Drives Regionalism in East Asia—And Why It Matters
Country
Agreements concluded
Agreements under negotiation
Agreements proposed
Total
Northeast Asia
People’s Republic of China
10
6
8
24
Hong Kong, China
1
1
0
2
Japan
11
5
4
20
Republic of Korea
7
9
8
24
Taiwan
4
2
1
7
Total NE Asia
33
23
21
77
SE Asia
Brunei Darussalam
8
1
4
13
Cambodia
6
1
2
9
Indonesia
8
2
6
16
Lao PDR
8
1
2
11
Malaysia
10
6
3
19
Myanmar
6
2
2
10
Philippines
7
1
4
12
Singapore
20
9
5
34
Thailand
11
7
6
24
Viet Nam
7
2
2
11
Total SE Asia
91
32
36
159
Oceania
Australia
8
6
6
20
New Zealand
8
3
4
15
Total Oceania
16
9
10
35
Western Pacific Rim Total
140
64
67
271
This chapter challenges the conventional wisdom regarding the drivers of these new trade agreements. This conventional wisdom typically rests on two foundations. The first is a set of functionalist arguments that asserts that the increase in inter-governmental collaboration that occurred in the period since the Asian financial crises of 1997–1998 was a response to increasing economic interdependence within the region. The second is the argument that the new PTAs are driven primarily by private sector demands—either to create new sources of advantage through discriminatory arrangements or to ‘level the playing field’ when domestic interests have been adversely affected by agreements that trading partners have signed with third parties. Neither of these arguments is persuasive. East Asian PTAs in the first decade of the new millennium were driven primarily by a ‘political domino’ effect. The content of PTAs is a direct reflection of the dominance of political over economic motivations for their negotiation.
2 Increasing Interdependence as a Driving Force for the New PTAs
Arguments that regionalism is associated with increased economic interdependence have a long pedigree; they rest on various strands of theoretical literature from economics including those pertaining to property rights and transactions costs. Functionalist explanations for why governments demand and supply regional institutions continue to enjoy popularity despite a substantial literature that questions whether empirical evidence provides support for a straightforward correlation between levels of interdependence and regionalism.3
The experience of the Asia-Pacific region generally, and East Asia in particular, has often been drawn on to question functionalist accounts of regionalism. Regional integration in the Asia-Pacific, it was frequently argued in the 1990s, was ‘market-driven’. The puzzle for theorists of regionalism was to explain the absence of formal inter-governmental collaboration in the Asia-Pacific despite the substantial increase in economic interactions among states. Haggard provided one of the most sophisticated accounts: greater economic interdependence in the region, he suggested, simply had not created the collaboration and coordination problems that would have led to a demand for regional institutions.4 Moreover, once consideration was given to the relatively rapid growth of East Asian economies vis-à-vis the remainder of the world, econometric studies found little evidence of an increasing regional bias in these economies’ trade.5 Liberalization, primarily on a unilateral non-preferential basis, had generated greater global economic interdependence for East Asian states, a development that would not necessarily give rise to a quest at a regional level for solutions to any coordination and collaboration problems that arose.
For some authors, however, the Asian financial crises marked a critical break with previous patterns of integration. The East Asian regional architecture, wrote T.J. Pempel, ‘today is more complex, more institutionalized, and more Asian than it was when the crisis struck’.6 MacIntyre and Naughton suggested the new interdependence in East Asia ‘increasingly requires a more structured and binding framework for policy coordination…’.7 Similarly, Munakata asserted that ‘the intensity of economic interaction contributes substance and depth and thereby a basis for institutionalized intergovernmental cooperation, including preferential trade agreements’.8 Such arguments rest on two important assumptions: (1) that levels of interdependence within East Asia must have increased over the last decade; (2) that an effective transmission mechanism must exist through which the increasing costs of interdependence produce effective demands for governments to engage in additional regional collaboration (see the discussion of business interests below).
Increases in economic interdependence among East Asian economies in the 1990s attracted a great deal of attention, notwithstanding the cautionary words from economists, noted above, that such increases were easily explained by the rapid growth of the region’s economies relative to the rest of the world. With the emotive responses that the Asian financial crises and Western responses to them generated, arguments about the increasing integration of the region assumed a symbolic importance: commentators seemed to take pride in noting that intra-regional trade in East Asia as a share of total trade had already surpassed the equivalent figure for the North American Free Trade Agreement (NAFTA), and was approaching that for the European Union (EU).9
But the question remains: Did regional economic interdependence really increase in the decade after the Asian financial crises? It all depends on how the ‘region’ and the dependent variables are measured. If the region is defined as ‘ASEAN Plus Three’, that is, the ten member states of ASEAN plus China, Japan, and Korea, then the share of intra-regional trade in the ten economies’ total trade rose only from 37.6 % in 1995 to 38.3 % in 2006 (an increase so small that one might regard it as being within a statistical margin of error, and a final total figure that is substantially below the equivalent for NAFTA).10 If Hong Kong and Taiwan are added to the list of economies then the figures change dramatically—to 51.9 and 54.5 % respectively. Most of the increase in the intra-regional trade share in East Asia in the decade after the financial crises reflected growing trade among the ‘three Chinas’. With the return to China of responsibility for Hong Kong’s administration, to count trade between it and the mainland as international trade is of dubious validity.
In a similar vein, if the analysis is confined to exports rather than overall trade, a move that would be justified because it is exporting interests that the literature expects to lead the push for governments to negotiate regional agreements, then the data show that the intra-regional share in total exports a decade after the crises had barely changed from the pre-crisis peak.11 And this is even before discounting any increases in the share of intra-regional trade because of the relatively rapid rate of growth of countries in the region compared with the rest of the global economy. Lincoln estimated that if such differential rates of economic growth are taken into account, East Asia is actually exporting less to itself than economic models would predict would be the case.12
To be sure, production networks within the region have been radically re-oriented in the years since the financial crises. China’s rapid economic growth has seen it emerge as a major (frequently the single most important) export market for other East Asian economies.13 But, at the same time, China’s own export dependence on East Asian markets declined dramatically—down from 53 % in 1996 to 39 % in 2005 (author’s calculations from IMF Directions of Trade data). The consequence is that the dependence of the region as a whole on extra-regional markets changed little over the decade—contrary to popular arguments that suggest a ‘de-linking’ occurred. And, if the focus is solely on finished manufactured goods rather than components, the region’s dependence on extra-regional markets actually increased.14
Aggregate data on intra-regional trade provide little support for arguments that interdependence within the region increased substantially in the decade after the financial crises. And a link between growing trade interdependence and a new enthusiasm on the part of regional states for regionalism lacks credibility: the timing here is all wrong. The major increases in the share of intra-regional trade in countries’ total trade occurred in the decade from 1985 to 1995, with the region-wide extension of production networks following the Plaza Accord,15 not in the decade after the Asian financial crises of 1997/1998. Moreover, the selection of partners with which PTAs were negotiated is not what an argument resting on increasing transaction costs would predict: most of the PTAs negotiated in the first decade of the new millennium by East Asian countries are with relatively minor trading partners. Japan, for instance, has eschewed negotiating a bilateral PTA with China, by far its largest export market in the region (its second largest market globally, and, since 2000, the most important destination for Japanese foreign direct investment (FDI) in the region)—although talks for a trilateral agreement among China, Japan and Korea commenced in March 2013.16
Can the hypothesis that increased interdependence has driven the new East Asian regionalism be ‘salvaged’? One argument might be that data on intra-regional trade are too blunt an instrument and fail to capture a new deeper regional interdependence that has arisen. Inconveniently for such arguments, however, other data point to a similar lack of increase in intra-regional economic interdependence. Data for Japan, the largest source within the region of foreign direct investment, show that whereas East Asia accounted on average for 40 % of the country’s outward FDI flows in the 3 years before the financial crises, the average for the years 2005–2007 was less than 29 %.17 More broadly, ASEAN Plus Three countries accounted for less than one third of total ASEAN FDI inflows over the years 1995–2006; the percentage actually fell during the years after 2002. In Northeast Asia, the share of intra-regional FDI was far smaller.18 And intra-regional portfolio asset holding as a share of total assets held by East Asian states is smaller still—in 2006, under 8 % of the total, in contrast to 37 % derived from the United States.19 A similar lack of interdependence is evident in the exchange rate field. Ogawa and Yoshimi demonstrate that the East Asian currencies, rather than moving in alignment with a notional Asian Monetary Unit (a weighted basket of regional currencies), have increasingly deviated from this unit in terms of real exchange rates. This movement they attribute to a coordination failure, a consequence of East Asian monetary authorities having increasingly diverged in the exchange rate systems they have adopted.20
In short, conventional indicators of trade and financial interdependence provide no support for arguments that increasing economic integration drove the new East Asian regionalism. Such scepticism is reinforced by the absence of empirical evidence for a transmission belt through which any concerns over the costs of increasing interdependence have been translated into effective demands for governments to engage in regional collaboration.
3 Have Business Interests Driven the New East Asian Regionalism?
3.1 The State as Agent … or Principal?
Regionalism is the product of purposive action by state elites. But where is trade policy actually initiated? The starting assumption in the literature on the political economy of trade policy is that governments are rational actors whose primary concern is to maximize their utility, which in this instance means re-election to office. In Milner’s words, in seeking to negotiate regional trade agreements, governments ‘attempt to balance consumer (and thus voter) interests and pressures from their private economic agents…’.21
Exporting interests will lobby the government for improved access to foreign markets. But why would they—and governments that respond to their pressures—choose a regional (preferential) approach to trade liberalization rather than a non-discriminatory global agreement, which all economic modelling suggests would bring larger aggregate economic gains? For Grossman and Helpman, an important factor motivating such a choice is the capacity of governments to manipulate PTAs so as to exclude politically-sensitive import-competing sectors from liberalization under the agreements.22 Naoko Munakata, a leading Japanese trade official, notes for instance that Japan’s Ministry of International Trade and Industry turned to the negotiation of PTAs after APEC’s Early Voluntary Sectoral Liberalization debacle (where the Japanese Government came under pressure to liberalize politically-sensitive sectors) because it wanted a trade policy approach that was acceptable to domestic constituencies.23
Exporting interests are more likely to lobby for regional rather than global liberalization when they are competitive within the proposed regional market but not at the global level.24 For Richard Baldwin, the new enthusiasm of exporting interests for regionalism in the 1990s can be explained primarily as a defensive response to other countries negotiation of preferential agreements. The move to regionalism in Asia was triggered by ‘idiosyncratic’ developments—NAFTA, and the EU’s move to a Single Internal Market. A ‘domino effect’ of proliferating PTAs was created as exporting interests in countries excluded from the new regional arrangements pressured their governments to negotiate their own agreements to ‘level the playing field’ with their rivals within the PTAs.25
How relevant these explanations are to Asia is questionable. Most of the writing on the political economy of trade policy has been developed in the context of the US political system where the legislature, especially in a context of weak party discipline, enjoys a more central role in trade policy-making than its counterparts in other industrialized economies. The assumption in the theoretical literature, however, has been that the propositions are of universal applicability: economic and political rationality knows no geographical bounds. Yet, institutional configurations inevitably matter. The extensive literature on East Asian political economy suggests in many cases that the logic of political action may be different in that part of the world. In particular, researchers have asserted that the state has been both a relatively autonomous actor and the lead player in formulating economic policies—whether of a ‘developmental’ type as in Northeast Asia or rent-seeking patrimonialism in many Southeast Asian countries.26 Not only does this literature suggest that the state enjoys substantial autonomy from domestic interests in formulating foreign economic policies but models of economic policy-making that depend on predictions of the behaviour of the median voter are unlikely to have much purchase in East Asia’s authoritarian and quasi-democratic polities.
In Singapore, government-linked corporations dominate the local economy, providing an opportunity, notes Lee, for the state to impose its trade policy priorities with little domestic resistance.27 In Taiwan, Hsueh asserts, a different logic applies. Due to the relative political weakness of sectoral interests and the government’s pre-occupation with the Cross-Straits relationship, ‘the Taiwanese government’s trade policy is often made in response not to domestic economic interests, but rather to the international political economic environment of threat under which Taiwan is forced to operate’.28 In Thailand, where the administration of Thaksin Shinawatra embarked on an active policy of negotiating multiple PTAs simultaneously with partners as diverse as Croatia and Peru, Nagai states bluntly that ‘the private sector does not play an important role in forming FTA policy’.29 Similarly, Chirathivat and Mallikamas noted that under Thaksin, ‘academia, policy-makers and even the business sector have difficulties monitoring the longer term development and progress of this FTA strategy’30; some of Thailand’s PTAs, Hoadley contends, ‘seemed impulsive, the result of tourism by Thai leaders, for which the preparatory staff work had not been done’.31
And in Southeast Asia in particular, the configuration of economic actors may be very different from that in Western industrialized economies, with consequences for both policy preferences and the policy-making process itself. In Malaysia and in Singapore, for instance, subsidiaries of multinational corporations are responsible for more than 80 % of the value of domestic exports. The regional production networks they operate often import components from a number of countries for local assembly for ultimate export to third country markets. Their interests in trade agreements within the region, therefore, may lie less in securing tariff reductions in other countries’ markets than in ensuring low domestic barriers to the components they wish to import.
To determine the source of ideas that inform economic policy-making is no simple task. State elites may have been socialized into accepting a particular policy approach through their participation in epistemic communities.32 They may be acting on their perceptions of what would either improve their prospects for survival in office and/or be in the national interest, whether this be framed in terms of the overall economic welfare of the country or of strategic or diplomatic considerations. Or they may be responding to specific demands from business interests. Industry leaders, even when they are not coterminous with state elites, frequently have little difficulty in gaining the ear of political leaders. The revisionist literature on the developmental state suggested that although state elites were responsible for the implementation of relevant policies, in many instances the ideas that underlay them may have originated with private sector actors and been conveyed to bureaucrats and ruling parties through the dense networks of interactions that were common in Northeast Asian economies.33
In trying to unravel the respective roles of business and state elites in the formulation of policy towards PTAs, the observer has to rely on evidence such as whether the initiative for a PTA came from domestic or foreign sources, which partners were prioritized for negotiations, and what responses were made to initiatives from other countries. Rarely do we have accounts from those who actually participated in the policy debates in East Asian countries on regionalism—and, when we do, these have to be interpreted with caution, given the interests of the writers in promoting the organizations with which they have been associated.
The case studies cited above identify a number of East Asian countries where business interests are stated to have played no significant role in governments’ decisions to pursue PTAs. The one PTA that has been examined in depth where some observers have asserted that domestic business interests were a primary driving force was the agreement between Japan and Mexico. Here, a domino effect is said to have occurred with Japanese business interests, led by Keidanren, the peak organization of large Japanese business firms, scrambling to level a playing field that had been tilted against them by the implementation of NAFTA (particularly changes required in Mexico’s treatment of maquiladora industries)34 and by the negotiation of a PTA between Mexico and the European Union.35 Manger uses the Mexican case to argue that Japanese business interests were the driving force behind the Government’s FTAs, and that trade policy-makers were motivated primarily by their need to cater to their core constituents, that is, manufacturing firms. In short, lobbying by firms, according to Manger, was ‘crucial in motivating Japanese policymakers to pursue FTA’.36
Keidanren did publish strong statements in support of the Government’s concluding a PTA with Mexico after negotiations were under way. But several dimensions of the case are inconvenient for those who see the negotiations for a PTA as being driven primarily by Japanese business interests. First, the initiative for the PTA came not from Japan but from Mexico, an informal proposal from the Mexican Secretary of Commerce and Industrial Development to the Chairman of the Japan External Trade Organization on a visit to Toyo in June 1998. It was only after the Mexican President repeated the invitation, at the 22nd Japan–Mexico Businessmen’s Joint Committee, hosted by Keidanren in Tokyo, that Keidanren, in January 1999, established a working group to examine the possible effects of a PTA between Japan and Mexico.37
Second, the immediate response of the Japanese Government (through the Minister for International Trade and Industry) to the formal Mexican proposal in November 1998 was not to pursue a PTA but to offer the counter-proposal of a bilateral investment treaty. At the very least, this lack of enthusiasm for a PTA suggests that other domestic political considerations on the part of the Government outweighed concerns about levelling the playing field for Japanese businesses in Mexico. The proposed bilateral investment treaty would have given Japanese firms ‘most favoured investor’ status (something the Mexican Government subsequently refused to concede except in the context of an FTA) but would not have addressed market access concerns.