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East Asian Economic Regionalism

East Asian Economic Regionalism

by Edward J. Lincoln

Something new is happening across East Asia. A region notable for its lack of internal economic links is discussing regional cooperation on trade, investment, and exchange rates. Because of negotiations elsewhere around the globe on regional trade—such as those that led to the consolidation of the European Union, the formation of the North American Free Trade


Something new is happening across East Asia. A region notable for its lack of internal economic links is discussing regional cooperation on trade, investment, and exchange rates. Because of negotiations elsewhere around the globe on regional trade—such as those that led to the consolidation of the European Union, the formation of the North American Free Trade Area, and the rapid proliferation of bilateral free trade areas—the talk is not surprising. Nevertheless, East Asia's past inertia with regard to forming a regional partnership raises many questions about its emerging regionalism. Why has the region suddenly shifted from taking a global approach to economic issues to discussing a regional bloc? How fast and how far will the new regionalism progress? Will the region become a version of the European Union, or something far less? What is the probable impact on American economic and strategic interests—are the likely developments something that the U.S. government should encourage or discourage? Edward Lincoln takes up these questions, exploring what is happening to regional trade and investment flows and what sort of regional arrangements are the most sensible. Lincoln argues that an exclusive grouping is unlikely. Free trade negotiations have brought some economies in the region together, but they also have led to links with nations outside the region. Some regional governments most notably Japan, continue to have difficulty embracing the concept of free trade, even with favored regional partners. In the wake of the Asian financial crisis, governments also have looked at cooperating on exchange rates, but they have done little to move forward. The U.S. government must decide how to respond to these developments in East Asia. An exclusively Asian form of regionalism could run counter to American economic interests, and the U.S. government has reacted negatively to some of these proposals in the past. Because trade and investment links between the countries of the Asia Pacific region and the United States remain very strong, Lincoln argues that the Asia Pacific Economic Cooperation forum remains the appropriate institution for pursuing regional trade and investment issues.

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East Asian Economic Regionalism

By Edward J. Lincoln

Brookings Institution Press

Copyright © 2004 Brookings Institution Press
All right reserved.

ISBN: 0-8157-5216-4

Chapter One


Something was stirring across East Asia in the opening years of the twenty-first century. A region that had been notable for its lack of internal economic links over the previous fifty years was talking actively about regional cooperation. Given the consolidation of the European Union, the formation of the North American Free Trade Area, and the rapid proliferation of bilateral free trade areas around the world, the talk was not surprising. Nevertheless, East Asia's relative lack of past action raises many questions about its emerging regionalism. Why has the region suddenly shifted from taking a global approach to economic issues to discussing a regional bloc? How fast and how far will the new regionalism progress? Will the region become a version of the European Union, or something far less? What is the probable impact on American economic and strategic interests-are the likely developments something that the U.S. government should encourage or discourage? This book takes up these questions.

Some advocates envision an East Asian equivalent of the EU-a region linked both by preferential trade and investment and by a common currency. The same vision underlies worries in the United States that if it is realized, East Asia may drift away from its strong trans-Pacific economic ties. Some may find this vision so unrealistic as to represent a straw man; nevertheless, the talk in East Asia makes it a straw man worth analyzing.

So far, nothing akin to the economic consolidation of Europe or North America has occurred in East Asia. However, regional institutions do exist, and others under discussion or negotiation could evolve in a manner that either aids or obstructs American interests in the Asia-Pacific region. The core issue is whether East Asia will drift toward a more exclusive economic regionalism that specifically shuts out the United States or continue to embrace broader regional and global institutions and their more liberal rules for economic interaction. Recent developments suggest that the region is indeed moving, albeit slowly and cautiously, toward a more exclusive regionalism that could have negative consequences for the United States. Certainly much of the rhetoric concerning East Asian regionalism has sounded a strong anti-Western or anti-American theme. Nonetheless, a principal conclusion of this book is that such moves are relatively weak and slow.

This book takes a skeptical view of regional groupings in general. Formal blocs involve distortions of trade and investment that generally are undesirable. Furthermore, a tight regionalism like that of the European Union can also involve an ethnic or racially inspired hubris that can complicate international relations more broadly. That might be especially true in East Asia, where there has been a tendency to emphasize "Asian values" and reject "Western" economic, political, or social principles. With notions of cultural superiority that are at least as explicit as those ingrained in the European Union, East Asian regionalism carries the potential for promoting an unhelpful divisiveness and tension in the region's economic and political relations with the rest of the world.

In addition, manufacturing technology, as well as the information technology that underlies much of the service sector, has been moving steadily toward larger economies of scale, which lead to global competition. Firms also are developing the personnel and technical capability to engage in global direct investment. As much as some interest groups in society may deplore globalism, economic activity should continue to move in that direction. To divide the world up into a variety of groupings, each with different rules of access, can only impede progress; an East Asian economic bloc therefore would not be desirable.

A fascinating disconnect has emerged between the growing American embrace of globalism as an economic and business concept and the rising Asian resentment of what some Asians view as American or European interference in their economies. Whereas twenty years ago, purchase of American companies or real estate by foreign investors generated media coverage, today most Americans appear to have abandoned a nation-centered view of the economy. While there is a "globaphobia" problem in the United States, the predominant world view among business people and policymakers has become much more open. This openness includes less reliance on legal means to block foreign businesses from the U.S. market and a stronger global strategic view among corporate managers. But in Asia, concern over American influence or dominance continues to be a factor behind the interest in regional economic cooperation.

Resentment of the United States is not new, and it may be simply one of the costs of being the world's largest economy and having globally active firms. However, in East Asia resentment of the United States and the West more generally received a boost from the 1997 Asian financial crisis. From an Asian perspective, the crisis was precipitated by Western speculators. Some point out that the U.S. government initially downplayed the crisis in Thailand and Indonesia, in contrast to its swift engagement in some other crises, such as that in Mexico. Once engaged, the U.S. government worked with the International Monetary Fund (IMF) for solutions, but the IMF imposed conditions for its loans that many felt were unfair or wrong. Of course, criticism of the IMF has not been confined to Asians; however, they have argued that the IMF has tried to "force" Western or American capitalism on Asia. Some voices in the region have argued that therefore the East Asian nations need to band together to protect themselves from the ravages of Western speculators and the unfair demands of the U.S. government and the IMF. Feelings of frustration and angry words, however, do not always find expression in action. This book looks at what has been happening with trade and investment links and with the development of regional institutions. The fundamental conclusion is that far less movement toward a regional bloc is occurring than the rhetoric would suggest.

A conundrum faces the developing countries of Asia and those elsewhere. They, or at least the noncommunist nations in the region, liked the framework imposed by the cold war. During that era, most developing countries maintained stiff import and investment barriers that were tolerated by the United States, which wanted to humor its friends in the struggle against communism. Those barriers enabled these nations to develop on their own, reversing several centuries of foreign domination of their economies through colonialism, and because of that they were politically popular. On the other hand, protectionism resulted in weak or flawed legal and institutional systems for pursuing modern economic development and often promoted inefficient or corrupt business practices. For a time, these nations managed to maintain high rates of economic growth and industrialization anyway. But the 1997 financial crisis was a potent lesson in the problems that eventually befall flawed economic systems. So now these countries must deal with the contradiction between their nationalistic urge to keep foreigners (especially Americans and other Westerners) out of their core economies and the need to open up in recognition of the fact that their institutions and behavior must accommodate international trade and investment if they hope to underwrite more robust economic growth and industrialization. Even Japan faces this dilemma. The emergence of economic regionalism in East Asia is, in part, an attempt by these countries to find a middle path by creating a preferential opening up among themselves, thereby still keeping the West at some distance.

How great that distance should or will be remains debatable. A decade ago, Lester Thurow wrote of a coming competition between three large economic blocs-Europe, North America, and Asia. That prediction has not come true. Nothing resembling an economic bloc has yet to emerge in Asia, but discussion in that direction has progressed over the past decade. Some now see it as a real possibility. Writing in 2001, C. Fred Bergsten stated that "East Asia, for the first time in history, is creating its own economic bloc, which could include preferential trade arrangements and currency cooperation in the form of an Asian monetary fund (AMF)." The reality thus far appears to be less dramatic.

A number of Asian nations are involved in negotiations or proposals for regional or bilateral free trade agreements (FTAs). The Association of Southeast Asian Nations (ASEAN) is in the process of forming an ASEAN free trade area; China has entered negotiations for an ASEAN-China FTA; and Japan has signed a bilateral FTA with Singapore. Other ideas-including a proposal for a broader free trade area among ASEAN, China, South Korea, and Japan-have been floated informally. The change in Japan's trade policy, which until the late 1990s had been firmly rooted in globalism -that is, centered on the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) rather than on regionalism -has been dramatic, at least in terms of rhetoric. Analysis of these discussions and agreements, however, reveals that Asian nations face considerable difficulty in opening up, even among themselves.

On the currency front, the principal accomplishment has been a series of swap agreements among pairs of central banks that enable one bank to borrow foreign exchange reserves from another in order to intervene in exchange markets to defend its national currency. Some governments and individuals in the region have proposed tightening regional links in various ways: adopting some form of regional currency, pegging individual currencies to the yen, or at least adopting stronger regional cooperation strategies to protect their currencies from fluctuations in global currency markets. In the past, most countries in the region had pegged their currencies to the dollar. That strategy was flawed, as it is for any country that tries to peg its currency to that of another nation while liberalizing international capital flows but rejecting the stiff requirements to subordinate its macroeconomic policies to its currency policy. Strategies that involve pegging to the yen instead of the dollar entail the same problem. Indeed, any strategy short of freely floating currencies is vulnerable whenever international investors detect a disparity between the fixed or quasi-fixed exchange rate and the economic fundamentals of the economy.

Informal talk of a regional Asian monetary fund continues, as well as proposals for stronger coordination of regional exchange rates. The institutional setting for these discussions has been ASEAN+3 (the three being China, Japan, and South Korea), set up in 1997. To date, however, this group has not moved very far beyond the central bank swap agreements it endorsed in 1999, which are largely inconsequential economically. The larger reality is that a number of countries in the region that had pegged or heavily managed exchange rates now have floating rates. Swap agreements make sense only in the context of pegged rates, and even then their value is debatable. What has occurred in the region appears to be a largely symbolic move to demonstrate regional cooperation while pursuing a more practical shift to floating rates.

Neither the moves toward regional free trade nor the discussion of currency cooperation is likely to produce anything akin to the European Union or even to the North American Free Trade Agreement (NAFTA). This book argues that a variety of constraints will continue to impede the tightening of economic regionalism in East Asia over the next five to ten years. What happens more than ten years in the future is more uncertain and depends on future economic and political factors. Within the next decade, however, it is unlikely that strong policy steps will be taken toward an East Asian version of the European Union.

Furthermore, narrow economic regionalism is not in the interest of these nations. The region has strong trade and investment ties with the United States and Europe, ties that would be attenuated should the region turn inward. To the extent that the region wants a useful dialogue on trade and investment issues, the appropriate institutional setting for that discussion remains the Asia-Pacific Economic Cooperation forum (APEC), a grouping that includes the United States and other non-Asian participants. APEC is a somewhat unwieldy organization that will not yield dramatic progress on lowering trade and investment barriers, but it serves the interests of the region better than a narrower approach.

Nevertheless, the rising drumbeat of discussions around a narrow East Asian regionalism has raised alarm in Washington over the past decade. Discouraging Asian regionalism, however, presents a real dilemma for American international economic policy, which continues to grapple with the alternatives of globalism and regionalism. Current U.S. policy favors a mix of globalism, regionalism, and bilateralism on the presumption that movement toward lower trade and investment barriers is desirable in any of those contexts. Whatever approach is likely to yield more rapid progress, in this view, is worthwhile pursuing. The Bush administration, for example, is simultaneously pursuing the Doha round of global WTO negotiations, a regional free trade area of the Americas, and various bilateral free trade agreements. It is difficult for the U.S. government, having adopted a favorable view of regionalism over the past two decades, to discourage similar moves by other groups of nations.

Given this book's conclusion that significant obstacles to Asian regionalism remain, the dilemma for American policy is largely moot. The U.S. government need not adopt a strongly negative public stance toward the various discussions ongoing in Asia since they are unlikely to proceed very far. Instead, the U.S. government should focus on the following:

-The WTO/IMF. The WTO should remain the primary multilateral trade organization, putting primary emphasis on concluding the Doha round of negotiations. This helps keep American, European, and Asian regionalism at bay while producing nondistorting global progress toward more open trade and investment. A similar argument applies to the primacy of the IMF on the financial front. To the extent that the IMF has institutional flaws, the U.S. government should work to fix them so that the IMF retains legitimacy as the sole multilateral mechanism for addressing financial crises.

-APEC. If the U.S. government wants to discourage narrow East Asian economic regionalism, the most appropriate way to do so is to reinvigorate APEC, which currently is regarded as ineffective and a waste of time in Washington.


Excerpted from East Asian Economic Regionalism by Edward J. Lincoln Copyright © 2004 by Brookings Institution Press . Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author

Edward J. Lincoln is a senior fellow in Asia and Economic Studies at the Council on Foreign Relations. His previous Brookings books include Arthritic Japan (2001), Troubled Times: U.S.-Japan Trade Relations in the 1990s (1999), Japan's New Global Role (1995), and Japan's Unequal Trade (1990). In the mid-1990s, Lincoln served as special economic advisor to Walter Mondale, former U.S. ambassador to Japan.

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