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The East Asia’ Regional Economic Integration

Tutor: Griffith, Edward

Student ID: 20647046

Student Name: Hong Xu (Eric)

Word Count: 2369

Date of Submission: 18/1/2016

The East Asia’ Regional Economic Integration In the past twenty years, the East Asian economies realized the freedom of foreign trade and direct investment (FDI) because of the influence of GATT/WTO and APEC and as a result, it further promotes the economic growth of East Asia. The mutual economic dependence of each countries has increased a lot and therefore, close economic cooperation among Asian countries is necessary for healthy economic development. Many countries try to deepen their cooperation by establishing agreement and carrying out negotiation or discussion (Kawai 2004). Besides, the East Asian countries want to have their own institutions where they have vital voice in decision making after the financial crisis. As a consequence, the regional economic integration become an inevitable trend. The structure of this essay is organized as follows. The first part of this essay will discuss the driving forces of East Asia’s regional economic integration, including the failure of the WTO and APEC, and the financial crisis. The second part will illustrate how regional organizations of East Asia are developed in aspect of trade cooperation and financial cooperation and then followed by the difficulties in creating a regional economic union, such as the resistance from the United States and the great diversity in economy and society among East Asian countries. Lastly, a brief conclusion of this essay will be introduced. According to Yip (2001), the forces for economic integration of East Asian countries can be classified into three reasons: the failure of the WTO and APEC; a widening and deepening regional integration in Europe and North American; the Asian Finance crisis. The failure to organize a new trade negotiation in WTO made many East Asian countries start to think about another way to realize trade liberalization. Many countries in East Asia are greatly depend on export for their economic development. Therefore, it is essential to protect thee continues availability to foreign markets. The continues liberalization should be protected, otherwise, the protectionism would be relapse. However, the new round of WTO was failed and the trade liberalization within APEC also stalled. However, the United States was dragged by domestic issue and East Asian countries can not wait for the revival of the US. What is more, under such circumstance, a non-integrated East Asia can not compete with Europe and the Americas in which the economic integration is deep and wide. On the perspective of monetary side, the East Asian integration was promoted by the financial crisis of 1997-1999. From the early 1990s, the financial openness of East Asia increased a lot. Many countries realized the liberalization of international capital and they are closed related with the international capital market. The increasing openness of its finance increased its financial vulnerabilities, which lead to financial crisis in 1997-1999 (Kawai 2004). The financial crisis in late 1990s greatly promoted the intergovernmental economic cooperation. Many East Asians felt that their situation became even worse because of the western capital. The resentment was increased by the thought that the IMF’s saving plan actually made the circumstance of East Asian economies more severe by making them into a more serious economic recession. Therefore, the East Asian aware that they should not rely on the western world and they should have their own institutions with a significant voice on decision making so that they can secure their future. Regional economics realized that the deep economic cooperation and effective mechanism should be put into place to manage the forces of globalization. For example, Japan and Singapore try to establish the economic partnership agreement (EPA), and many meetings were progressed for setting free trade agreements (FTAs). Apart from that, Asian countries try to be independent from the Washington-based International Monetary Fund (IMF), World Bank, and U.S. Treasury, so that they can insulate themselves from outside pressures (Henning 2002). Apart from the three forces mentioned above, the market also plays a leading role on Easter Asian regional economic integration (Lardy 2006), as the firms try to exploit the comparative advantages of East Asian countries. Therefore, in order to clear the obstacles on the way of trade, the governments try to enhance their economic relationship with their neighbor countries and create an East Asian Community by establishing a series of formal agreements. Statistic evidence clearly shows that the trade has greatly increased the degree of regional integration over the last two decades. Specifically, there is a great increasing of the share of intra-regional trade for East Asian that it increased from 23 percent in 1980 to 41 percent (Kawai 2004). The rising trade in East Asia requires the setting of more official institutional mechanism to facilitate trade and investment and harmonize standards. The deepening financial independence forces interdependent regional entities to enhance the integration by establishing cooperative framework, for example, the trade and investment agreement, as the crisis of one countries could be easily transmitted to another country. China also plays a central role on the evolution of regional organization for East Asian countries as it is the biggest developing country in the world and has the biggest potential market. It has great influence on East Asia’s regional integration (Wu 2006). For example, it objected the initial proposal for an Asian Monetary Fund in 1997, as the intention of this fund is to ensure the leadership role of Japanese finance. After China joining the World Trade Organization (WTO), it accelerated the development of free trade agreement (FTA) with the Association of Southeast Asian Nations (ASEAN) and at the same time, China try to broaden the coverage of this agreement to include more countries, such as India, New Zealand, and Australia. Except from what have mentioned above, the closer regional economic cooperation is formed because of the proactive response, for example, the dissatisfaction to the financial system controlled by the IMF, increasing the financial stability and the Asian voice in the global economic market. The Asian financial crisis taught Asian countries that the effective prevention and management is needed for health financial system. The ineffective of IMF increased the awareness of establishing their self-help mechanism and enhancing cooperation. After discussing the forces of East Asia’s regional economic integration, the next two paragraphs will talk about the development of regional organization in aspect of trade arrangements and financial cooperation. The regional trade initiative is active in recent years and many East Asian countries are linked by ongoing negotiation or official studies. For example, they try to develop blueprint for a Northeast Asia Free Trade Area (China, Korea, and Japan) (NIRA 2007) and a full East Asia Free Trade Area. Even though the resistance of the United States and other Western countries prevent the economic integration of East Asian countries, the East Asian economies still keep positive altitude towards the further regional integration in East Asia. As for the aspects of trade arrangement, in the early attempts of Asian regional organization, the Association of South East Asian Nations (ASEAN) Free Trade Agreement (AFTA) was established in 1992. In early stage, the free trade agreement could put into effect only among the original five ASEAN members - Indonesia, Malaysia, Singapore, Thailand and the Philippines. By 2015, all members of ASEAN will become a tariff-free FTA. The pooling of resource and markets aims to enhance the ability of ASEAN to attract more foreign and regional investors. Multination companies which was built in ASEAN could realize the economies of scale and better operation by distributing various part of operation to the ASEAN countries based on each unique strength. In 2003, the ASEAN Economic Community (AEC) was created to promote the free flow of goods, services, investment and free flow of capital. In December 1990, the East Asian Economic Group (EAEG) was created with the aim to respond to the preferential regional trade arrangement, but was rejected by the United States and Japan. Asia-Pacific Economic Cooperation (APEC) was established in 1989, and this organization intends to promote the degree of liberalization in trade and investment and make it on a voluntary and unilateral way within an Asia-Pacific context. Except the Asian countries, the United States, Canada, and Australia are also included in this organization. However, the influence of APEC was decreased after the Asian financial crisis because it performed ineffectively in face of the crisis. Besides, the regional and bilateral RTAs are prevalent, which decreases the influence of APEC. Recently, the East Asian in moving toward regional and bilateral FTAs/EPAs and they even established relationship with countries outside the East Asian. For example, the cooperation between Japan and Mexico. As for the regional financial cooperation, the members of ASEAN set the first memorandum of understanding on the ASA with the total facility of US$100 million. The objective of it is to solve the problem of liquidity shortage for the members of ASEAN. Then the Asian Monetary Fund (AMF) was proposed in 1997, with the aim to supplement IMF. It received the resistance from the United States and IMF (Randall 2006). The New Miyazawa Initiative, Asia Growth and Recovery Initiative were announced later on. The economic integration of Asia is different from that of European after World War II. It is not forced by top-down, overarching political influence. The economic integration of Asia is developed on it own track, but it might be changed. For example, the proposition of East Asian Vision Group was pointed out by the East Asian Community (Tanaka, 2006). The task of East Asian integration is not easy and they are facing many obstacles. Yip (2001) mentioned that the essential difficulty of economic integration among East Asian countries is the political reasons rather than economic factors as the interdependent economic relationship among Asian economies existed for a long history. After the situation was changed after the World War II, the United State try to prevent the formation of signal dominant power, in order to maintain the suitable degree of order and keep a table environment and protect its economic partners (Ted 1998). The United States play the main role of keeping stability for East Asian and not allow any movement which would close the relationship among East Asian countries while exclude the United States. The creation of a regional economic union will create bad effects on the United States. Firstly, the East Asian economic union has discriminatory effects on the United States. Specifically, a deep analysis carried by Scollay and Gibert (2001) found that the United States may lose $25 billion of annual export because of the true fee trade in East Asia. Apart from that, the integration of East Asia may create the fierce competition between a China-led Asia and a United States-led “West” for the leading role in the global economy. With the support from East Asia, there is a greater opportunity for China will furthermore increase its influence toward global economy. The potential threat of regional economic union to the United States’ systemic leadership will make the United States try to prevent the forming of regional economic union. The United States did not allow any initiative which exclude them because it would damage its influence in this region. An example can be used to illustrate the side effects of the United States to economic integration of East Asian countries. In the late 1990s, Malaysia suggested to establish an East Asian Economic Group (EAEG) consisting of the ASEAN countries, China, Japan and Korea. This suggestion got great support from many countries in East Asia, and it was regarded as a closely related organization of the East Asian states, which the intention to respond to the trade blocs from Europe and North America. However, this proposal received great objection from the United States, Australia and New Zealand, as those countries think the EAEG would damage the Asia Pacific Economic Cooperation (APEC) (Bergsten 2009). In facing of the strong objection from the United States, the Japan have to follow the United States (Akiko,2006). Without the support from Japan, Malaysia had to change the EAEG to East Asian Economic Caucus (EAEC) and it only calls for periodic consultation for East Asian countries. However, the strong opposition from the United States made EAEC a stillborn proposal. Another example is the Asian monetary found (AMF). This fund is a unconditional found and would consider the special situation of Asian countries to meet the different requirements of Asian countries. This idea got objection from the United States and several European countries, by claiming that fund would increase moral hazard (government or corporate care less when lending or borrowing funds) and create potential conflicts with IMF. Another outstanding difficulty is that the East Asian economies are significantly different in their economic systems and social developments, such as the industrial structure, trade openness and human resource management and so on. The great diversity greatly increases the difficulty of creating a regional economic union. Specifically, in the poor countries which private firms are undeveloped, would adversely affect the free od trade and market openness, and therefore, it is a challenging to ask them to form a regional economic organization with other countries in East Asia based on the same standards. Apart from that, due to the economic and social diversity, economies will have different regulations and preference, and the national sovereignty is seen more important than economic policies. In order to create a regional economic union, the substantial economic convergence is very important, while that is what the East Asian is lack of. It is important to overcome the difficult in creating the regional economic organization. The mutual trust and community should be nurtured in region by creating a long-term vision for the future of East Asia. This essay discusses the forces for East Asia’s regional integration, for example, the failure of the WTO and APEC, a successful regional integration in Europe and North American, the Asian Finance crisis, and the influence of China as well. The second part of this essay decrease the development of economic integration in aspect of trade arrangement and financial cooperation. Finally, this essay illustrates the difficulties for East Asian countries on the way of economic integration, which includes the resistance from the USA and the huge diversity for Asian countries in both economy and society.

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