The ASEAN Experience, Northeast Asia and Beyond: Free Trade and Economic Integration

II. Northeast Asia's Learning from the ASEAN Experience

Northeast Asia and Southeast Asia

The Northeast Asia region is usually seen as disparate from Southeast Asia in terms of traditions, economics, and international relations. Yet there exist some key similarities between the two regions. In today's geopolitical context, the Northeast Asia region includes Japan, Taiwan, North Korea, South Korea and China. These countries are largely different in scale, as well as economic and political power. Also, the countries are of different levels of development with countries like Japan ranked among the most developed nations in the world, China as a rising industrial economic power, and countries such as North Korea ranked among the least developed nations in the world.³² This condition of different stages of development is similar to Southeast Asia, where countries can also be approximately classified as belonging to different levels of economic development and factor endowments.

The different stages of the Northeast Asian states' economic development indicate that they can also benefit by re-aligning their economic bases according to their comparative strengths, just like AEC countries could do. China like has a large labour force, allowing it to have a comparative advantage in labor-intensive industries. South Korea and Japan have advanced industrial technologies, although the costs of production are markedly higher than in neighbouring countries. But greater alignment according to their comparative advantage in high value technology goods will benefit the region through specialization and trade. However, free trade is still a work-in-progress, since the current regional trade system in Northeast Asia is characterized by significant transaction costs in terms of tariffs and legal restrictions.³³ This reduces the region's collective productivity and lowers the efficiency of resource allocation. Northeast Asian countries ought therefore to re-align their economic means of production according to their comparative advantages, as the AEC has managed to do. In this manner, countries can benefit from exchange of production factors such as labour and also intermediate and final goods and services. This will increase the whole region's productivity and economic efficiency, ultimately benefitting all member states' societies in the long run through more sensible resource allocation.

Secondly, an NAEC will benefit from the same enlarged consumer market size, as has been the case for ASEAN. Theoretically, the benefits for the former should be similar to the latter. For example, there will be greater foreign direct investment inflow, since investors usually favor an integrated market that is much larger and potential. Northeast Asia is even larger than Southeast Asia in economic scale. The effects will be even more significant in Northeast Asia due to its large demographic size of 1.5 billion people, accounting for 20% of the world's population (Seliger, 2002). This NAEC integrated market will increase the region's competitiveness as a whole against the rest of the world. The integrated consumer markets also allow companies to generate more values, while benefitting the people in the form of greater product variety, lower prices and higher incomes from shared economic growth.

Thirdly, an economic community can help to maintain regional peace and ameliorate security-related challenges in Northeast Asia. Just as the presence of the AEC has provided positive security externalities against unnecessary regional conflicts, a common economic community can effectively reduce political tension and ensures peace in Northeast Asia. The economic interdependence theory explains that as two countries become more economically interrelated while trade increases and economic connections deepen, it is less likely for conflicts to break out between the two states. Economic interdependence increases social interdependence, making countries more closely connected with one another and increasing the cost of conflict. In Northeast Asia, the use of economy to promote peace is not new. China has long sought to increase its economic interdependence with Taiwan, hoping to achieve reunification in the future.³⁴ It welcomes Taiwanese businessmen to invest in Mainland China and has also signed many economic cooperation agreements with Taiwan. The increasing economic interdependence across the strait has been very effective in improving the amity and stability between the two. In fact, many scholars have argued that closer economic relations between North and South Koreas is the more promising option in achieving reunification.³⁵ Integration into one economic community can in this way promote better relations between different Northeast Asian countries and stabilize the region.

AEC lessons in Northeast Asia

As discussed above, the three main problems encountered during the process of creating AEC are: 1) the dumping of excess produced goods in other countries' markets; 2) the extent of protectionism that hinders full economic integration; and 3) undesirable labour-side effects caused by labour mobility. Because of the similarities between Southeast Asia and Northeast Asia, these problems can also be expected when creating the Northeast Asia economic community. The lessons learnt by AEC are thus highly valuable to Northeast Asia and can serve as suitable guidelines steering the latter towards integration.

Dumping is one of the most serious concerns when countries establish free trade ties. Countries able to manufacture goods at much lower prices tend to export such goods to foreign markets for more sales. Because of their cost leadership, they are able to out-compete less efficient producers from the receiving country, leading to structural unemployment and a tandem rise in animosity towards the exporting country. Dumping is a perennial concern among many countries in Asia.³⁶ In Northeast Asia, China's low labor cost and abundant manufacturing capabilities have allowed it to have a comparative advantage in production of materials such as steel, which has been argued to be "dumped" in the European and American markets. In the AEC, this problem of dumping has been averted by negotiating and re-aligning comparative advantages while embracing the overall enhancing effects on consumer surplus. As countries re-align themselves according to competitive advantages, they will not compete with others in their less efficient industries. They avoid narrow concentration of industrial efforts on similar products and focus on their niche areas of production. This reduces any surplus production needing to be "dumped" in regional markets. Inefficient producers should be incentivized to divert their capital to other industries in which the country can build a comparative advantage. If Northeast Asia is able to delineate industries they are most suited for economically, then the long-term benefits of greater economic integration will outweigh the short-term costs, such as structural unemployment.

Protectionism is another issue hindering the successful implementation of economic community. When member countries refuse to follow economic agreements and restrict entrance of foreign goods and services, they largely reduce the efficiency of the whole community. These trade barriers prevent free flow of goods and services and endanger the foundation of economic integration. Countries may use protectionism to protect domestic industries from foreign competitors or because of lobbying by business groups with powerful influence and ties to politicians.³⁷ Japan has frequently set up import restrictions on goods made in China and prevented foreign competition in sectors such as the consumer groceries sector. A relevant lesson from the AEC is how all member countries have collectively developed a consensus to disavow protectionism, based on comparative advantage logic. As earlier mentioned, member states have signed various agreements to prevent protectionist actions by any member state towards others in the AEC. If Northeast Asia can collectively reject the use of protectionism policies, disregarding protectionism's political popularity, the regional consensus can increase the likelihood of an NAEC's establishment.

The other problem is uncontrolled labor movement within the economic community. In theory, free labour moves from places where they are currently unemployed or lower paid to other places with better job prospects (Lieberman and Hall, 2013). When foreign workers, especially low skilled workers with limited education, enter a society largely different from theirs, they are unlikely to integrate well in the host society for reasons such as cultural differences. In addition, some locals tend to see foreigners as unnecessary competitors fighting for the same jobs that they need. For example, Chinese immigrant workers have caused some conflicts and discontentment in various Japanese and South Korean cities that they work in. In AEC countries like Singapore, this problem is overcome by careful planning by the government. The Singapore government actively monitors the amount of foreign labor needed in each industry, thereby ensuring there is a local-foreign job balance that does not alienate its own citizens, while still benefitting from the skills and experience that foreign workers bring along with them. This experience is very helpful to the Japanese government when creating NAEC, since controlling the rate of Chinese worker entry sends a signal to citizens that the government is aware of the associated problems and is actively managing the issue. Greater acceptance of foreign workers within Northeast Asia, while requiring incremental and gradual efforts, is a desirable outcome that will facilitate the chances of regional economic integration.

Other Problems in Creating a Northeast Asia Economic Community

The problems experienced by Southeast Asia can help Northeast Asia better plan the creation of their own economic community. But there are also some unique Northeast Asian problems that have not been experienced by the AEC, which may still need to be addressed. This paper will not engage these alternative problems in detail, since the focus is on the path towards greater economic integration. While resolving these issues can promote the growth of an NEAC, it is equally viable that this causality may be reversed. Greater economic integration, perhaps, can provide the preliminary basis for Northeast Asian countries to work these other issues out.

The first problem is the lack of formal political institutions in Northeast Asia to facilitate the creation and functioning of a common economic community. The notion of establishing an NAEC was initially floated in 2001, when South Korea president Kim Dae-Jung raised the idea of a regional economic community.³⁸ However, this idea has never been achieved. Leaders of Northeast Asian countries mention it almost every year, but there remains no concrete plans for such a community yet. In Southeast Asia, the structure of ASEAN is very important as it creates necessary institutions and platforms for all countries to discuss their individual interests and reach agreements. However, there is no comparable regional organization encompassing all Northeast Asian countries. Still, there are existing regional platforms that can be leveraged upon to provide the medium for negotiation. For example, the East Asia Summit, established by Japan, is a suitable arena for all stakeholders to participate in. The ASEAN+3 summit, which includes all ASEAN states, China, Japan and South Korea, is another prospective platform that can facilitate discussions and work out differences between these three largest Northeast Asian states.

Secondly, the inter-state politics of Northeast Asia is much more complicated than that of Southeast Asia. The United States, as a major actor in Northeast Asia, engages in multipolar policy in the region under a "hubs and spokes" model, in which all countries are bilaterally tied to the U.S.³⁹ Hence, it will be difficult for states allied to the U.S, namely Taiwan, South Korea and Japan to act without American support. Nonetheless, although this barrier to economic integration is significant, it is not by any means insurmountable. As the American government has indicated on various occasions, it welcomes China to play a larger role in the region, although subject to the latter abiding by international rules and regulations. If China is able to indicate its commitment to upholding such institutions, then American support may be forthcoming, raising the chances of economic integration. Economic integration will benefit the said countries, which should therefore merit American support, assuming the U.S truly wants to help its allies economically develop. Should the U.S value political goals more than the material interests of its Asian allies, then there exists little reason for Taiwan, South Korea and Japan to forsake material benefits simply to please the American government. The logic of economic integration, if objectively presented, provides Northeast Asian states with more economic benefits, at the expense of minor political cost.

Thus far, economic integration has been proposed as a way to enhance the economies of the various Northeast Asian states, according to various theories such as the model of comparative advantage. While there are various barriers in Northeast Asia that can hinder the development of an economic community, it has been argued that such barriers are surmountable, given sufficient political will. The benefits from economic cooperation can provide reasonable grounds for member countries to work towards resolving their political differences, since it is only from doing so that an economic community can hope to be sustained and strengthened over time. Following economic liberalism theory, greater mutual interdependence through an economic community can provide states with the motivation and the mechanism to resolve their problems, thereby increasing the attractiveness of an NAEC.

III. Beyond Northeast and Southeast Asia: The Future of Pan-East Asian Economic Integration

The successful creation of an NAEC, alongside the AEC, can be powerful drivers of a more closely integrated East Asia. The enhanced preponderance of East Asia as a counterweight to other major economies in the world can augur in an even more formidable era of collective economic gains to member economies. Fortunately, the possibilities of doing so are not without existing mechanisms to utilize, with the most important of all being the ASEAN+3 outfit as mentioned in an earlier section. This potential platform for cross sub-regional ties formation will be expounded on, following some preliminary thoughts on the issue's salience.

The creation of an "East Asian Economic Community" can provide for a more stable and peaceful environment for member countries in East Asia. This can be useful in moderating the degree of conflict among member nations. Different communities of people may seek association (and dissociation) on the bases of primordial affiliation, ideology, security interests or economic ties. An East Asian Economic Community may pose the most unproblematic means for East Asian states to associate in this realm of affairs. The other means of association do not appeal to these countries for the following reasons. Primordially, Samuel Huntington identified different civilizations in the Asia region.⁴⁰ For example, much of the Sinic civilization is different from the Japanese civilization. In Southeast Asia, the two main Austroasiatic and Austronesian groupings are even further apart from these civilizations in Northeast Asia, than they are in relation to each other.⁴¹ What this indicates is that the "imagination" of a community, following Benedict Anderson proves more difficult since cultural stocks are largely different.⁴² Ideologically, Asia is noted for its diversity of political systems and structures that closely follow behind. Fareed Zakaria classifies Singapore and Malaysia as "illiberal democracies"; North Korea and China remain communist states; Taiwan and Japan are liberal democracies; and Thailand and Myanmar are influenced by military rule.^43,44 Since ideology proves a polarizing issue amongst peoples, as Andrew Heywood notes, it is expected that ideological association cannot be satisfactorily achieved.⁴⁵ In the aspect of security, the particular nature and organization of intra-regional state-to-state relations militate against any semblance of collective security arrangements or cooperation. More specifically, this is due to the maintenance of the "hubs and spokes" model, which links Japan, South Korea and Taiwan close to the United States, with China perceived as a competitor for power in the region.⁴⁶ China's increasing military power can provoke a Hobbesian response from Japan, Taiwan and South Korea. This is due to the insecurity, as realists posit, that the latter three countries feel about China's "aggression."⁴⁷ Furthermore, the presence of the United States, with its strong bilateral alliances with Japan and South Korea, renders any regional security ties foreseeably unfeasible. As such, security interests also fail to provide a common platform for cooperation.

It is in this regard that economic ties prove most valuable for giving East Asian states some cause to seek association. Following the wave of globalization, every East Asian state (save for North Korea) has successfully integrated into the global economy as willing and active participants. Insofar as every actor in the association is guaranteed and receives the economic benefits promised under the organization's collaboration, there are clear game-like and straightforward ways of seeking assurance that cooperation is being valued over competition. Economics today largely follow the global liberal market model, rendering all participants familiar with such an idea. This is important, since such familiarity through an active participation in the global economy organized along these lines ensure that all participants are clear about the processes and outcomes involved, making the tasks of monitoring easier to accomplish. Consequently, there is less likelihood of suspicion arising, vis-à-vis security cooperation.

Still, a reminder is in order – nationalism appears to be a powerful force driving the behaviors and actions of many societies in Asia, which is not altogether a positive development for economic integration. As Singapore's Prime Minister Lee Hsien Loong shared, his biggest worry for Singapore today is a growing nationalism in the region.⁴⁸ This is not threatening to Singapore alone, for clearly nationalism poses a danger to inter-state relations in the entire Asia region. For example, Japan and China continue to experience friction over wartime-related activities during World War II.⁴⁹ while the Philippines and China are also locked in a dispute over ownership of various islands in the South China Sea. These are inductive examples, but their repercussions on the region resound clearly and need to be well managed. Where irrational emotions and actions can be galvanized by the politicization of such psychological and nationalistic issues, the threat posed to economic integration is also considerable. As such, governments need to actively manage these issues, to prevent the threat of nationalistic rhetoric from derailing economic cooperation.

But a successfully created East Asian economic community will be of benefit to all member countries, should the above obstacles be resolved. The production base of East Asia's economy will be the aggregate of the AEC and the NAEC greater movement of goods and capital can facilitate even more cohesive and mutually beneficial economic growth; and East Asia can also institutionalize a regional trading block rivaling those in Europe or North America, assuring it of greater gains than before. Where cooperation can be sought in the realm of economy, it is also conceivable that there are other effects that can enhance the overall attractiveness of integration. This is the ability to utilise economy as a platform for trust and confidence building, the successful outcome of which may serve the moderation of nationalistic tendencies and friction among states over territory or historical experiences. This is by no way easy, evidenced from Japan's ongoing dispute with China in spite of economic ties.⁵⁰ But this is precisely why we have highlighted the need for both sides, perhaps, to take reference from ASEAN's resort to negotiation and consensus building. Through peaceful and constructive dialogue, a common agreement on economic cooperation is not necessarily hindered by issues related to politics and culture as well. As such, every country in East Asia should play a larger part in looking beyond short-term political interests and seek genuine long term gains which can only benefit all in the society. The object of government is to secure the greatest welfare for the greatest number of its citizens. This is an outcome an East Asian Economic Community may help to secure and it will rest a priori on the successful creation of the AEC and NAEC.

The presence of ASEAN+3 is a useful mechanism for coordinating the further integration of these two regions, since it is an institution with representation from both sub-regions. ASEAN+3 refers to all ASEAN member states, in addition to China, Japan and South Korea. Through this institution, East Asia as a whole can begin this task of seeking economic integration cross sub-region, if this is an end that all countries desire. Some successes have been evident, such as how greater financial cooperation was achieved in 2003 whereby the "number of bilateral [currency] swap arrangements" across the member countries doubled.⁵¹ Other than its role as a clearing house for information among regional leaders, it also serves as a site for negotiation and subsequent shaping of shared interests, which can be vital to any pact's successful implementation and continuation. But an East Asian Economic Community still remains a long term ideal: in the short to middle term, effort should be devoted towards creating a durable and beneficial NAEC that enjoys buy-in from all member countries. Thereafter, the potential for an East Asia-wide equivalent can then be more concretely explored.Continued on Next Page »