The financial crisis made Asian regionalism. This is not only due to the collapse of Western export markets. The outlook for global recovery is also more optimistic about a quicker turnaround in Asia as compared to Europe and North America. The incentives for Asia?s export hubs to work towards a common market for goods and services are clearly understandable.
The emergence of G-20 as the key global body on economic and financial matters also underlines the undisputed growing clout of Asia in the world economic order. The idea of a pan-Asian economic market is expected to be steadily conveyed to the international community by the key Asian members of G-20. The latter?China, India, Indonesia and Japan?are vital cogs in the Asian regional architecture. After Pittsburgh, they are also likely to receive the endorsement of the International Monetary Fund (IMF) in their mission.
Asian integration will dominate public policy discussions and intellectual attention of the region in the months to come.
But beyond the obvious?Asian countries cooperating with each other on matters of mutual concern?what does regional integration imply from an economic perspective? It is important to achieve intellectual and conceptual clarity on this issue.
Creating a common Asian market implies erecting a common platform for facilitating exchange between regional producers and consumers. The European Union (EU) and the Association of South East Asian Nations (Asean) are two such examples. Individual constituents in both can transact in common markets. The key to achieving such commonalities is a set of uniform rules that ensure that goods and services move seamlessly across borders within the region.
The current state of play in Asian regionalism perceives an Asean plus arrangement. With Southeast Asia already having an integrated framework, outgrowth of the same makes operational sense. The next step is conceiving further expansion. Southeast Asia?s trade links are stronger with East Asia vis-?-vis the rest of the region. Thus, regionalism with Asean as the hub acquires a Southeast+East direction at the outset.
Southeast and East Asia enjoy several similarities in trade frameworks. Tariff levels of the two regions are broadly compatible and low for most product lines leading to easy movement of goods. Moreover, operational factors determining movement of goods & services such as rules of origin, certification standards and associated requirements are also largely similar. A consequence of the easy movement of goods between the two parts of Asia has been the evolution of regional production chains. These have contributed significantly in integrating the regions.
Trade in machinery parts and components dominate the goods trade in the region. Sophisticated machinery networks originating in technologically mature countries such as Japan, Korea, Taiwan, Hong Kong, Singapore and more recently China have dovetailed firms from relatively less technologically developed Southeast Asian countries like Thailand, Malaysia, Vietnam and Philippines in their ambit. Production networks of Hyundai, Toyota, Panasonic and other leading global manufacturers are fragmented across the region. The fragmentation is driven by country-specific efficiencies of enterprises in executing particular processes. Thus while Taiwanese or Hong Kong lead firms, for example, handle the critical design and scheduling functions at the top end of the chain, the relatively lower value-added processing functions are discharged by the Thai or Vietnamese enterprises.
Deeper Asian integration must focus on expanding the enterprise network to other parts of the region. South Asian firms have begun featuring in these networks. Pushing frontiers of the regional envelope require coordinated responses on trade facilitation measures. This is where the rest of Asia is likely to face major challenges.
A flavour of the difficulties likely to be encountered can be gauged from the negotiations on the India-Asean FTA. Rules of origin occupied considerable part of the discussions. These rules are essential for determining ?origins? of products since tariffs imposed by a country on the same product can be different between two importing countries. India?s extension of preferential tariffs to Asean implies only products originally made in Asean countries are eligible for lower tariffs. However, dense growth of production networks between Asean and East Asia make determination of origins difficult.
Though Asian regionalism is the flavour of the season with many expecting the regional framework to soon spread to South Asia and beyond, achieving the goal may be far more difficult than envisaged. Southeast and East Asia have integrated meaningfully through enterprise networks. Reproducing the same model elsewhere in the region won?t be easy. If it took India and Asean six years to get a FTA going, one can well imagine how long it may take for South Asia to get locked with Southeast and East Asia. Given that South Asia itself is hardly a united family!
The author is a Visiting Research Fellow at the Institute of South Asian Studies (ISAS) in the National University of Singapore (NUS). Views are personal