This is the fundamental prerequisite for ASEAN’s centrality discussed in this section. The conditional nature of ASEAN centrality means that this position is a vulnerable one. For ASEAN to protect this vulnerable position, on one hand it would need to push for further integration internally while on the other hand it must make full effort towards maintaining the existence of the East Asian cooperation framework. iii. RCEP as a key means towards maintaining ASEAN centrality ASEAN can only continue to exercise its role of functional center within East Asian regional cooperation if the East Asian cooperation framework advances in a steady 15

At one point, it was believed that the ASEAN Way should be promoted in the wider Asia–Pacific context. See: Acharya (1997). 16 ASEAN Community 2015 is top priority at 22nd ASEAN Summit (ASEAN Secretariat News 2013).

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manner. What this means is that ASEAN is highly sensitive to how well the East Asian cooperation framework performs, and perhaps explains why ASEAN is more interested in the cooperation process rather than the state of advancement. In terms of the development history of East Asian regional cooperation, following the 1997 Asian financial crisis the common call for building up an East Asian regional market led to the swift formation of the “10+” groupings anchored by ASEAN. This structure, which consists of the “10 + 3” and multiple “10 + 1” arrangements that serve to support each other, has made ASEAN a key platform for East Asian cooperation and also created ASEAN’s role as functional center within East Asian regional cooperation. Although the issue of Sino-Japanese competition is always lurking under the surface when it comes to ASEAN’s role as functional center (Wang, 2010) the cooperation framework centered on ASEAN has lasted till today. After East Asian cooperation was caught in the “10 + 3” and “10 + 6” framework dilemma in 2006, the split in the East Asian cooperation framework has also led to stagnation in terms of the advancement of East Asian cooperation (at which ASEAN is at the center). Subsequently, the “10 + 6” arrangement—designed mainly to reduce China’s influence—achieved its intended effect. However, the stagnation caused by such competition had also threatened ASEAN’s role as functional center within East Asian regional cooperation.17 The term “centrality” appears with very high frequency in various statements and declarations that have been made by ASEAN in recent years, indicating that ASEAN is already aware of the deep-level challenges to its central position. In addition, in 2009 the move by the U.S. to join and fully promote the TPP process has also furthered threatened ASEAN centrality.18 As APEC was clearly lifeless and as the Bogor Goals originally set earlier under the APEC framework—goals that were mostly relating to trade liberalization—were no longer suitable for a changed Asia–Pacific region19 this mean that the U.S. had lost an effective link to East Asian cooperation. The TPP, the objective of which is to establish the Free Trade Area of the Asia–Pacific (FTAAP), is on one hand a platform for the U.S. to reshape its cooperation with East Asia and on the other hand a means for the U.S. to establish the rules of ‘gameplay’ for East Asia through the new cooperation framework (Li, 2012). To date, the TPP approach is to admit members on a nation-by-nation basis. The entry requirements for the TPP process are very high, and has changed ASEAN’s accustomed way of working as a group in the context of East Asian cooperation. The goal designated by the TPP is a free trade area where APEC serves as framework. However, certain ASEAN members are not part of APEC. Thus, even if the TPP is eventually extended to APEC it may not consist of a complete ASEAN. Clearly, ASEAN cannot hope to exercise its central position within this framework. 17

Professor Yaqing Qin, a proponent of the process-centered theory, has seen the threat posed to the advancement of the East Asian cooperation process by competition in the framework area. See: Qin (2010). 18 On the motives behind the TPP and the course of its development, refer to: Shen (2012). 19 The U.S. believes that trade liberalization (based on measures such as the cutting of tariffs) is no longer important for the Asia–Pacific region of today, and that what truly needs to be tackled is the question of how to dismantle behind-border barriers to trade.

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Thus, although ASEAN knows very well that it would be very challenging to realize the goals of the RCEP but as Das observed, ASEAN has cleverly avoided Sino-Japanese competition through this new framework and successfully kicked off a new East Asian cooperation process with ASEAN at the center. Furthermore, in the course of this change ASEAN has in fact been able to kickstart the RCEP process through the “10 + 6” arrangement that it had preferred. This also helped ASEAN to free itself of the state of passivity caused by the expansion of the East Asian cooperation framework, a move that was intended to mitigate the growth of Chinese influence.

8.3 The Challenge of Multilateral Framework Restructuring Facing China A major change has occurred with Asia–Pacific/East Asian cooperation as America returns to the Asia–Pacific. This is because America’s attention has already replaced considerations of interests as the topmost priority for various priorities. The Asia– Pacific/East Asian cooperation landscape is facing the phenomenon of framework restructuring. In this new regional environment. From China’s perspective, in a time when traditional Asia–Pacific and East Asian cooperation platforms have lost their vitality one key characteristic of our surrounding environment is the accentuation of competitive regionalism.

8.3.1 Multilateral Partnerships to Stagnate in Next 5–10 Years, China to Turn to Regional Cooperation The formation of the TTIP is not good news for multilateral cooperation. As Marcel Fratzscher, head of the German Institute for Economic Research in Berlin stated: the TTIP may threaten the foundation of multilateralism, particularly the Doha round of trade talks; it will also weaken the influence of multilateral organizations such as the World Trade Organization (WTO).20 However, it would appear that this is an unstoppable trend as the U.S. and Europe will not mind the sacrifice of the WTO since they seek the right to reshape and establish new rules in the areas of trade and investment. Of course, to some observers both the advanced economies and developing economies also have a part to play in the failure of multilateral cooperation. Jean-Pierre Lehmann of the International Institute for Management Development (IMD) in Switzerland believes that the WTO, which commenced the Doha round in 2001, is close to death. One reason for this is that economies like the U.S., Japan and South Korea are not willing to adapt to a new reality; another reason is that the leading economics of the global South have not come together to exert a constructive 20

Excerpted in The paradox of regional trade liberalization. (2013). Study Times. p. 2.

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influence (Lehmann, 2013). Nevertheless, America’s choice to promote the TTIP signals the beginning of the fragmentation of international trade. During this period, China’s need for economic integration can only be fulfilled through regional or bilateral platforms. On one hand, the weakening of APEC as cooperation framework for the Asia– Pacific region following fragmentation by the TPP is one issue that China faces. Currently, America’s strategy is to use the high standards of the TPP to reshape APEC. However, whether China would be able to join the TPP in the next 5–10 years is yet unclear. In the area of Asia–Pacific cooperation China can only rely on the platform that is APEC. As mentioned above, APEC faces the threat of disintegrating consensus in the fact of TPP’s impact. Thus, the question for China is how to sever the link between the TPP and APEC and to revive APEC under a new consensus so that the grouping will be able to have further influence in terms of promoting regional cooperation in the Asia–Pacific. On the other hand, the “10 + 3” arrangement that China has long stood by has essentially lost its function as the key channel for East Asian regional cooperation, and while the RCEP has the potential to become the new platform for regional cooperation in East Asia there is still a fair bit of uncertainty with this arrangement. One key issue is whether ASEAN can be satisfied with using the RCEP as a process platform for the maintenance of “ASEAN centrality”. The task of reshaping the East Asia cooperation framework from the perspective of China’s interests is complicated both by the state of the RCEP process that has been promoted on the basis of the stronger China–ASEAN cooperation and whether China is able to coordinate with other key nations in the region. Currently, China has already proposed the objective of the “China–ASEAN Diamond Decade”. Just how to further enhance interconnectedness between China and ASEAN, work together with other East Asian nations while continuing to support ASEAN’s core position within East Asian cooperation, promote the healthy development of the RCEP process, and build a new platform for regional cooperation are all issues that are part of China’s environment and also a future that China can help to shape with active participation. The TPP issue is an avoidable issue for China as she seeks to advance regional cooperation in the next 5–10 years. The U.S. believes that as Japan and South Korea join the TPP process China will have no choice but to eventually consider the matter of joining the TPP.21 Internally, the question of whether to join the TPP is still a subject for debate in China. The majority believes that China is not yet ready to join the TPP as China has yet to attain the high standards demanded by the TPP process. More importantly, certain TPP rules run counter to China’s fundamental policies.22 There are also those who believe that certain major TPP principles point the way 21

Matthew Goodman, holder of the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies in the U.S., believes that “If Japan joins the TPP there is a 99% chance that South Korea will follow”, and that “by then China will have no choice but to turn back, and take a hard look at the TPP again as well as the possibility of joining the TPP.” See: The TPP: the U.S.–Japanese chess game. (2013). China Newsweek. 22 There are many who hold this view. E.g.: Cai (2013).

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forward for China’s development. They also consider the fact that China can make use of the TPP to provide an external boost to China’s domestic reforms.23 The trajectory of rule-making in the TPP process indicates that no matter if China joins the TPP, as long as the TPP process can advance China will subsequently be limited by an all-new international trade system and framework. The pressures of restructuring China’s domestic systems and industries in the short term will make the cost of joining the TPP very high for China. China would need strategic guidance for regional cooperation at an even more strategic level as well as rely on domestic reforms to complement bilateral and regional cooperation in practice in order to break out of this difficult situation.

8.3.2 APEC’s Weaker Role as Cooperation Platform for Asia–Pacific and East Asian Cooperation in Framework Restructuring Following the end of the Cold War, the regional cooperation situation in the Asia– Pacific has shifted from there being a single framework in APEC to a situation where APEC and the “10 + 3” ASEAN-centered framework in East Asia are working concurrently to promote cooperation within the region. Into the twenty-first century, the “10+” framework has fallen into stagnation while the TPP process is also creating a new regional framework for the Asia–Pacific within the APEC framework. That the “10+” framework has fallen into stagnation threatens ASEAN centrality within East Asian cooperation and also creates the opening for the East Asian cooperation framework to be completely eclipsed by the Asia–Pacific framework that is the TPP. In terms of the development of cooperation frameworks in the Asia–Pacific region, the RCEP—formed by ASEAN to protect its central position—has also led to the formation of a new dual-framework model after the dissolution of the previous dual-framework model consisting of APEC and the “10+” arrangement. For a highlydiverse East Asia, a situation where the TPP and the RCEP co-exist is a blessing no matter if the FTAAP24 is eventually formed. After all, many East Asian nations are unable to conform to the high standards of the TPP in the short term. The RCEP is a cooperation framework created by ASEAN in order to protect its central position at a time when the cooperation landscape in the Asia–Pacific region is changing. To date, the RCEP had received enthusiastic support by the various parties involved. The RCEP process has already begun, meaning that it is beginning to work to protect ASEAN’s centrality within regional cooperation. However, the RCEP objective of promoting regional integration by means of consolidating five bilateral free trade areas centered on ASEAN would not be an easy one to achieve. ASEAN does not appear to truly want to realize the objective set by RCEP in order 23

E.g.: He and Yang (2013). The authors of at least one study are of the opinion that an Asia–Pacific-wide free trade area that joins the TPP and RCEP will bring even more benefits to the region (Kawai, 2012).

24

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to change its reputation of being “process-heavy, advancement-light”. The RCEP being an all-new process for regional cooperation will certainly exert an effect on the cooperation landscape in the Asia–Pacific region. This is because a new dualframework model of cooperation consisting of both the TPP and the RCEP will appear in the region. For some time into the future various parties to the RCEP process will first have to reach consensus on the liberalization and integration objectives to be achieved. The many challenges faced by the RCEP process means that the coming negotiations will form an arduous journey forward, even if there is a very high possibility that consensus will be reached only on some RCEP objectives and energies would be saved for the “post-2015” matter.25 Currently various parties to the RCEP will still try to complete talks by end-2015. In terms of maintaining ASEAN centrality in regional cooperation the RCEP will be a successful effort. In addition, this new process will also have a certain impact on the state of regional cooperation. An all-new process for regional cooperation has already been put into motion, no matter if RCEP negotiations can bring to Asia a modern and high-quality free trade area by end-2015. Further, based on the design of the RCEP framework document, the arrangement will further expand post-2015 through the acceptance of even more of ASEAN’s dialogue partners into the RCEP. This means that the RCEP building process is a long-term one. For the Asia–Pacific region, the emergence of the RCEP will help the formation of an Asia–Pacific cooperation structure consisting of a parallel Asia–Pacific/East Asia double framework.

8.3.3 RCEP Expected to be Advanced to the Maximum Although it would be unlikely that RCEP talks will be wrapped up by end-2015 as intended, the process will be effectively advanced as a regional cooperation process. There are two main reasons for this: First, ASEAN places a high priority on completing negotiations by 2015. Over the past few years, the security situation in East Asia has changed dramatically, forcing ASEAN to respond in order to protect its own interests.26 As such, the RCEP proposal has foregrounded the issue of ASEAN centrality within regional cooperation.27 Key to the idea of ASEAN centrality is that ASEAN’s needs would be placed in regard and supported by various parties in the course of East Asian 25

Das, a researcher with the ISEAS–Yusof Ishak Institute in Singapore, stated the following opinion in an interview with the authors. 26 With the rise of China, the U.S. has “locked in” on China as its strategic opponent, leading SinoAmerican relations into a state of “strategic tension”. See: Zhu (2013). In the face of such changes, ASEAN (which has long relied on playing the major powers off each other in order to maintain its interests) is in fact even more sensitive than China, a direct player in regional competition. 27 The “ASEAN centrality” concept covers multiple areas. ASEAN has already clearly stated that it seeks to establish its central position in terms of regional security issues through the ASEAN Security Forum (ARF) and the ASEAN Defense Ministers Meeting Plus (ADMM+). Statement by

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cooperation. ASEAN has worked to promote cooperation within the grouping for 46 years. However, levels of integration within ASEAN are not high. The 1997 Asian financial crisis was highly damaging for ASEAN’s image. Thus, ASEAN has to enhance its image through efforts on various fronts. In terms of the RCEP talks, achieving consensus of whatever kind and completing negotiations as scheduled are both secondary concerns. ASEAN’s foremost goal with the RCEP proposal is to set the ball rolling on a new cooperation process that has ASEAN at its center. Second, there is sufficient need-based support for the RCEP. At the 2012 ASEAN Summit, ASEAN together with the leaders of six of its FTA partners jointly released the Joint Declaration on the Launch of Negotiations for the RCEP, expressing their common support for the RCEP (2012). Prior to this, various parties in the RCEP talks had already expressed their positive attitudes towards the talk. China had also made an undertaking to participate in and promote the RCEP process before the ASEAN meetings at the end of 2012. The U.S., which has always paid close attention to matters relating to East Asian regional cooperation, also rated the RCEP positively. What lies behind these statements of support is a regional need for the RCEP. A study by the Asian Development Bank (ADB) shows that at present Asian macro economies are more reliant on each other compared to the past (ADB, 2013a). At a time when the Doha round does not appear to lead anywhere Asian nations [have realized that] it would be more practical to establish the RCEP as a platform for regional cooperation. The U.S. is now working actively to promote the TPP. However, the prospects for the process are now better its high barriers of entry make it impossible for many Asian countries to join the process at present (ADB, 2013b). In other words, even though for ASEAN the promotion of the RCEP process allows it to protect both ASEAN centrality, there is also a strong economic drive for the RCEP, meaning that there is sufficient needs-based support for the RCEP. In fact, the process of the RCEP (a new platform for ASEAN-led regional cooperation—has already kicked off. On the one hand, the commencement of the RCEP talks means that East Asian regional cooperation has already transcended the “brake effect” of Sino-Japanese competition; on the other hand, ASEAN has clearly played a leading role in the proposal of the RCEP framework and the establishment of principles for the negotiations. The RCEP is already producing early results in terms of providing a platform for ASEAN to maintain its centrality within regional cooperation.

References Acharya, A. (1997). Ideas, identity, and institution-building: From the ‘ASEAN Way’ to the ‘AsiaPacific Way’? Pacific Review, 10(No. 3), 328–333. ADB (Asian Development Bank). (2013a). Asian economic monitor, p. 25. ADB (Asian Development Bank). (2013b). Asian economic monitor, p. 56.

the Chairman of ASEAN on the 45th Anniversary of ASEAN: The Way-Forward, Phnom Penh, April 4, 2012.

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Amador, J. S. (2010). ASEAN in the Asia-Pacific: Central or peripheral? Asian Politics and Policy, 2(4), 601–616. ASEAN FTA. (2012). Joint declaration on the launch of negotiation for the regional comprehensive economic partnership. Phnom Penh, Cambodia. http://www.asean.org ASEAN Secretariat News. (2013). Retrieved April 23, 2013, from http://www.asean.org/news/ asean-secretariat-news/items/asean-communiry-2015-is-top-priority-at-22nd-asean-summit. Bergsten, C. F. (2000). East Asian regionalism: Towards a tripartite world. The Economist. Cai, P. (2013). An inopportune time for China to join the TPP. China and U.S. Focus. http://www. chinausfocus.com Cai, P. (2013). Transversal issues in the TPP process and next-generation trade rules, and their impact on China. World Economy Study, No. 7. Chen, J., Pang, B., & Qiu, D. (2013). The current global economic landscape and its prospects. Journal of the CPC Central Party School, No. 4. Chen, S. (2013). From the TPP to the TAP: America mining the ‘potential dividends’ of economic growth all around the world. Zhongguo Shehui Kexue Bao, p. A06. Clinton, H. (2010). Remarks on regional architecture in Asia: Principles and priorities. http://www. state.gov/secretary/rm/2010/01/135090.Htm Clinton, H. (2011). America’s Pacific Century. Foreign Affairs, No. 189, 56–63. Das, S. B. (2012). Asia’s regional comprehensive economic partnership. East Asia Forum. http:// www.eastasiaforum.org Das, S. B. (2012). Asia’s regional comprehensive economic partnership. East Asia Forum. http:// www.eastasiaforum.org European Economic and Trade Relations Task Force. (2013). On the prospects of the Transatlantic trade and investment partnership of the U.S. and Europe. Xian dai guo ji guan xi, No. 3. Feng, Y. (2013). The strategic competition between major powers against the backdrop of “Big Change”. Xiandai Guoji Guanxi, No. 4. Friedberg, A. (2011). Hegemony with Chinese characteristics. National Interests. Fukunaga, Y., & Ikumo, I. (2013). Taking ASEAN + 1 FTAs towards the RCEP: A mapping studies. ERIA Discussion Paper 2013(02), Jakarta: ERIA. http://www.eria.org He, F., & Yang, P. (2013). China should not be absent from the TPP. Economic Herald. No. 23. He, Z. (2013). Ending major-power politics: A study on the objectives of the international legal system. Journal of Jilin University Social Sciences Edition. No. 3. Ikenberry, J. (2008). The rise of China and the future of the west: Can the liberal system survive? Foreign Affairs, 35–37. Itakura, K. (2013). Impacts of liberalization and improve connectivity and facilitation in ASEAN for the ASEAN economic community. ERIA Discussion Paper 2013(01), Jakarta: ERIA. http:// www.eria.org Jin, C., & Duan, H. (2013). Relations between the major powers and new developments in the post-crisis era. Journal of Hubei University (Philosophy and Social Sciences), No. 1. Jones, M. D., & Smith, M. L. R. (2007). Making process, not progress: ASEAN and the evolving east Asian regional order. International Security, 32(No. 1), 148–184. Kawai. (2012). Masahiro and Ganeshan Wignaraja, Japans Approach to TPP. Paper presented to the CNCPEC Seminar “TPP 2012: Progress and Challenges”, Beijing, December 7, 2012. Kim, M.-H. (2012). Why does a small power lead? ASEAN leadership in the Asia-Pacific regionalism. Pacific Focus, 27(No. 1), 111–134. Lehmann, J.-P. (2013). The TTIP trade strategy of testing China. http://finance.eastmoney.com/ news/1365, 20130401282725776.html. Li, X. (2012). The Trans-Pacific Partnership agreement: A major challenge in the course of China’s rise. International Economic Review. No. 2. Liu, Q. (2013). Strategic choices for China’s international role in the future and a discussion of China’s international strategic environment. Journal of PLA Nanjing Institute of Politics, No. 2. Liu, F. (2013). The transformation of the international system and China’s role. Foreign Affairs Review, No. 2.

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Narine, S. (2012). Human Rights Norms and the evolution of ASEAN: Moving without moving in a changing regional environment. Contemporary Southeast Asia, 34(No. 3), 365–388. Pieterse. J. N. (2013). Twenty-first century globalization: A new development era. (H. Wang, Trans.) China Governance Review, No. 1. Qi, H. (2011). Conceptualizing a leadership model for East Asian regional cooperation: A cooperative leadership model between China, the U.S., and Japan under ASEAN mechanisms. Southeast Asian Studies, No. 4. Qin, Y. (2010). East Asian regionalism: possibilities and models. A Changing East Asia and the U.S.A. Social Sciences Academic Press. Severino, C. R. (2012). Southeast Asia in search of an ASEAN community. (Wang Yu, Trans.). Social Science Academic Press. Shen, M. (2012). A cost-benefit analysis of the Trans-Pacific Partnership (TPP): China’s perspective. Journal of Contemporary Asia-Pacific Studies. No. 1. Song, X., & Ma, L. (2013). Building a harmonious international system: Origins, concepts and China’s strategic role. Socialism Studies, No. 2. Sun, C. (2001). Major-power relations and cooperation in East Asia. Guoji Wenti Yanjiu, No. 4. Wang, Y. (2010). Competition for pathway of Asian regional cooperation and China’s strategic choices. Journal of Contemporary Asia-Pacific Studies. No. 4. Wang, Z. (2013). Three indicators/reasons that Sino-American relations may enter a high-risk phase in ten years. Xian dai Guo ji guan xi, No. 4. Wu, X. (2011). Promoting positive interactions between China and the U.S. in the Asia-Pacific region. Guoji Wenti Yanjiu, No. 5. Yang, Y. (2013). America’s Asia-Pacific alliance and China’s strategy for its neighboring nations. Journal of International Security Studies, No. 3. Ye, J. (2013). On the current diffusion of, and shift in, authority in the international system and the impact on the international landscape. The Journal of Shanghai Administration Institute, No. 3. Yu, X. (2003). Cooperation in early 21st-century East Asia. Journal of Contemporary Asia-Pacific Studies, No. 10. Zhu, F. (2013). Sino-American strategic competition and the future of the security order in East Asia. World Economics and Politics. No. 3.

Chapter 9

Strategic Direction and Pathways for China’s Consolidation of the Asian Market

Today, as China finds herself within a strategic window of opportunity internationally as conditions are changing, the external environment is no longer able to meet the objective needs of China’s industrial and economic development. In particular, as China’s economic strength grows significant changes have already occurred in terms of external market conditions. To ensure stable industrial and economic development for China and also to provide a key economic platform for China’s external strategy henceforth, and at a time when traditional markets (the advanced economies) continue to be in a state of slump and China’s domestic market has yet to be fully activated, there is a need for us to make adjustments to China’s traditional external strategy and to work actively at the building of a regional market in Asia so as to create a new strategic window of opportunity internationally for the Chinese economy.

9.1 Challenges Facing China in Consolidating the Asian Market 9.1.1 Addressing Issues in the Chinese Economy in the Period of International Strategic Opportunities At the 18th National Congress of the Communist Party of China stated: “Looking at the general situation both at home and abroad, we see that China is still within an important strategic window of opportunity with promising opportunities.” So how do we mine these “promising opportunities”? This would need us to “… accurately judge the substance of this important strategic window of opportunity as well as changes in conditions”. This “important strategic window of opportunity” refers to long-term, comprehensive, and broad domestic and external political and economic environments or conditions that can help China to complete her industrialization © Social Sciences Academic Press 2021 J. Zhao et al., China’s Rise and the Development of Asian Regional Integration, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-16-4644-7_9

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process and to realize a swift enhancement of her economic strength. Here, “window of opportunity” does not merely refer to the development opportunities that have been brought on by domestic circumstances but also by international developments. In the past, China has been able to make pretty good use of circumstances on the international scene to raise her economic development to another level. However, as the Chinese economy becomes stronger and as changes occur both domestically and on the international scene (with the latter in particular) the “readymade” development opportunities provided to us by the current international environment will become fewer. However, China has not yet achieved her goals in terms of the industrialization process and economic development, and still needs the international environment to help with resolving certain issues in economic development. Thus, China needs to be proactive in “creating” a new international window of opportunity for herself for the sake of future economic development. Since the “opening-up” of China, the country has made full use of the favorable conditions on offer in the international environment, changed her model of economic development, and encouraged the development of an export-oriented economy. This external orientation has helped China to quickly grow her economy. On one hand, China has made use of the opportunity provided by continued shifting of industries overseas by the advanced economies as well as the international division of labor to promote the development of her labor-intensive industries to form a large-scale export industry that would also promote the growth of China’s domestic economy. On the other hand, at a time when the domestic market has yet to be fully developed China has made use of the product demand left by the shifting of industries overseas to realize supply balance overseas and thus realize her goal of promoting Chinese industrialization. China has swiftly become a world manufacturing power, a major exporter of finished goods, and the world’s second-largest economy thanks to her ability to make good use of the strategic window provided by the international environment. As the Chinese economy becomes stronger, profound changes are also occurring in terms of China’s relationships with the rest of the world. Correspondingly, there have also been changes in terms of the form and conditions of the international strategic window of opportunity for China. The most fundamental change here is that external market conditions—in markets provided by the advanced economies— are changing. In the past, China was less open to the outside world and compared to the global market China was but a “minor trade player”. Although China’s exports have been on a constant growth path the quantum of Chinese exports could still be absorbed by the advanced economies. As the volume of Chinese exports continues to grow, the advanced economies have also put more restrictions on products exported from China. The classic response here is the trade conflict, the number of which has grown. Pressures for the renminbi to appreciate have also grown. In particular, talk of asking developing countries like China to perform economic rebalancing had proliferated after the 2008 global financial crisis. That is to say, the global market (including the advanced economies) are finding it increasingly hard to match the growth in China’s manufacturing scale and export capabilities and thus absorb the growing volume of Chinese exports. External markets have become more restrictive

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markets and are no longer growth markets that can absorb any amount of goods exported to them by China (and hence help to promote China’s industrialization and economic development). This is a key change that China will have to contend with for a significant period of time henceforth in her external markets. Restrictions placed on Chinese exports by external markets are on the rise, meaning that for a certain period into the future it will become more challenging for China to rely on external markets, especially markets in the advanced economies, to help resolve or partially resolve China’s need for markets as Chinese industrialization and mid-tohigh economic growth continue apace. This is also a key reason for the increase in tension in the international environment for China. At the same time, although the domestic market is beginning to grow and develop it has yet to reach the scale or structure that future industrialization requires. Currently, China has entered the mid-to-late stage of industrialization and there will definitely be new needs in terms of the scale or structure of consumption. However, the domestic market today hardly matches this new phase in industrialization. On one hand, the volume of domestic consumption does not match the level required by China’s industrialization process, something which has been made clear by the effect of exports on economic growth and China’s significant trade surpluses. On the other hand, China’s consumption structure is a comparatively low-income one that is different from the kind of consumption structure needed by the industrialization process. We can say that the current state of China’s industrialization and mid-to-high levels of economic growth require a certain kind of market that has placed China in a difficult situation where external demand is restricted and domestic demand, insufficient. This will have a major effect in terms of delaying the course of China’s industrialization and undermining her bid to swiftly strengthen the economy. Of course, that is not to say that China’s strategic window of opportunity is disappearing or no longer existent. In fact, although external markets do not have an “add-on” value to China’s industrialization process or economic growth, they continue to play a significant “inventory” role for the Chinese economy, especially in terms of market structure. The high-income consumption structure of the advanced economies can provide China with a market for her high-tech products. On the other hand, the domestic market does not have any existing “inventory” value for the Chinese economy but rather “add-on” or “incremental value”. It is just that the level and structure of domestic consumption can not yet completely make up for the volume and structural lack caused by the lack of growth in demand for Chinese exports by the advanced economies. Thus, seeking out major markets with potential has become a key problem for us to tackle. This would need us to change the way we think and work actively to change the external environment so that the negative factors that have an impact on the development of the Chinese economy can be transformed into beneficial factors. This is what we mean by actively “creating” a new international strategic window of opportunity for economic development. For the current time, the “creation” of a new international strategic window of opportunity for economic development is primarily about how to build new external markets to help stabilize the future course of Chinese industrialization and economic development. On the one hand, we need

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to work actively to develop the domestic market since after all in an open economy the domestic market is also part of the global market. We would work actively to advance domestic economic reforms, reform the distribution-of-income system, and shift the dividends of economic growth from a focus on capital towards labor in order to stimulate a swift growth in the size of the domestic market and realize a balance between supply and demand. On the other hand, at a time when the size of external markets is limited and the market structure has ossified, we must be more proactive in terms of our external strategies and deal with the issue of the loss of markets in a creative manner.

9.1.2 Strategic Direction for China’s Consolidation of the Asian Market China should move from a position of passivity to active efforts to create change. In the coming 5–10 years, although compared to China’s neighbors and powers outside of Asia China’s economic strength is not sufficient to “reshape” the surrounding environment, China would be able to move out of what is a “passive adaptation phase” with respect to her surrounding environment to a phase where China is an active participant in the consolidation of the regional market, and a phase where she serves as “adjusting player”. The key challenges that would need to be tackled are: First, how to mitigate the sustained negative impact of the 2008 global financial crisis. Since the crisis the global economy has seen ups and downs in terms of its recovery. The reason that the negative impact of the crisis has been so sustained is that the “drive system” behind this round of economic recovery has not been fully replaced and the existing “drive system” is no longer capable of pulling the global economy forward. This is especially true for the advanced economies. If the impact of the financial crisis continues then whether China and China’s neighbors can maintain a high rate of growth will also be an issue. After all, consumers in the advanced nations are still the prime export target for China and China’s neighbors. Second, how to avoid conflicts of interest between China and China’s neighbors as these parties go on the rise. In the next 5–10 years the nations around China will also enter a period of economic growth and structural transformation,1 especially since most developing nations have established a mid-to-long-term development strategy centered on economic growth mainly by means of exercising their respective comparative advantages in production. In an environment where conditions for economic growth are limited, pressures and market competition between China and surrounding nations will be exacerbated, such as in the areas of competition for resources, the shifting of industries to other countries, and room for industry upgrading. Third, how to effectively deal with the “meddling” of powers from outside the region. External powers have often had a decisive role in terms of the Asian economy 1

The ADB has published an annual report on economic transformation in Asia. See: Asia’s Economic Transformation (2013).

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and security at a time when the economies of surrounding nations have been weaker. As China’s economy rises the U.S. has sought to control China’s regional influence. That the U.S. is currently stepping up on its TPP talks with China’s neighbors is a clear example of this desire.2 Of course, it is an obligation for powers from outside the region to maintain growth for China’s neighbors and not to damage the basic trend of regional economic growth. As China’s neighbors become stronger economically ex-Asia powers may also step up on their attempts to gain market share in these countries. For example, America’s plans to double its exports and thus grow its economic benefits have essentially cast an eye on China’s neighbors. In terms of future trends, the strengthening of China’s neighboring economies can help Asia become a relatively independent and important ‘pole’ in the world and thus reduce meddling in the region by outside powers.3 Fourth, how China can realize the transformation from manufacturing power to manufacturing and consumption power. The shift towards becoming a consumption power is the key force behind China’s exertion of greater influence in her surrounding region. This is also a key factor in America being able to exist around China over a long time. The shift from manufacturing power to consumption power requires changes to China’s domestic policies.4 The aforementioned challenges, however, can be resolved. We believe that China should work actively to realize a “model of shared economic growth” with her neighbors. This model is one wherein China marks use of the opportunities provided by economic development in neighboring nations while also providing these neighbors the opportunities that have presented themselves with China’s economic growth. This will help to mitigate the pressures created by the challenges mentioned above. This model relies primarily on the fact that China’s neighbors will not give up easily on the core objective that is economic growth at a time changes are occurring in terms of economic growth and economic structures. The shared hope for economic growth is 2

Xiangyang Li holds the opinion that the TPP is designed to counter the rise of China and that the TPP has become part of advanced economies’ measure against the rise of emerging economies (with China at the head). The TPP process has made the limitations that China faces in the international economic system as she seeks peaceful development even more obvious. See: Li (2012), Li (2013). 3 Deguang Zhang believes that the growth of the influence developing nations, especially the emerging economies, in international affairs has accelerated the pace of changes in the international landscape and world order. See: Zhang (2010a). 4 Domestic scholars have begun to pay attention to this aforementioned transformation issue. Zhonggen Mao et al. hold the opinion that China has yet to become a global consumption power and would need to work actively towards such a shift through means such as the raising of income for urban and rural residents alike, narrowing the income gap, improving the social security system, enhancing her infrastructure and enhancing the area of social services, enhancing financial services, and accelerating the development of the service industries. Mao also believes that as China has certain major-economy characteristics the Chinese model of economic growth should be driven primarily by domestic demand. As such, he proposed the model of “major-economy demand-driven development”. Fei Liu et al., believe that the Western experience shows that with the arrival of an era of prosperity consumption-driven modernization would be a longer-lasting type of economic modernization strategy, and thus it is imperative the China acts immediately to vigorously promote the building of a modern consumption system. See: Ma and Tao (2011), Mao (2011), Liu and Li (2011).

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what keeps relations between China and neighboring economies stable; as economic relations between China and her neighbors become more complex and developed on multiple levels, the cost of placing constraints on each other becomes higher while the mutual advancement of each other’s economies produces greater benefits.5

9.2 Main Pathways for China’s Consolidation of the Asian Market 9.2.1 Strategic Significance of Building an Asian Market At present, major differentiation has already occurred with the structure of China’s external markets. This is an opportune time for China to build or consolidate her external markets. Following the 2008 global financial crisis markets in the advanced economies such as the U.S. market and in the European nations weakened. There was very little room for growing these markets by means of cooperation as they had already shifted a good part of their goods production to developing nations (including China), and as these markets are already highly international markets. Thus, these were not prime targets for China. In contrast, Asian markets (referring mostly to markets in East Asia, Southeast Asia and South Asia) were becoming part of a massive emerging market. When we compare the structure of imports and exports by various Asian economies before and after 2008 we find that there has been a swift increase in goods imported from, and exported by, Asia by Asian countries (as a proportion of total Asian imports and exports) while the proportion of goods imported from, and exported to, Africa has been on the decline. One key reason for the rise and development of the Asia market is the sustained growth in per-capita income levels in recent years in developing nations across Asia. In 2000, there were more than ten Asian nations with average GDP per capita of lower than USD1000. Today, however, the figure has shrunken to a handful. The direct consequences of this rise in per-capita income levels are greater spending and 5

There is much literature that posit that China should turn to domestic demand when facing limitations in the external environment, and thus rely on domestic structural adjustments to counter changes outside of China. For instance, Yongding Yu believes that no matter if the export situation with the U.S. will improve China must reduce its dependence on external demand; Yunsheng Fu is of the opinion that China will have to make new policy choices in the face of constraints in the international environment and the lack of balance in the domestic structure. Qiuju Zhang has found using a quantitative model that there is long-term equilibrium and stability in the relationship between the external economic environment and China’s exports, and that the external economic environment promotes the growth of Chinese exports while Chinese exports also improve the external economic environment. Thus, at a time of growing economic globalization China’s export policies must take into consideration the external international economic environment. See: Yu (2010), Fu (2011), Zhang (2012). We are of the opinion that apart from the following arguments, we should also seek to create two-way interaction with the external environment. Thus, we have proposed the model of shared economic growth.

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changes to the structure of consumption. This is why Asia has become an emerging major market that is regarded highly by countries around the world, including the advanced economies. The building of an Asian regional market has both practical economic significance and geopolitical meaning for China. Apart from providing China’s industrialization process and growing economy with the market it needs, an Asian regional market can also serve as the economic platform for China’s implementation of her external strategy. Although China has established closer economic relationships with her neighbors following the ‘opening-up’ of China, these relationships have always been based on bilateral or vertical division of labor. China has easily become a part of the regional division of labor. However, China can also be easily excluded from this structure. This sort of unstable regional economic relationships has led to the slew of security and political problems faced by China recently. Thus, working actively to promote the consolidation of the Asia market and to enhance China’s position and role within the regional division of labor can help create a more stable immediate environment for China. Asian economies have always relied on the regional division of labor to establish economic relationships with each other. The trade targets produced by such a division of labor are also mainly centered on intermediate products, which make up around 70% of all intra-regional trade in Asia. The economic relationships established on the basis on such stable division of labor are sufficient reason for maintaining strong relationships between the participating economies. This is also why generally speaking there is no strong need for cooperation on the regional level. However, Asia is not a unified regional market. Or perhaps we should say that Asia is only a potential major market at the moment and does not have the major-market effect the way Europe and the U.S. do. The reason is that developing nations in Asia have participated fairly little in regional cooperation. Currently, Asian nations participate more in bilateral or sub-regional cooperation arrangements. Although multilateral cooperation arrangements do exist, these arrangements have not had the effect of consolidating the Asia market. Thus, the building of an Asian regional market is a key solution to the loss of external markets and also an important task as China seeks to create an international window of opportunity for herself. The building of an Asian market is a proactive strategic act by China as she seeks to align her interests with those of other economies. Therefore, such behavior will be a departure from China’s traditional strategic approach with other nations and requires changes to the principles and pathways of China’s external strategy. To consolidate various disparate national markets into a unified market we must first eliminate the key obstacles that exist for reasons of national boundaries. This way, we can then realize the free flow of goods, production factors, and personnel, etc. The elimination of these obstacles requires the institution of cooperation arrangements and joint efforts by various Asian nations.

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9.2.2 Main Pathways for Building an Asian Market China will have to take the following measures in the coming 5–10 years. First, China will have to grow the trade of goods and services with her neighbors. Currently, the East Asian division of labor primarily still serves the traditional markets outside of the region, making of a unique economic structure where production is performed within the region and consumption, outside the region. The rise in Chinese and ASEAN per capita incomes can partially make up for the consumer demand gap left behind by the advanced economies. This way, production targeted at the markets of both parties will replace production traditionally geared towards markets outside of the region. Production cooperation between the two will also change as the division of labor evolves: while in the past the division of labor in East Asia has primarily been of the vertical type in the future there may be a transition towards the horizontal type to form a structure that primarily serves the needs of the regional market. On the one hand, as neighboring economies become stronger they are also becoming bigger importers of finished goods (including capital goods and consumer goods). Expanding investment needs will in turn lead to more imports of capital goods, while the rise in per-capital income will promote the change in consumption structure—towards the mid-to-high end of the market—in neighboring countries. Thus, China’s neighbors may replace traditional markets in the advanced economies to become China’s key export destination. On the other hand, China’s developing-nation neighbors are entering the stage where economic growth is being made possible by investment. The expansion in their production capacities may exceed the scale of their respective domestic demand. Thus, China’s neighbors also share a focus on finding new markets for their excess production. As constraints in external markets become more severe, China has also entered the stage where she is producing mid-to-high-end products. Consumer goods may become a key import for China and serve as the driver of economic growth for developing nations around China.6 Second is to enhance investment in surrounding nations in order to grow economic benefits for China while aiding economic growth in these nations. The more backward members of ASEAN are one of the potential areas for market growth in East Asia. Aiding economic growth with these members is the key pathway to enhancing their consumption capacity. China can accelerate the pace of industry transfer to these countries to an appropriate degree. Doing so can help these backward members to develop their economies and at the same time increase Chinese imports of consumer goods from ASEAN. Although there is tremendous consumption potential with the China market, the rate of growth in ASEAN exports of consumer goods to China has been low as China is herself a strong manufacturing nation with significant competitive advantages. Currently, the developing nations around China are in the stage where their economic growth is driven primarily by investment. In order for 6

Alexander A. Dynkin et al., believe that by the year 2030 China would have become the world’s largest consumer economy as well as the key player in maintaining the levels of global consumer demand. See: Dynkin et al. (2011).

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these nations to move on to another stage they will first have to resolve the problem of lack of capital. Since the 2008 global financial crisis developing nations around China have been working actively to improve the investment environment. For instance, Myanmar has worked to introduce laws and regulations designed to encourage the inflow of foreign capital. Third is to participate actively in the building of systems and institutions for the consolidation of the regional market to realize ‘domestically’-driven economic growth on the regional level.7 The key motive in participating in regional cooperation is to consolidate the regional market to provide the driver for future regional economic growth. For instance, although currently the ACFTA agreement already covers a number of areas there is still some way to go before the agreement reaches the standards of FTA agreements signed by the advanced nations. Areas that have not yet been covered] include intellectual property rights, government procurement, and labor standards. As such, henceforth we would need to deepen and broaden our FTA efforts to realize trade and investment liberalization of even higher quality and of broader coverage for China–ASEAN. Fourth is to provide even more support to neighboring nations and aid in their infrastructure-building efforts to realize interconnectedness on an even broader scale. The enhancement of cooperation with external parties and seeking out even more external resources are one of the growth strategies adopted by developing nations around China. China can provide more support to these countries, thereby promoting their economic growth while creating new opportunities for the Chinese economy. Infrastructure is one of the prerequisites for the furthering of industrialization in China–ASEAN. It is also an area that requires heavy investment. Currently the infrastructure in China and ASEAN—especially with the more backward members—is not sufficient to satisfy the growth needs of these members. In the future, apart from leveraging on the capabilities of both parties, other parties may also need to be roped in for infrastructure investment. Of course, infrastructure is not only about the hardware such as highways. It also involves the building up of the “soft environment”, such as through human resource development.

7

Jinhong Han has made use of data from the ASEAN-10 for the period 1991–2010 and the gravity model to better understand the impact of various factors on demand for end products in the East Asia region. Han’s results show that regional trade agreements (RTAs), economic scale, the 2008 financial crisis and absolute differences in GDP per capita have a positive relationship with demand for end products in the region, and the population size and geographic distance have a negative relationship with demand for end products in the region. The 1997 financial crisis was also shown to have a negative relationship with demand for end products in the region, although the relationship was not statistically-significant. In terms of differences between industries, apart from the distance variable various explanatory variables showed a greater effect with demand for capital goods compared to demand for consumer goods. See: Han (2013).

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9.3 China’s Cooperation Strategy for Asia China has gradually integrated into regional cooperation mechanisms since she joined APEC in the early 1990s. Following the 1997 Asian financial crisis China began to contribute positively to the building up of East Asian cooperation, and also began to promote such cooperation from the perspective of her interests. In general, China believes that the strengthening of regional cooperation is in line with her fundamental interests, while the formation of a regional cooperation framework centered on East Asia has been regarded as the most appropriate overall strategy for a China seeking to first stabilize relations with surrounding nations. Thus, from the beginning China has expressed positive sentiments towards the East Asian cooperation framework represented by the “10 + 3” grouping. Thereafter, with the successful experience of the ACFTA as the starting point China has gradually established her FTA strategy based on bilateral free trade areas. As the center of the global economy shifts slowly from the sluggish Western economies towards East Asia, and as the Chinese economy goes on a swift ascent, key nations have become more enthusiastic about East Asian cooperation. The constant tabling of competing cooperation proposals has led to constant pathway competition within East Asian cooperation. This has, to a very large extent, become an obstacle to the continued deepening of East Asian cooperation (Wang, 2010). In 2009, the U.S. announced that it was joining the TPP process, and began to bring certain East Asian nations into TPP talks. East Asian cooperation began to be challenged by the U.S.-led TPP cooperation framework. In 2010, breakthroughs were achieved in the CJSKFTA process (a long-term cooperation project between China, Japan and South Korea). The conclusion of the joint China–Japan–South Korea government-industry study signaled the beginning of the preparation phase for CJSKFTA talks proper. However, as the TPP and CJSKFTA processes advanced, ASEAN was also working to push for the building of the ASEAN Community on one hand8 and started preparing for a new regional cooperation framework on the other. In 2011, ASEAN released its ASEAN Regional Economic Partnership Framework document, and in 2012 the grouping announced that it would first launch RCEP talks based on the “10 + 6” framework in 2013. In the face of swift changes in the East Asian cooperation landscape, the urgent need for China was to establish a strategy for regional cooperation, and to obtain a full understanding of various parties’ interests and strategies in the context of East Asian cooperation.

8

In 2011, the Bali Concord III ASEAN claimed that it was stepping up on the building of the ASEAN Community in order to establish an even more united front in global affairs.

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9.3.1 Competition in Regional Cooperation Framework in the Context of China’s Rise Since 2011 changes to international relations and the global order have been taking place at a significantly quicker pace, and certain structural changes and developmental trends have become clearer (Yang, 2012). China, and even her people, is feeling the pressures from a worsening international environment due to the intensification of disputes in the South China Sea and between China and Japan. In terms of the cause of these changes, it has been believed that the swift rise of China’s global position has been a key factor. The comparative enhancement of China’s regional influence has drawn the attention of key nations worldwide as well as of China’s neighbors, and this concern has been reflected in the formation of a competitive landscape in the area of regional cooperation. Since the ‘opening-up’ of the Chinese economy China has been able to maintain steady economic growth. The average rate of over 9% growth per annum in GDP has served as strong support for the rise of the Chinese economy. In 1991, China’s GDP was valued at USD 409.1 billion, a figure that placed China at 10th position in the world. Twenty years later in 2011, China’s GDP has risen to USD 7.3011 trillion, and she had become the second-largest economy in the world. (Refer to Table 9.1) Of course, this rise—which gradually came to be regarded as a miracle— had not been not an easy one at all. This is because in the three decades or so that had ensued the global economy had endured repeated setbacks in the form the 1997 Asian financial crisis, the recession caused by the 2007 U.S. subprime loan crisis, and the subsequent sovereign debt crisis in Europe. On the other hand, China also had to deal with blows caused by multiple major natural disasters including floods and earthquakes. The arduous path taken to success had instead boosted the selfconfidence of the Chinese. At the same time, this has also exacerbated worries on the Table 9.1 Changes in GDP of major countries in the world, 1991–2011 In USD1 billion Country

2011 GDP 2011 ranking 2001 GDP 2001 ranking 1991 GDP 1991 ranking

U.S

15,094.4

1

10,171.4

1

5992.1

China

7301.1

2

1159.0

6

409.1

10

Japan

5868.5

3

4245.1

2

3484.7

2

Germany

3578.6

4

1873.8

3

1848.6

3

France

2778.1

5

1302.7

5

1244.6

4

Brazil

2476.6

6

502.5

11

465.0

9

U.K

2421.2

7

1406.3

4

1055.8

6

Italy

2199.6

8

1140.9

7

1195.2

5

Russia

1849.6

9

309.9

16

560.1

9

India

1839.3

10

477.5

12

289.6

16

Source IMF

1

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part of other countries with regard to China’s rise, particularly after China overtook Japan to become the world’s second-largest economy.9 The changes in relative economic strength has led to the return of realpolitik in international relations within the Asia–Pacific region. This has in turn caused nations in the region to look at matters such as territorial disputes and regional cooperation from this angle, thereby complicating the regional landscape. The situation is both complicated and straightforward at the same time. For various nations in the Asia– Pacific region at present, what they are doing is simply to maintain their existing favorable positions or to improve their positions amidst the power restructuring caused by the rise of China. The U.S. was the first country to complicate the Asia–Pacific situation. As the current global hegemon, the U.S. has complex interests in East Asia. Realpolitik has it that changes in economic strength will invariably cause power shifts. The swift rise of the Chinese economy has been regarded as a direct threat to the dominant position of the U.S. Therefore, America has clearly treated China as a potential challenger. The focus of U.S. policy towards China has shifted from system-related and human rights issues to the issue of economic growth. Examples of U.S. attacks on China’s economic weaknesses include U.S. accusations that China has been undervaluing the renminbi and its calls for green growth. The U.S. has taken a hostile attitude to the possibility of East Asian cooperation being led by China.10 In practice, the approach that the U.S. has adopted is to vigorously promote the TPP as a competitor to East Asian cooperation frameworks. Although the U.S. has claimed that the aim of the TPP process is to help establish an Asia–Pacific free trade area, in reality if the so-called “platinum standard” that is the TPP is established then it would include all of China’s main trading partners, meaning that China would be forced to accept trade standards that are not suitable for her. For this reason, the U.S. has emphasized its strategic relationship with Asia–Pacific nations. The TPP is no longer an economic arrangement but a strategic partnership framework designed to counter the rise of China. This has caused nations that had chosen to balance China and the U.S. in the post-Cold War world to have to choose sides. The existing harmonious situation built upon strategic ambiguity had been undermined and the Asia–Pacific landscape has been made more complicated. Apart from the U.S., Japan is another key player in international relations within the Asia–Pacific. For a very long time after the Second World War Japan had relied on the regional production network built upon the flying geese paradigm and had played a leading role in economic terms. In the area of security, Japan had relied on the Treaty of Mutual Cooperation and Security between the United States and Japan to protect America’s interests in East Asia with other East Asian allies. Japan appears not to be accepting of the swift rise of China’s economy, and thus it has been 9

Zhong Huang and Xiaosong Tang believe that key Asia–Pacific nations and organizations have not chosen to counter the rise of China. However, they also believe that this has been severely affected by America’s China policy. See: Huang and Tang (2011). The authors of this volume also believe that there is a great deal of uncertainty in this response. 10 According to Xiaoming Zhang, this is in line with America’s interest calculations. See: Zhang (2010b).

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begrudging on the leadership issue within regional cooperation.11 The attention to paid to comparative gains within realpolitik has led Japan to abandon the “10 + 3” pathway of establishing an East Asian free trade area and to turn towards the approach of working with the likes of Australia, New Zealand and India instead. However, in its recent rebalance to Asia the U.S. has clearly stated its intentions to prevent Chinese dominance in East Asia. Sino-Japan competition has clearly been superseded by Sino-American competition. Japan has chosen to stand with the U.S. to counter China’s rise. The South Korean and ASEAN economies are more reliant on the Chinese economy. However, for a long time these countries have been dependent on the U.S. in the area of security, which makes their positions a little more complex. For a very long time the nations of ASEAN have adopted an optimized risk-avoidance strategy in order to avoid being mired in this predicament. On the one hand, they have worked to maintain their relations with the U.S., and on the other hand, they have also worked to strengthen their economic cooperation with China while trying not to affect their relations with the U.S. However, the U.S. regards China as a potential competitor, creating pressures on these nations trying to balance the two. Nevertheless, it is not clear that ASEAN nations are seeking to contain China. That is to say, they have taken a more neutral stance with regard to current discussions about power shifts. Of course, individual ASEAN nations may have different attitudes. For instance, Vietnam and the Philippines clearly believe that the rise of China to be disadvantageous in their territorial disputes with China. Thus, they do not wish to see a stronger China and hope that China can be contained by the U.S. Certainly, what they hope for most is to resolve their territorial disputes before China rises rather than to put these disputes aside and engage in joint development with China. If we are to look outside of the Asia–Pacific region we will find the key reasons for the development of complications in the regional landscape. First, the rise of the Chinese economy has damaged the existing power structure in the Asia–Pacific and given rise to the aforementioned countermeasures. Second, the rise of the Chinese economic and the strengthening of Chinese nationalism has also provoked nationalistic reactions in regional countries. In general, currently the Asia–Pacific region is in a transitional period where the center of power is shifting due to uneven economic development. Reactions to this development have been varied: there are those who hope to maintain the existing power structure, and there are those who have adopted a wait-and-see approach. However, because the U.S. has returned to realpolitik because of the rise of China, international relations within the region will be mainly governed by this ideology for some time to come. This most direct impact of this change on cooperation within East Asia is in the appearance of competing cooperation frameworks as described above.

11

For more on Japan’s complicated psychology with regard to the problem of leadership in regional cooperation, refer to McCormack (2008).

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9.3.2 Interdependence and the CJSKFTA One of the effects of the 2008 global financial crisis is that China, Japan and South Korea came to see the need to enhance cooperation in the regional market. At the same time, the three countries also recognized the importance of working together to ensure the stability of the East Asian economy. Since then, in their annual meetings the leaders of the three countries have been focused on the issue of East Asian cooperation, and substantive progress has also been made in the CJSKFTA process. The establishment of cooperation mechanisms based on shared interests means that cooperation between the three is no longer simply crisis-driven. However, with the change in 2010 that is China’s surpassing of Japan to become the world’s secondlargest economy by GDP there has also been a psychological impact made on regional countries. In particular, the impact on the minds of the Japanese people (Japanese Ambivalent, 2009) has to a certain extent also led to a hybrid impact on China– Japan–South Korea cooperation. On the one hand, Japan has felt the need to enhance her economic cooperation; however, at the same time it has also weighed the matter of comparative gains in the context of international cooperation (Yuncang, 2010). After the 2011 T¯ohoku earthquake and tsunami, although pressure on Japan to shift its industries to Asian nations such as China had grown,12 Japan chose instead to beat a retreat on the matter of the CJSKFTA. It was only when the U.S. joined the TPP process and applied pressure on Japan did the latter become more enthusiastic about the CJSKFTA. This indicates that although China–Japan–South Korea cooperation is already shifting away from crisis-driven mode and although trade integration is now clearly beginning to be driven by the market (Xu & Bilian, 2011) there is still a fair bit of uncertainty in the cooperation process due to multiple factors. The process remains affected by domestic politics and also the international relations environment beyond the Asia–Pacific region. Here, the problem of low trust due to historical issues and territorial/maritime disputes and the recent strengthening of the U.S.–Japan and U.S.–South Korean alliances are also impeding further deepening of cooperation between the three countries.13 China must have a strong understanding of the mutual dependence that occurs between the Chinese, Japanese and South Korean economies. Given the rise of both Chinese nationalism and the Chinese economy, China must be able to identify the characteristics of relations between the three in order to craft a strategy for regional cooperation. i. Mutual dependence between the economies of China, Japan and South Korea 12

This has been made especially clear when issues emerged in the Japanese economy. For instance, in a short period immediately following the earthquake over a hundred Japanese enterprises sent delegations to China to study the investment environment there. See: CCID Research Institute (2011). 13 As for the U.S. factor, on May 30, 2012 Professor Wang Jisi of Peking University stated in a talk at the Chinese Academy of Social Sciences that China can choose to treat the TPP issue while putting the matter of China-U.S. relations aside. However, the implementation of this approach may be difficult in practice.

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China–Japan–South Korea cooperation began as a response to external threats and beginning with the ASEAN “10 + 3” regional framework that was set up to counter the challenges posed by the financial crisis. The passive nature of this type of cooperation was still present in 2008, when the three countries held a meeting between its leaders. Nevertheless, cooperation between the three nations has taken on the dimension of regional economic integration in Northeast Asia, with initiatives towards deep market consolidation and industry cooperation, etc. This indicates that endogenouslydriven cooperation is beginning to emerge in this long-term interaction process. The formation of the concept of gaining benefits from cooperation has made China– Japan–South Korea cooperation even more meaningful when analyzed from the gains perspective. In this respect, the mutual dependence between the three economies is very clear. First, from Table 9.2 we can see that for China, Japan and South Korea, exports to the other two markets make up a significant part of their total exports. In 2011, over 12% of China’s exports were to the Chinese and South Korean markets, while exports to China and South Korea made up 27.7% of Japan’s total exports. For South Korea, nearly one-third of its exports were to China and Japan. Exports between the three countries have been growing at rapid rates. Although Chinese exports to Japan and South Korea as a share of her total exports have declined due to a dramatic growth in her overall export numbers, exports to the two countries had grown over 100% between 2005 and 2011. Japan–South Korea trade pales in contrast. In general, at a time when traditional markets in the U.S. and Europe have been facing internal Table 9.2 Trade between China, Japan and South Korea Exports to S Korea (in USD100 million)

Japan + South Korea/total exports (%)

China

Total exports (in USD100 million)

Exports to Japan (in USD100 million)

2005

7620

840

351

15.6

2010

15,778

1210

688

12.0

2011

18,984

1483

829

12.2

Japan

Total exports (in USD100 million)

Exports to China (in USD100 million)

Exports to S Korea (in USD100 million)

China + South Korea/total exports (%)

2005

5949

801

466

21.3

2010

7698

1495

624

27.5

2011

8233

1621

662

27.7

South Korea

Total exports (in USD100 million)

Exports to China (in USD100 million)

Exports to Japan (in China + Japan/total USD100 million) exports (%)

2005

2844

619

240

30.2

2010

4664

1168

282

31.1

2011

5552

1342

397

31.3

Source Table data collated using UN Comtrade Database

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issues, this mutual dependence between the three East Asian economies is important to all parties involved. The growth in trade is closely linked to investment between the three countries. In particular, Japanese and South Korean investment in China has contributed to Japanese and South Korea trade with China through enterprise internal trade. According to the White Paper on Cooperation Between China, Japan and South Korea released by the Chinese government recently, as of end-2011 Japan and South Korea have invested USD80 billion and USD50 billion in China respectively. We believe that investment between China, Japan and South Korea will further increase with the implementation of the Agreement Among the Government of the People’s Republic of China, the Government of Japan and the Government of the Republic of Korea for the Promotion, Facilitation and Protection of Investment. Second: for China, there are certain advantages for promoting cooperation between China, Japan and South Korea, especially cooperation in the areas of trade and investment. One direct reason is that China’s massive and swiftly-growing domestic market is highly attractive to Japan and South Korea. From Table 9.2, we can also see that while China’s dependence on the Japanese and South Korea markets has declined in relative terms, dependence by Japan and South Korea on the Chinese market is growing. This market structure proves that there is a solid economic foundation for enhanced economic cooperation between China, Japan and South Korea, and that such cooperation has also provided China with more room to seek out deeper cooperation. At the very least, any new proposal by China will not be questioned simply because China’s interests are clear. ii. The conditions limiting the development of the CJSKFTA The interdependence between the Chinese, Japanese and South Korean economies is an objective fact. However, cooperation between the three countries is still being held back by a number of factors, such as low levels of political trust between the three nations, historical memories, and the various strategic considerations, domestic politics, and interest groups within each country. (1)

On historical issues and low levels of political trust. Historically, the three countries have had close contact and shared cultures. Although discussions of the Middle Kingdom complex have focused on the vassal system (Fangchuan, 1998) since the end of the Second World War the core of historical issues between China, Japan and South Korea has shifted towards the Japanese invasion and colonization of China and South Korea. Although there are some who believe that the impact of historical issues has been less significant than the changes in their respective identities for both China and Japan (Yahuda, 2010) historical issues continue to strike a raw nerve for the three nations. The link between historical issues and levels of political trust between the three countries has lengthened the shadow of historical issues on China–Japan–South Korea cooperation. To take Sino-Japanese relations for instance, both parties do not trust each other or recognize its counterpart’s core security interests, and historical issues often become the expression of such distrust. This is also an issue between Japan and South Korea. According to a South Korean expert,

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209

South Korea had originally intended to commence Japan–South Korea free trade talks but had chosen to initiate China–South Korea free trade talks first instead due to failed talks on the comfort women issue between President Lee Myung-bak and former Japanese premier Yoshihiko Noda during the former’s visit to Japan.14 The rise of nationalism has exacerbated the negative effects of historical issues and low levels of mutual trust as nationalistic sentiment in China, Japan and South Korea runs counter to the idea of regional cooperation (Zhao, 2011). Thus, historical issues must be tackled head-on for China–Japan–South Korea to move forward. If historical issues cannot be resolved quickly, the parties involved must focus on broader objectives to minimize the negative impact of historical issues and low trust on the cooperation process. (2)

On the difference between China, Japan and South Korea in terms of their respective regional cooperation strategies. Among the three nations, Japan was the first to promote East Asian cooperation after the Second World War, though consistently to poor effect. According to a Japanese scholar, Japan’s efforts to enhance its partnerships with Southeast Asian nations in the 1960s and 1970s had been due to errors in American strategy. In the post-Cold War period, in response to China’s rise Japan has on the one hand maintained its dream of being a “normal country” while on the other hand worrying about the prospect of being marginalized in East Asian cooperation due to Chinese dominance. Japan’s aging population has made its economy moribund (Feng, 2009), and the large number of domestic interest groups present has also caused political stagnation. Japanese society is being torn apart by competition between nationalism and pro-America factions. This has caused a great degree of uncertainty in Japan’s strategic performance with regard to regional cooperation. At times, Japan would wave the banner of East Asian cooperation, such as in 2009 when Yukio Hatoyama pushed for the East Asia Community; at other times, it would lean towards trans-Pacific cooperation instead, such as during the 2011 APEC Summit when Premier Yoshihiko Noda announced Japan’s participation in TPP talks despite tremendous objection at home. Overall, although Japan’s position shifts from time to time it is still working actively to promote cooperation with other Asian nations. Japan has sought to establish a Japan–America relationship that is equal in nature and has also recognized the rise of China as a guiding principle in cooperation (Zhang, 2011). Of course, it would appear that after the U.S. rebalance to Asia became clear Japan no longer placed its competition with China for leadership as top priority as the U.S. is clearly also taking the rise of Chinese power to heart.15

South Korea has also been quite enthusiastic about East Asian cooperation, and has positioned itself as a bridge between China and Japan. It has, however, also been 14

Interaction between South Korean academic Hwang Jae-ho and the authors. Meltzer, P. J. has spoken about the threat to American influence posed by East Asian cooperation in a recent Congress hearing (Meltzer 2012).

15

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very interested in tabling proposals. The APEC arrangement was proposed by South Korea and Australia at the close of the Cold War. In 2001, the establishment of East Asia Outlook Group proposed by South Korean President Kim Dae-jung had played an important role within the East Asian cooperation process with the submission of its East Asia Outlook Report to leaders. In 2011, South Korea proposed the establishment of a second East Asia Outlook Group for the purposes of strategic planning for regional cooperation. For South Korea, it is not easy standing between China and Japan, and it is most concerned with how to extricate itself from being “sandwiched” and serve as a force for balance within Northeast Asia. Thus, with its “New Asian Diplomacy” strategy South Korea seeks to change the existing diplomatic locus of China–America–Japan–Russia to a broader distribution across the whole of Asia (Zhang, 2011). Of course, South Korea’s attempts to enhance its economic relations with key partners such as the U.S., Europe and China also smacks of bilateralism. Clearly, Japan’s and South Korea’s strategies for East Asian cooperation are driven by both economic and security considerations. This is highly similar to China’s strategy of focusing on East Asia and constructing a regional cooperation network. China’s strategy for regional cooperation is interest-driven. However, her long-term goal is to facilitate China’s peaceful rise. Thus, although all three nations valorize East Asian cooperation as well as China–Japan–South Korea cooperation, it would not be easy to bridge their strategic differences. iii. The strategic significance of China–Japan–South Korea cooperation While there is interdependence between the Chinese, Japanese and South Korean economies, the deepening of further cooperation has been stymied by a number of factors. However, we must also see that looking beyond considerations of comparative gains and overcoming the negative factors are one approach that can build mutual trust between China, Japan and South Korea. Many commentators are of the opinion that low strategic trust levels are what is holding back cooperation between China, Japan and South Korea.16 In fact, mutual trust and cooperation are necessarily a process of interaction. The experience of the European Union tells us that such a relationship exists. In East Asia, although quantitative analysis of such a qualitative description is hard to perform, the cooperation between China and ASEAN since 1991 essentially proves the existence of such an effect. Based on our 20 years of experience in bilateral cooperation, we can basically say that the mutually-beneficial cooperation that happened between China and ASEAN after the Cold War has already brought bilateral relations from resistance to the level of strategic partnership.17 Although we can further discuss just how comparable China–Japan–South Korea relations and the bilateral relationship between China and ASEAN are, it is easier to establish mutual trust through the promotion of economic cooperation then to 16

E.g.: Yu (2011a). For instance, Yun Zhang has examined the development of China-ASEAN relationships from the perspective of the “minor actor” strategy. See: Zhang (2010c). Yuzhu Wang has analyzed the course of China-ASEAN relations, which have progressed from resistance to mutual trust and cooperation, from the perspective of the “bilateral game of interests”. See: Yuzhu (2011a).

17

9.3 China’s Cooperation Strategy for Asia

211

work directly to do so. In other words, promoting what is a “low-end” type of political cooperation (economic cooperation) is easier that working on the higher ends (working directly to establish mutual trust) although the relationship between the two is unclear.18 On the level of trilateral relations, promoting cooperation between China, Japan and South Korea remains a viable plan for the building of mutual trust in Northeast Asia. Let us first look at the realities of Sino-Japanese–Korean relations: Japan and South Korea have been key allies and strategic partners of the U.S. since the end of the Second World War, while a rising China has been regarded by the U.S. as a potential challenger to its position as global hegemon. Japan, a leading economy in East Asia following the Second World War, has also had to grapple with the fact that a swiftly-rising China is about to take its economic position in East Asia and even in the world. At the same time, painful historical memories persist between China and Japan, and between South Korea and Japan. Hence, on the one hand levels of mutual trust between the three nations are severely low due to historical issues, maritime rights and island disputes, and difference in political systems and values (Wei, 2011); on the other hand, the aforementioned strategic positions of the three nations make direct efforts to build up mutual trust difficult. Some academics have called for the establishment of a regional development strategy based on mutual acknowledgment between China, Japan and South Korea. However, there is no viable pathway for the establishing of such a partnership strategy (Yu, 2011b). In fact, efforts of this sort of mutual acknowledgment as a means of resolving the issue of low mutual trust are bound to fail as the two concepts are the two sides of the same coin. Thus, given that the matter of mutual trust between China, Japan and South Korea concern regional security in East Asia, not only should communication be improved between the three, there should also be efforts to further promote economic cooperation as a way of creating shared interests—undoubtedly a key platform for the building of mutual trust—between the three. There is also a need to further promote cooperation between China, Japan and South from the perspective of China’s strategic needs. This includes being supportive of existing cooperation schemes and more importantly, being willing to explore new cooperation initiatives. According to the game theory and the science of signals, a willingness to compromise with the other party and more importantly, to put forward new proposals, signal a positive attitude, a desire to share the “payoff” of the cooperation proposed. This is especially true for the proposing of new initiatives: not only does it convey expectations of gain from the partnership, to a certain extent it also hints at a willingness to compromise with the other party in order to bring about cooperation. These are all positive signals that can facilitate the formation of cooperation in the “cooperation game”. The strategic significance of the tripartite cooperation would become even more apparent if we examine it in the light of the 18

Recently, a study has stated that there is a stronger drive for political cooperation between nations with more similar economic interests. However, this proposition does not, to date, describe relations between China and Japan: strong economic links and cooler sentiments on the political front. See: Xiaobo and Weiting (2010).

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theory of process-oriented integration (Yaqing & Ling, 2007). Within this theory, the process of regional cooperation, both as a means and an end in itself, would be conducive to the socialization of power and the creation of collective consensus. Therefore, any action which helps keep a process going is meaningful. Applying this theory to the trust-starved Sino-Japanese relations may beget unforeseen positive results.

9.3.3 The TPP and China China’s worries about the TPP comes, to a very large degree, from the overdependence of her economy on external markets. To take the year 2007 (before the global financial crisis hit) as an example, that year, net exports of goods and services made up 18% of China’s GDP. As what happened during the crisis, the drop in demand from the U.S.—China’s largest export market—gave the Chinese economy a severe shock. We can imagine that if the TPP were to exclude China for the long term, and if at the same time more Asian nations were to join the TPP, then Chinese enterprises engaged in exports to the U.S. would be confronted with unfair competition and the development of the Chinese economy may be affected. From the perspective of China’s domestic policies, for the long term the growing of domestic demand is the fundamental way out of the negative impact of the TPP. Only by continually enhancing China’s domestic end-demand and moving away from the accustomed over-dependence on net exports for economic growth and reducing the proportion of net exports within GDP to the global level of around 5% would China be able to break free from her dependence on the U.S. market. That way, China’s economy will be able to continue developing no matter if it joins the TPP or not. In the short-to-medium term, China has few effective options for responding to the TPP. On the one hand, China can establish bilateral free trade zones with countries in the TPP arrangement to mitigate any shift of trade. However, since the U.S. is highly unlikely to reach consensus with China on a bilateral free trade zone, this approach will not resolve any trade impact on China caused by the TPP. On the other hand, Chinese enterprises can consider investing in TPP nations, and shift part of their labor-intensive work to countries such as Vietnam and make use of the preferential customs tax rates under the TPP to continue exporting to the U.S. Regrettably, as the U.S. may adopt the “yarn-forward” rule of origin with textiles, Chinese enterprises that would have invested in TPP countries such as Vietnam will have no choice but to give up on the importation of half-finished goods from non-TPP countries like China in order to make use of the TPP’s preferential tax levels. These enterprises will have no choice but to purchase comparatively more expensive half-finished goods from TPP nations and thus suffer diminished profit margins. Of course, whether the enterprise needs to shift its operations and how much of such operations it should shift will be determined by how fast the cost of labor rises in China and the outcome of the corresponding TPP talks. It is not quite possible to make accurate guesses about this fluid situation.

9.3 China’s Cooperation Strategy for Asia

213

On the level of regional policy, if, up to the year 2020, “ASEAN + 3” or “ASEAN + 6” can be achieved within East Asian cooperation then East Asian cooperation may provide China with sufficient gains to completely offset the losses caused by China’s non-participation in the TPP. Therefore, whether China can successfully promote East Asian cooperation is critical in China’s response to the TPP in the medium term. In fact, in terms of China’s interests, Japan is one of the most important factors affecting the TPP and East Asian cooperation game. On the one hand, Japan’s joining of the TPP has had a critical impact due to its economic strength and influence. Figure 9.1 shows that once Japan joins the TPP, there will be a fundamental change for the U.S. in terms of the export market access it would enjoy through the TPP, as it would obtain access to new markets equal to 5% of its total exports. From the economic angle, Japan’s significance and value to the TPP goes without saying. On the other hand, Japan is a critical part of East Asian cooperation. Practical experience in East Asian cooperation tells us that although in theory the three “ASEAN + 1” bilateral free trade zones can form “ASEAN + 3”, once substantive issues such as rules of origin are encountered the level of difficulty will not be lower than if one were to re-negotiate and sign a brand-new FTA agreement. Thus, this is not a road we should go down. Hence, the core issue in the “ASEAN + 3” or “ASEAN + 6” vision of the future of East Asian cooperation remains: can the CJSKFTA be realized? This is an issue that will finally be determined by whether China and Japan and reach an agreement. From the perspective of how China should respond to the TPP: should the TPP talks fail, and if at the same time East Asian cooperation is realized, then China’s

Fig. 9.1 TPP members’ contribution to the U.S. trade

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gains would be maximized. However, whether this optimal outcome can be realized is highly uncertain. In the medium term, no matter if the TPP talks succeed or fail, if China is able to realize East Asian cooperation together with Japan, then China will at least achieve the second-best outcome in the TPP game.19 Therefore, in the medium term China’s best option is to work together with East to promote East Asian cooperation as a means of countering the TPP. Of course, from the angle of negotiation strategy, as South Korea has already signed bilateral FTA agreements with major economies such as the U.S. and the E.U., signing a bilateral FTA agreement with China will be another important step forward for the formation of its “axle” position; China, however, does not need to rush into FTA talks with South Korea as a China–Japan FTA should take precedence over a China–South Korea FTA. The TPP is a normal response by the U.S. made in response to the developments in East Asian cooperation (in particular, the rise of China) and in order to win the right to establish international economic rules. For many years, China has been advocating for a multi-polar world, and today the U.S. has begun to promote a “multi-polar Asia” through the TPP. As the strategic significance of the TPP already far exceeds its traditional economic significance, China should pay more attention to the TPP from a broad perspective.

9.3.4 RCEP and China’s Cooperation Strategies For China, the RCEP is significant on two levels: first, the RCEP is a framework that extends the reach of East Asia. Although ASEAN claims that it will open up the process to other economic partners in the future, at least before end-2015 the RCEP process will be a platform for East Asian cooperation without the participation of the U.S. Second, the RCEP embodies a certain kind of ASEAN–China relationship. Currently, Chinese–ASEAN cooperation has entered the post-FTA phase, and how to enhance the partnership between China and ASEAN has become a task for both parties (Yunhua & Jiaqing, 2011). That the RCEP calls for going beyond the current “10 + 1” FTAs20 actually points a way for the enhancement of China–ASEAN relations. Hence, for China, support for the RCEP can help maintain the East Asian cooperation in which ASEAN enjoys a central position. This has tremendous significance at a time when the “10 + 3” and “10 + 6” initiatives have been caught in limbo because of difficulties in China–Japan relations and when East Asian cooperation has been severely challenged by the Asia–Pacific framework that is the TPP. At the same time, China should adopt a whole range of measures, including enhancing cooperation at the sub-regional level, in order to enhance cooperation between China 19

This approach can help avoid the worse outcome: the success of TPP talks and the failure of efforts towards East Asian cooperation, an outcome that will have a negative impact on China’s external developmental environment. 20 Refer to the ASEAN Framework for the Regional Comprehensive Economic Partnership document released at the 19th ASEAN leaders meeting. http://www.asean.org.

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and ASEAN. Doing so can help promote the advancement of the RCEP process as well as strengthen China’s role within the RCEP process. Currently, China–ASEAN cooperation is regarded as the most successful instance of bilateral cooperation for China. However, the current level of cooperation is actually the result of the cooperation strategies taken by both parties based on their respective interests (Yuzhu, 2011b). Since the formation of the ACFTA in 2010, bilateral relations between China and ASEAN have actually be severely challenged: with the swift rise of the Chinese economy, ASEAN nations have begun to adopt the strategy of distancing themselves from China in order to maintain a balance in their relations with key nations (Yuzhu, 2012). Territorial disputes between China and a minority of ASEAN members have also complicated the matter. China’s relations with ASEAN, an important neighbor, has great strategic value for the former. The proposal of the RCEP is a highly positive initiative in terms of the potential to deepen cooperation between China and ASEAN. China–ASEAN cooperation is a part of international relations in the Asia–Pacific region, and developments in the partnership between China and ASEAN will naturally feed back into regional international relations. A prosperous China–ASEAN partnership with mutual gains and high levels of mutual trust means a more favorable external developmental environment for China. Currently, the opinion of Asia– Pacific powers towards China is changing due to rising Chinese power. The impact of realpolitik is growing. Although various Asia–Pacific nations are still using economic strategies to counter China, this has increased the uncertainty in relations between China and major powers in the Asia–Pacific. The majority of ASEAN members are small or mid-sized developing nations that are most concerned with economic growth. Thus, it would be easier for them to accept a China’s regional cooperation strategy that has economic development at the core, and to maintain steady relations over the course of cooperation. In fact, over the last 20-plus years, China and ASEAN have established a relationship of interdependence to a certain degree in the course of their partnership. To take bilateral trade as an example: since ASEAN established official relations with China, the value of bilateral trade between the two grew from around USD8.4 billion in 1991 to USD362.8 billion in 2011. By 2011, ASEAN was already China’s third-largest trading partner and also third-largest export market. Even if we are to use the establishment of the ACFTA as a starting point, by end-2011 bilateral trade had also grown by more than 8.7 times (see Fig. 9.2). More importantly, in the future when China’s economic growth is increasingly threatened by energy and resource supply issues, a resource-rich and developing ASEAN will be a key partner as China seeks to transform her economy into one driven by domestic demand. This process, together with increased Chinese investment in other countries, will also generate benefits for ASEAN. Therefore, the enhancement of China–ASEAN cooperation is not only beneficial for China but is also in line with ASEAN’s needs. Not only can such an enhancement serve China’s rise, it will also help China create a surrounding environment that is even more harmonious. The significance of China–ASEAN cooperation within China’s efforts to establish a harmonious and stable surrounding environment is clear. ASEAN is not willing to

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Fig. 9.2 China–ASEAN trade since the establishment of dialogue. Source China customs

further enhance its partnership with China on individual-member basis. To a certain extent, this has become an obstacle to the further enhancement of China–ASEAN relationships in the post-FTA era. ASEAN’s RCEP initiative is designed to promote its relations with existing FTA partners on all fronts and to maintain ASEAN’s centrality within East Asian cooperation. This provides China with an opportunity to deepen its cooperation with ASEAN, which needs China’s active participation to ensure the smooth advancement of the RCEP process. At the same time, ASEAN also needs China’s full support to maintain its centrality within East Asian cooperation. This way, within the RCEP framework ASEAN will be able to worry less about Chinese domination and work actively towards even higher levels of China–ASEAN relations.

9.3.5 China’s Strategic Choices for Regional Cooperation For now and for some time into the future, China is undergoing social and economic development that is making her prosperous and that will bring her closer towards the critical stage of being a moderately-developed nation. As Chinese strength increases and as economic globalization continues apace, China will have no choice but to participate in globalization and regionalization. For more than 20 years, China has gradually established a regional cooperation strategy based on free trade areas over the course of her participation in regional cooperation. In the twenty-first century, changes in the global landscape—especially the swift rise of the Chinese economy— has to a very large extent changed China’s developmental environment, one that she had developed over-dependence on for the sake of generating high growth. From the perspective of regional cooperation, the shift of the center of the global economy towards the Asia–Pacific region has made the region the center of global attention. For the first time, cooperation in the Asia–Pacific is being driven by a number of

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competing frameworks (Yunling, 2013), and China, which finds herself in this situation, is also subsequently facing pressures to adapt to this new environment and establish new strategies to maintain her interests and long-term economic and social stability. Based on the above analysis of modes of cooperation in the Asia–Pacific region, China should engage in regional cooperation based on the principles of alignment with her needs and interests, and the maximization of gains. China should also regard correctly the reality of increasing interest-driven competition in the Asia–Pacific and a growing array of interested parties, and establish a cooperation strategy with a clear interest orientation, clear strategic levels, and with a balance between the offensive and the defensive. Specifically: China’s regional cooperation strategy must have the long-term stable growth of the Chinese economy as its topmost priority, and at the same time, it must also seek to create a harmonious and stable surrounding and international environment with higher levels of mutual trust created through means such as the exchange or transfer of benefits. To this end, China should work to further enhance her free trade area sub-strategy to ensure the success of her regional cooperation strategy. On the FTA level, China must work vigorously to develop bilateral free trade areas for market development, resource supply, and the exchange of benefits. Doing so will provide stable support for the medium-to-long-term development of the Chinese economy. At the same time, China must participate actively in regional cooperation arrangements as part of her “offensive” efforts in regional cooperation. As part of such efforts, China should provide strong support to East Asian cooperation frameworks to ensure that there are platforms for China to play a role. At the same time, doing so will also serve as a counter to the aim of restraining a rising China by means of trade rules, an aim that has been behind the phenomenon of competing cooperation frameworks in the region. China should abandon any thoughts of dominating or leading the process and seek instead to participate in cooperation for joint benefits. On the one hand, for some time into the future China’s key task is to ensure continued economic growth. On the other, Chinese participation in regional cooperation begins with the followup strategy. Once China starts to seek a leading position, the trust deficit caused by China’s rise would cause East Asian cooperation to become mired in competition and stagnate. Hence, we must foreground the win–win nature of cooperation and make benefits the main goal of Chinese participation in regional cooperation (through Chinese participation in East Asian cooperation frameworks, namely the RCEP). China should work actively to participate in, support on all fronts, and help the RCEP to play a positive role in promoting the integration of the East Asian economy. In addition, China should also abandon the oppositional perspective, and seek to promote cooperation in East Asia for her own developmental needs. While America’s high-profile efforts to promote the TPP do indeed stem from a focus on China, more importantly, the TPP would help the U.S. maintain and grow its interests in the Asia– Pacific region. Our materials have painted the TPP process as an enemy that we have to respond to all on fronts. While there is nothing wrong in doing so, there is not much meaning either. This is because even if we insist on painting our participation in East Asian cooperation as a way to counter the TPP it would neither change the

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nature of the TPP nor retard its advancement. We might as well regard the promotion of cooperation in East Asia as something that our development needs. After all, even if the TPP does not exist we would also need to seek out stronger partnerships in East Asia. In the face of three major competing trade negotiation processes in East Asia, China’s regional cooperation strategy should contain the following few elements: First, China will have to shift the focus of her free trade area strategy from bilateral agreements to multilateral cooperation. Since the 1997 Asian financial crisis, regional cooperation in East Asia has seen consolidation at an unprecedented pace. Multiple bilateral free trade agreements have b been signed, and sub-regional partnerships have been advanced. On the regional level, there are the “10 + 3” and “10 + 6” arrangements. All these have indeed led the Asia market into a new period of integration. However, such integration is not enough as a region-wide market does not yet exist. This is because the complexity of the terms between multiple bilateral free trade agreements and sub-regional agreements have made it difficult for a consolidated regional market to emerge. China has long focused on bilateral partnerships as a means of advancing regional cooperation. Bilateral partnerships have also been the starting point of our external economic relations. This was in line with our needs at that point and also a reflection of practical reality in Asia. However, with bilateral cooperation we can only work to establish division-of-labor relationships with our partners and not provide China with long-term and stable markets of scale as one is limited by the size of the domestic market of the counterpart. On the other hand, with multilateral cooperation we can establish division-of-labor relationships within a broader scope and help to aid economic growth in various nations and achieve demand-and-supply balance within the region through the building of a common market. Second, China should provide active support to the establishment of the new multilateral mechanism that is the RCEP. Currently, many multilateral cooperation mechanisms in Asia are still yet to mature, especially in comparison to their counterparts in the E.U. and North America. Only the “10 + 3” mechanism preferred by China and the “10 + 6” mechanisms favored by Japan have yet to serve to consolidate the regional market. Talks for the RCEP mechanism proposed by ASEAN began in 2013. The RCEP is also set to become the first multilateral cooperation mechanism in Asia and will undoubtedly facilitate the consolidation of the Asia market. Although the members of the RCEP are exactly the same as the members of the “10 + 6” arrangement, this does not mean that the “10 + 3” arrangement advocated by China has been abandoned. In fact, based on welfare effect analysis in general, cooperation with a broader scope can bring even more benefits to participants. Therefore, not only does China support the establishment of the RCEP, if China is able to achieve something within the RCEP framework it would be even more beneficial to China’s development. Third is to opt for the lowest common denominator in terms of cooperation pathways. Doing so can help to achieve agreement between economies that vary widely from each other in terms of state of economic development. Currently, economic development has been fairly limited in Asia, and both its consumption power and

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structure are not yet ready to support the building of a cooperation mechanism or arrangement with high standards in Asia. Even though China is Asia’s largest economy, she has little power to consolidate the regional market due to her low GDP per capita numbers. Thus, a practical choice would be to go for the “lowest common denominator” when it comes to cooperation mechanisms and arrangements. Currently, the multilateral cooperation arrangement that is the RCEP can be regarded as established ahead of time based on the multiple bilateral free trade agreements that are already in force. The five “10 + 1” arrangements can be used as the basis for changes made to past thinking about how free trade areas can be established. A shift from “talks, then formal announcement of establishment” process can be made to an “announcement first, then more in-depth talks later” process. ASEAN, which proposed the RCEP, has already signed five “10 + 1” free trade agreements with six other members: China, Japan, South Korea, Australia, New Zealand, and India. Henceforth, work on the RCEP process can take a different approach from the traditional pathway, which is to first conduct protracted talks and then announce the official formation of the arrangement. This new approach can take the form of first reaching a basic agreement, i.e., on the lowest common denominators in the five existing “10 + 1” agreements, and then announce the formation of the RCEP. Then, as the economies of various members develop further, further talks are conducted on various issues. This way, the partnership can be enhanced on a continual basis, and the multilateral arrangement can move forward without interference from factors outside of the region.

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