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

By Aik Seng Tan
Cornell International Affairs Review
2016, Vol. 10 No. 1 | pg. 1/3 |

Introduction

Economic regionalism has been an observable phenomenon worldwide. Many countries around the world pursue some degree of economic integration with neighbouring countries, in the hopes of capitalizing on the benefits of such an arrangement. At the turn of the 21st century, there already existed various regional economic institutions, including the highly integrated Eurozone in Europe and the East African Community (EAC) for continental Africa. This is in addition to a proliferation of bilateral free trade agreements (FTAs) between countries, which can be regional or cross regional in nature. Many Asian countries, including South Korea, China and Singapore, have also been active participants in these economic processes, with many FTAs signed intra and inter-region. The Association of Southeast Asian Nations (ASEAN),2 recognizing the preponderant benefits that can be derived from trade ties, have been among the most vocal advocates of economic regionalism, an institution that goes beyond bilateral FTAs. Unlike bilateral FTAs, regional institutions include more than just two parties, thereby enabling more countries to benefit from trade together. Against this backdrop, the ASEAN Economic Community (AEC) is currently being implemented incrementally by all member states, according to a chronological roadmap. The AEC is expected to deliver substantial economic gains to all member countries, including increased access to regionally produced goods, better allocation of capital resources and overall improvement of economic well-being to the people in ASEAN. Yet, the creation of the AEC did not come without its obstacles. Much effort was – and continues to be channeled towards coordination, alignment of interests and resolution of conflicts. As is encountered even in the Eurozone and the EAC mentioned earlier, all regional economic institutions have to overcome various establishment and maintenance problems that can hinder the efficacy and effectiveness of such institutions. Thus far, the AEC appears to be coping with these barriers well. If it can do so successfully, the economic benefits accrued to member countries will be considerable.

Economic integration provides promise of improving societal welfare through market mechanisms, but also closer inter-state ties and improved intra-regional peace and stability. Much scholarship has been devoted towards exploring the political difficulties that undergird economic integration. Tensions from historical or ideological issues have been attributed as problems that hinder cooperation.3 Therefore, a common line of argumentation could hold that resolving these political problems must occur prior to cooperation between these states. However, evidence on this count is inconclusive. For example, the United States (U.S) and China were able to set aside ideological differences, despite decades of tension, in favour of cooperating against the Soviet Union. This implies that the tangible benefits from economic integration could provide the motivation to isolating or resolving major political differences. If there are clear material benefits at stake, as in the Soviet threat of the 1970s, there are reasonable grounds to posit that states may be willing to pursue self-interest before considering less immediate and non-threatening problems, such as ideology. As this paper will show, the AEC is a powerful force promoting peace in the Southeast Asian region. Greater labour mobility within this region, coupled with the material gains from collective economic growth are major stabilizers that mitigate unnecessary conflict. In other words, national behaviour increasingly adapts to ensure that economic development is prioritized. If a government cannot guarantee its people security in their basic material needs, then there can be no foundation to pursuing higher-level, abstract goals such as ideological legitimization.

Assuming the logic of economic integration holds true, Northeast Asia stands to profit immensely if the region creates a similarly structured economic institution. As such, this paper argues that Northeast Asia's ability to increase economic integration's viability can be greatly enhanced by understanding how ASEAN has approached the creation of the AEC. There are both economic and political-security benefits which can greatly enhance the attractiveness of creating a "Northeast Asian Economic Community" (NAEC). In the first section of this paper, I perform a case study of ASEAN to better understand the actual and potential benefits of the AEC's creation, followed by a distillation of lessons that can be learnt, pertaining to how major barriers to successful economic integration have been and are still being -mitigated. The second section will then proceed to examine the benefits of forming the NAEC and suggest how, by way of the ASEAN experience, significant barriers to economic integration can be overcome to increase the possibility of successfully creating the envisaged NAEC. The final part of this paper will articulate the possibility of a more encompassing East Asian economic community, contingent on the success of the AEC and NAEC.

I. The ASEAN Way to Economic Integration

Historically, Southeast Asia was a major node in the international trade network, exposed to major movements of goods between different nations around the world. Following post-colonialism, however, many member countries turned to import-substitution industrialization in order to develop their economies. In recent decades, more countries have increasingly embraced the idea of free trade, persuaded by the benefits that it can provide. The ASEAN Economic Community (AEC) was conceptualised in 2003, following the meeting of ASEAN headsofstate in Indonesia, and is part of a larger concept of regional integration.4 The AEC aims to create a common economic platform that will facilitate the participation and trade of ASEAN member countries. Its main pillars are: 1) a single market and production base; 2) a competitive economic region; 3) equitable economic development; and 4) integration into the global economy.5 With the integration of the AEC, the total value of the economic market is estimated at US$2.3 trillion.6 As a large market with considerable promise, the AEC is an attractive region for robust economic growth. It is in this regard that many countries have been convinced to participate in the AEC, as the tangible and rational benefits accrued to each country will go a long way in promoting the economic health and societal welfare of their respective countries.

How the AEC benefits its member countries

First, the AEC provides countries with incentives to align their production bases according to their comparative advantages. For many Southeast Asian countries, most countries retain a large agrarian base, with only a few having successfully transitioned to a more capital-intensive economy.7 For example, Singapore and Malaysia are the leading economies in the region and both have considerable infrastructure tailored to meet the needs of a more knowledge-based, high-value economy. This is aligned with their comparative advantages, especially so for Singapore. Public universities, such as the National University of Singapore and Nanyang Technological University, have consistently been recognized for academic excellence in various world rankings, while other technical and vocational training institutes provide Singaporeans with the needed skills that employers from MNCs look for.8,9 As a result, Singapore in general has emerged as a strong and competitive economy. On the other hand, the Philippines, with a large agrarian base, is presently much poorer than Singapore. Without specialization, it will be difficult for the Philippines to achieve economies of scale via large-scale efficient production of goods according to their comparative advantage in primary products, such as agricultural goods.10 The AEC aims to address this by encouraging economies to re-align according to their strengths. In doing so, other trading partners within the AEC will benefit from lower prices, thereby enhancing consumer welfare.

Second, the AEC effectively creates an integrated market for 611 million consumers.11 A large consumer base will be advantageous to many firms located within member countries, as their product reach will be greater than before. Where successful integration without significant trade barriers prevails, social welfare improves as raw material and final product prices are not unnecessarily distorted. It is little wonder, therefore, that many countries are receptive of the AEC since this will increase both domestic consumption and export expenditure, enhancing the interest of their respective business sectors. Consumers in the AEC will be exposed to even more product choice, variety and nature at a higher level of quantity and quality. Already, benefits have been apparent. For example, Jollibee, a fast food restaurant chain from the Philippines, has successfully expanded its operations into nine of the ten ASEAN nations as a result of lower trade and investment barriers. Today, its operations are worth a total of US$866 million.12 The presence of a large market is also effective in attracting foreign direct investment from other parts of the world. This sentiment was captured in a survey by the US Chamber of Commerce, which polled and discovered that 54% of American firms have plans that involve expanding into ASEAN.13 Such investments can go a long way in strengthening the regional economy even further, thereby enhancing the overall returns to integration. Specifically, more jobs can be created and economic development achieved. Effectively, consumers will benefit alongside business and every country is moved along in this cycle of economic prosperity.

Third, the AEC's success can promote greater regional peace and ameliorate security-related challenges. Economic competition has often been implicated in political conflicts among states (Le Billon, 2004). The presence of the AEC provides all states with positive security externalities, specifically, a buffer against unnecessary conflict caused by economic fundamentals. Under conditions of shared economic growth and prioritized economic cooperation, the benefits of a successful AEC will be enjoyed by all ASEAN states. Fostering an economic community can also provide additional benefits to regional peace, following economic liberalism. According to economic interdependence theory, states that form a network of cross-border cutting economic ties will be more disposed towards peace and less towards conflict. If the theory is true, the presence of the AEC will be a major driver of regional peace in ASEAN. While no studies have been conducted in ASEAN yet, economic interdependence theory tentatively has some support from research conducted by Russett and Oneal, who established the presence of a positive relationship between trade and peace.14 This is salient, as ASEAN leaders such as Singapore's Prime Minister Lee Hsien Loong have identified growing nationalism as a threat to regional stability.15 Integration in the economic sphere, in turn, can serve as a viable launch pad for better and more stable political and social relations across the region. Building a stable and powerful AEC will be advantageous to promoting peace in Southeast Asia, a goal that is desirable in the context of greater political conflict among East Asian states. This being achieved, peace in Southeast Asia will be a good base to enhance peace in the greater East Asia region.

Lessons from the ASEAN Experience

Following the above, it is apparent that economic cooperation is desirable as it provides economies access to a larger market, fosters economic competitiveness and carries positive security externalities. Together, these attractive "push" factors encourage states to seek out such an arrangement. Against this backdrop, there is cautious optimism that Northeast Asia can achieve similar results, if a similar economic community can be mooted. Should major economies such as China, Taiwan, Japan and South Korea come together to form a coherent economic multi-lateral institution, there is a high chance that these countries can enjoy the economic benefits that AEC member states will share. Yet, such communities are not naturally formed, owing to various barriers that can discourage countries from associating into an economic community. This section will enumerate three major difficulties associated with national-level economic organizations. Every multi-member organization is prone to conflict among constituent members owing to different priorities, norms and domestic needs. ASEAN is no stranger to these issues. Specifically, the issues under discussion 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.

Dumping

Countries able to manufacture cheaper goods tend to export such goods overseas upon saturation of the local market, leading to greater competition and declining profitability of recipient country firms. This condition, known as dumping, is a recurrent problem found in economic zones with members being in different stages of economic development.16 Assuming free trade and a country X with a strong comparative advantage in good A, compared to countries Y and Z, the latter two countries will experience an influx of good A from X, leading to an outcompeting of domestic producers in Y and Z who lack the level of efficiency needed to provide similar goods at more competitive rates. This has been a problem faced in various regions, whereby the movement of goods according to comparative advantage has meant a decrease in earnings from domestic industries, who are unable to compete with more efficient producers from other countries. As a result, this phenomenon of dumping causes domestic producers to be squeezed out of the production market, leading to negative effects on the economy's production capacity as a whole. Of greater salience in politics, the marginalization of local sectors in business can foment greater resentment and demands placed on the government to protect their interests better. Should the government heed this call and respond in favour of their businesses, the resultant situation can be detrimental to the overall fabric of the regional outfit writ-large.

In ASEAN, this problem of dumping has been averted by negotiating and re-aligning comparative advantages while embracing the overall enhancing effects on consumer surplus. The ASEAN institution leverages greatly on such conciliatory negotiation mechanisms that aim to produce consensus among member states.17 This minimizes any consequent disagreements that can impede successful policy implementation. According to an ANZ Bank analyst, the ASEAN countries will likely structure their economies to match their resource endowments, with Singapore and Malaysia developing "into service and financial hubs for the region" while Indonesia, the Philippines, Thailand and Vietnam move into middle-end manufacturing, while Myanmar, Laos and Cambodia, will leverage on its physical resources for lower-value manufacturing.18 This indicates that no particular industry will see inefficient and large-scale production of any goods or services. Instead, countries largely avoid the narrow concentration of industrial efforts on similar products and focus on their niche areas of production. Hence, this reduces any surplus production needing to be "dumped" in regional markets.

Protectionism

Economic integration can be greatly hindered when member countries refuse to abide by agreed upon regulations permitting movement of goods and services across borders. This is commonly done by raising barriers to mobility, a practice officially known as protectionism. Traditional protectionist measures include tariffs and quotas on foreign imports, while modern protectionist measures typically involve regulations on product content requirements.19 Countries may adopt protectionism so as to protect their domestic industries from more efficient foreign competitors, which may have repercussions on domestic employment. Another reason for protectionism may be to pander to business groups with powerful influence and ties with politicians.20 Such businesses understandably do not wish to see an erosion of profits, which competition brings about generally. Still, despite such justifications, protectionist measures militate against the creation of an integrated and accessible economic community. These barriers prevent free flow of goods and services from one country to another, contradicting the basic tenet of economic integration.

ASEAN countries have tackled this problem by collaboratively building consensus about the disavowing of protectionism. This was embodied most clearly in the communique released after the ASEAN Summit in 2015, whereby ASEAN affirmed its commitment to eliminating trade tariffs, of which nearly 96% have been eliminated.21 Incrementally, every country has been reducing restrictions on competition in protected sectors such as banking, which is a major source of revenue for economies. The commitment to protectionism can be seen in agreements signed within the AEC, including the ASEAN Comprehensive Investment Agreement (ACIA). The ACIA institutionalizes each country's commitment to liberalize their business sectors and this has "eased restrictions to cross-border trade."22 This is supplemented by the ASEAN Trade in Goods Agreement, a "legal framework to realize the free flow of goods within the AEC." Consequently, much progress has been made in the AEC, whereby more than "70% of intra-regional trade" now has zero tariffs across 80 sub-sectors.23 With more time given, the rate of further liberalization is expected to increase given the continued commitment of political leaders to the AEC's cause.

Undesirable labor effects

Labor movement can be both a source of benefit and conflict to the receiving society, which may not always embrace foreigner inflows. This poses a formidable obstacle to any plans for full-scale economic integration, since any failure to permit free labour flow can go against a fundamental tenet of a shared economic community. In theory, free labour flow is beneficial because it can correct any asymmetry in the labour market by ensuring that workers move to where they are in demand from places where they are currently unemployed due to undersupply of jobs.24 Furthermore, these workers are likely to have received education and training in their home countries prior to movement to other countries, being a big advantage to the latter. Such prior training greatly reduces the need to equip these workers with basic skills, a source of cost savings for the receiving country. However, labour factors, despite their advantages for the receiving economy, interact with socio-cultural cleavages at the same time. Locals may perceive foreigners to be taking their jobs, fomenting greater resentment as a result. How have affected ASEAN countries dealt with this? To provide a more detailed analysis, here this paper examines a single case, Singapore, in detail.

Being an advanced economy, Singapore is attractive to many foreign workers around the world. This ranges from lower-value employment such as in construction and the service industry, of which most workers tend to be from neighbouring ASEAN countries and South Asia, to high-value employment in sectors such as banking and Information Technology (IT).25 Such workers can come from any part of the world, with the critical distinction being their professional qualifications and experience. Due to rapid development, alignment with comparative advantage, and a small labour force, Singapore has relied on foreigners to fill gaps in the various sectors, with most of them found in the lower-value sectors.26 The reason for this is that, since Singapore's only valuable resource endowment is human capital, such capital must be upgraded to be of higher value in order to sustain the economy's development.27 As such, labour shortages are found more in the sectors of construction and ancillary public services such as cleaning.

However, Singaporean society has not taken well to such measures and has displayed occasional resistance to the foreign labour policy of the government. This has sometimes translated into strong pressure on elected politicians to manage the policy better by slowing down the rate of uptake. As society's support is essential to any public policy, the state is unable to ignore public opinion. To this end, Singapore has been more careful and calibrated in its approach to foreign worker inflows. There are categories of employment that require different skill sets, and are open to different nationalities.28 In labour intensive sectors, the government does not appear to be intervening extensively, since such labour flows are transient and do not significantly pose problems to society. For the professional sectors, depending on deemed merit and worthiness, foreigners are eligible for Permanent Resident status or Singaporean citizenship itself. It is in this domain that discernible change is apparent, with majority beneficiaries being other ASEAN countries, while those from South Asia and other regions are in the minority. In 2013 for example, 55.3% of new PRs were from ASEAN countries while 34.6% came from other Asian countries such as India and China.29

On the societal frontier, the government has become more active in its drive to clarify the misconceptions related to foreign workers taking jobs away from locals, backed up with actual policies to lend such messages more credence. For example, companies must list openings for certain jobs one month prior to opening them up to foreigners.30 In addition, the number of foreign workers allowed for hire by a company is determined by a pre-set ratio of local to foreign labour.31 This means that firms must hire local workers before they can be allowed to hire foreigners. Together, these policies aim to assuage public concerns by showing that the government is monitoring labour inflows and ensuring no undesirable side effects on society writ large. This is a strategy that dovetails with larger AEC goals. Singapore has continued to privilege AEC partners in its foreign labour policies, as seen in the above proxy indicator of majority ASEAN PR and citizenship grants, supporting the AEC's eventual ideal of free labour mobility. In this regard, there are positive steps being taken to ensure that, despite societal resistance, Singapore's cooperation and compliance with AEC goals are not compromised, but have been managed in order to ensure smooth policy development and acceptance.

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