East Asia Economic Community: Vision and Reality

By Zhu Caihua & Feng Xingyan

The idea of an East Asia Economic Community (EAEC) originates from the proposal of building an East Asia Community (EAC) by the East Asia Vision Group (EAVG I) in 2001. The EAVG I expected that “the economic field, including trade, investment and finance, is to serve as the catalyst in this community-building process”. Ten years later, the second East Asia Vision Group (EAVG II) proposed to make “the realization of an EAEC by 2020”as the main pillar for regional cooperation and community building. The proposal was adopted by the APT (ASEAN plus Three) Commemorative Summit in Cambodia in 2012. Since then, significant progress has been made towards this goal. However, despite such progress and political will, the EAEC building still seems to lack momentum. Unlike the AEC, the EAEC so far has not yet developed any master plan or work plan. With only four years to go, skepticism and pessimism arise on the realization of the goal.

I. Genesis of the Vision: Past Experiences in East

Asia Economic Integration

East Asia integration has been driven by the market force, state efforts, and the globalization and regionalization. These major features dictate that the EAEC building, which takes open regionalism as its core, is quite different from other region’sintegration process.

A. East Asia integration: market force and state efforts. 1997 has been a dividing line in East Asia Economic integration. Before that, only ASEAN pioneered in forging the regional framework for cooperation, East Asia as a region only existed in the market framework webbed by business community. In this regard, China played a very important role, especially before the 2008 financial crisis. Continuous and rapid economic growth had made China an important link in the international production system and formed a very unique “China model”, in which China began to gain its position in capital and technology-intensive industries while still enjoyed its advantages in labor-intensive industries. China’s industrial development, coupled with the push of MNCs’ investment strategies, has gradually eroded the traditional industry shift model in East Asia which mainly involved labor-intensive industries. This has also changed the hierarchical industry shift starting from Japan to NIEs and then to ASEAN and China (i.e. the “flying geese pattern”) and formed regional production network in East Asia with China playing a pivotal role as the hub and final assembly center. China’s rapid integration into regional production network has become a highly important recent development in the international fragmentation of production and partly contributed to the continued dynamism of East Asia and its increasing intra-regional economic interdependence.

The break-out of 1997 Asia financial crisis made East Asian countries realize that no one is an isolated island who can mitigate single-handedly the economic and financial risks in the context of globalization and that only through enhancing intra-regional cooperation can they consolidate their economic resilience in facing up to external economic and financial shocks. Since then, East Asian countries have witnessed increasing economic interdependence and unprecedented regional integration in its recent history, demonstrated by rising intra-regional trade and investment, and multi-layered functional cooperation in a broad range strongly supported by the governments.

B. East Asia integration: globalization and regionalization. Integrating into global production network has been an integral part of East Asia’s economic landscape since the end of Cold War. This production regionalization has also resulted in high intra-regional trade shares with rapidly growing trade in components. However, the region’s outstanding growth based on vertical specialization depends largely on its extra-regional trade in final goods, especially with the US and EU. Therefore, this growth pattern of “we produce, they consume” dictates the principle of open regionalism in East Asia, which means that policies should be welcomed as long as they are conducive to liberalizing and facilitating trade and investment, no matter globally or regionally. East Asia’s successful practice in the past shows that open regionalism has indeed helped enhancing the competitiveness of the countries in the region by promoting regional integration and shaping regional production network, while at the same time constituted a building block for a more open global economy by complying with current rules set by the multilateral trading system under the WTO/GATT and further supporting the WTO’s new efforts in speeding up global trade, such as the forthcoming Trade Facilitation Agreement (TFA).

C. The EAEC: a new explanation of open regionalism. The phrase of “economic community” usually reminds us of the European Economic Community and its criteria were always used to measure the success of community building in other regions. As a matter of fact, since East Asia economies are highly dependent on and open to the rest of the world, the path and pattern of community building in this region, showing more of open rather than close regionalism, is inevitably different from traditional sense. Open regionalism has been adopted as a fundamental principle of the Asia Pacific Economic Cooperation (APEC) from its creation in 1989. It aimed to achieve compatibility between the explosion of regional trading arrangements around the world and the global trading system as embodied in the WTO. According to Bergsten, there are at least five possible definitions of “open regionalism”, which can be implemented simultaneously as well as independently. However, APEC has never come up with a binding trade agreement, hence far from the realization of liberalization and facilitation. In this sense, the APEC-led open regionalism as a pathway to converge regionalization and multi-lateralization proves to be a failure so far. Currently, in the context of anti-globalization embodied by the setbacks in both multi-lateralization and regionalization, the EAEC-envisaged regional integration stands out most striking in its unique explanation of open regionalism, which reflects the openness and inclusiveness of the East Asia region.

In terms of the ultimate goal, like the AEC, the EAEC aims to realize a region of shared interests featuring equitable, inclusive, balanced and sustainable development with freer movement of goods, services, investment and people as well. Open regionalism has demonstrated that not only cooperation among regional members can benefit regional integration and community building, but partnership with external members can also facilitate regional integration.

II. Opportunities for the EAEC

Currently, East Asia is still the most promising region with greatest market potentials. This is the source of common economic interests underlying the process of regional economic integration. At the same time, the existing and prospective cooperation mechanisms and initiatives also provide solid foundation for the EAEC building.

A. The rise of Asia in the landscape of world economy. Since 1980s, many developing countries, particularly the BRICS, have been developing rapidly, and their economic strengths have been greatly promoted in the 21st century. On the contrary, the growth of developed countries, typically the G7, has slowed down. The weight of the world economy is gradually shifting from developed economies to developing economies. Since Asia is home to the majority of these rising developing economies, this shifting process can be vividly described as a transition from “European and American Century” to “an Asian Century”. If measured in PPP, the developed economies accounted for 63.7% of the global GDP in 1980, while the developing economies accounted for 36.3% and the developing Asian economies only 9.0%. After entering the 21st century, the developing economies, especially those in Asia, began to grow faster than ever. By the year of 2014, the developed economies’ share in global GDP has dropped to 42.9%, while the developing economies’ rose to 57.1% and the developing Asian economies to 29.6%.

This shifting of world economic activity from west to east is also accompanied by trade and investment movement. Asia has now grown from an almost negligible player in world’s trade and investment into a major player, with 37.5% of the global trade, more than 40% of the global FDI inflows and outflows in 2014. An Asian Century is also gaining reputation from another proof. With half of the global population, Asia is becoming a fast-growing world consumption market because of the increasing middle class. According to an OECD study, the size of the middle class could increase from 1.8 billion people in 2009 to 3.2 billion by 2020 and to 4.9 billion by 2030, and the majority of this growth (85 %) comes from Asia. Demand from the middle class may grow from 2009’s 21 trillion U$D to 56 trillion U$D by 2030. Again, over 80 % of the growth in demand comes from Asia. Before the year of 2050, India and China will have more than half of the world’s middle class consumption. In this sense, Asia is now rising and transitioning from a traditional production base to both production and consumption bases. The formation of consumption base is the most noteworthy trend to expect in Asia and will have significant and far-reaching impact on the landscape of international trade and investment. At least, with the growing importance of this consumption market, final-goods trade fueled by consumption needs will be gradually on a par with intra-regional components trade derived from regional production network, and the region will be more highly integrated. At the same time, the slow pace of world economic recovery has increased the necessity of regional cooperation in the hope to capture economies of scale and reduce vulnerability to external shocks. Currently, Most East Asia economies still maintain a higher-than-average growth rate, which is also quite conducive to regional cooperation.

B. Political consensus. Since the adoption of the EAEC 2020 by the APT Summit in 2012, the vision has been mentioned and emphasized for many times by leaders. The annual Chairman’s Statements of APT Summits show that political consensus on the EAEC 2020 still exist with some follow-up study being adopted. However, this consensus seems to have waned recently because so far all the work since 2012 has not resulted in an EAEC blueprint.

C. Existing cooperative mechanisms. Up to now, East Asia has AEC, “10+1”s, “10+3”, EAS and other cooperative mechanisms. The AEC is the core of the East Asia “noodle bowl” of agreements, which laid solid foundation for ASEAN centrality in East Asia integration based on its own integration. ASEAN is now working towards elevating its centrality role in the regional economic architecture and has already begun the process of crafting the post-2015 agenda, a key priority of which is strengthening implementation of the Economic Blueprint to close remaining gaps. The “10+1”is bilateral cooperation between ASEAN and its FTA partners in East Asia. The efforts have been rewarded by strengthened bilateral trade ties. For example, China has become ASEAN’s largest external trading partner, up from 2001’s 5% to 2014’s 15% of ASEAN’s foreign trade; ASEAN has become China’s third largest trading partner, up from 2001’s 7.4% to 2014’s 8.9% of China’s foreign trade. In this regard, a strengthened centrality role through bilateral cooperation, not only in trade and investment, but also in capacity building and other areas, can make ASEAN more capable of duly driving the region’s integration. The “10+3” is a region-wide cooperative mechanism, which took place for the first time in December 1997 when the East Asia financial crisis was rampant. Unsurprisingly, the prime focus of ATP process was initially on improving East Asia’s regional financial cooperation and governance and subsequently developed into a regional framework for promoting cooperation in all-around areas as mentioned above. The most notable schemes led by the APT are the Chiang Mai Initiative (CMI) and Asian Bond Market Initiative (ABMI). The EAS is more of a regional forum for strategic dialogue and cooperation, in which extra-regional powers like the United States can express their interests in the affairs of East Asia as well as an interface between the regional and global arenas from an East Asia perspective on key issues and challenges such as security, environmental issues and climate change, etc. Due to these mechanisms, East Asia’s integration has speeded up, with intra-regional trade rising from 38% in 1990 to over 50% today.

D. New initiatives. In addition to the above-mentioned mechanisms, East Asia cooperation is also expecting the RCEP and CJKFTA, both of which are quite crucial to the EAEC building. As study shows, the RCEP boosts more GDP growth than the TPP, even for countries participating in both. For instance, Vietnam will have an increase of 23.42% of real GDP from the success of the RCEP, while only 12.81% from the TPP.

The Belt and Road Initiative (BRI) proposed by China will also provide new impetus for regional cooperation and integration due to its high openness and inclusiveness. The BRI aims to promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road, set up all-dimensional, multi-layered and composite connectivity networks, and realize diversified, independent, balanced and sustainable development in these countries. The connectivity projects of the initiative will help align and coordinate the development strategies of the countries along the Belt and Road, tap market potential in this region, promote investment and consumption, create demands and job opportunities, enhance people-to-people and cultural exchanges, and mutual learning among the peoples of the relevant countries, and enable them to understand, trust and respect each other and live in harmony, peace and prosperity.

III. Challenges for the EAEC

So far, not a single or coherent plan has been developed that can help progress step by step towards the final goal of the EAEC, let alone the monitoring process which tracks the implementation progress. This actually reflects that the EAEC building faces a lot of challenges and uncertainties.

A. Geopolitical challenges.  Mutual trust is the base for regional cooperation. However, it is very hard to build up mutual trust in East Asia due to increasingly complicated geopolitical context. The rise of China, the shift in the region’s balance of power and the U.S. rebalancing towards Asia-pacific have increased complexities and geopolitical challenges for regional cooperation. In the past, ASEAN succeeded in balancing its relations with dialog partners to maintain ASEAN centrality and in socializing regional players onto the ASEAN way for regional cooperation despite differences and diversity. In the future, a major challenge is whether countries in the region can promote mutual trust to mitigate risks and manage disputes from power competition or even rivalry, and whether ASEAN can build up its capacity to remain central in the institutionalization of regional cooperation.

B. ASEAN centrality not in full play. ASEAN centrality in the evolving regional architecture will depend to a large extent on the successful completion of the AEC. Thus, a full ASEAN integration is the most important task before we move towards the EAEC. However, this centrality might be eroded from both internal and external dimensions. From internal dimension, ASEAN’s internal integration has not lived up to expectations. So far as internal integration is concerned, there has been much progress on the AEC, but the project has not yet met its 2015 timetable. According to the ASEAN Secretariat’s report, as of 31 October 2015, the implementation rate of the full AEC Scorecard stood at 79.5%, or 486 out of 611 measures. Undoubtedly, the remaining 20% of measures will be more challenging. The delayed issues, such as agriculture, integration of the less-developed CLMV members remain to be worked out. In addition, complete liberalization of capital flows and ASEAN capital market integration, as well as opening up financial markets within ASEAN are all areas which need to be addressed. From external dimension, ASEAN is hard to form common external positions due to the fact that internal and external integration are less clearly sequenced but proceeding in parallel. For globally competitive economies like Singapore, regional markets will not be big enough, and ASEAN style of agreements with outside partners will not produce sufficient market access abroad for it. For less developed ASEAN economies, in contrast, rapid liberalization may conflict with development objectives. At the same time, middle-ground regional agreements are unlikely to satisfy anyone. Thus, ASEAN faces challenges: it has to develop external relationships even though its ability to make common policy is limited. As a result, the external policies of ASEAN members are not closely integrated because as an FTA rather than a customs union, ASEAN cannot set common tariffs, let alone other common economic policies. For international credibility, the region will have to demonstrate its ability to create common markets and to function as an integrated economic entity.

C. Impact of the TPP. The TPP, enlisting seven of the RCEP members (four ASEAN members—Brunei Darussalam, Malaysia, Singapore and Vietnam, and three non-ASEAN countries—Japan, Australia and New Zealand), has become a major external variable in East Asia cooperation and integration. And now a few more East Asia countries like the ROK, the Philippines, Thailand, Indonesia and even Cambodia are now showing increasing interests in joining the TPP. The impacts of TPP on East Asia’s regional integration are: First, the TPP may lead to disunity within ASEAN because not all AMSs are included in the TPP and this will undermine ASEAN’s centrality role in leading regional integration process. Second, exclusion of China from the TPP will reduce China’s influence in East Asia and thus slow down the EAEC building process. Third, the TPP’s higher standards and new rules serve the developed economies’ goals best but are unrealistic currently for many East Asia’s developing countries. Though the final text of the TPP is actually a compromise with certain concessions from its original ambitions, its broad coverage and high standard is still a challenge for many developing economies in East Asia.

IV. Some Thoughts on the Pathway of the EAEC Building

The EAEC won’t come true by itself, but requires closer collaboration among APT countries to take concrete actions. The new round of world economic restructuring characterized with the transfer of manufacturing industries and the nurturing of regional consumption base present a good opportunity for the region. The EAEC-building is vital to help upgrade each member’s position in the region’s production network and better integrate them into the region’s consumption loop for a more balanced, inclusive and economically resilient region. Starting from the reality of East Asia integration, market still plays a dominant role as driving force while inter-governmental cooperation provides the necessary catalyst. So long as cooperation has been the theme of the region, the strong market force will leave no one outside East Asia as a region of economic community. Therefore, the recommendations are as follows.

A. To uphold ASEAN centrality. Regional cooperation and integration is a complex, expensive and slow-moving process that requires not only convergence of interests and values, but also momentum and leadership. ASEAN centrality means that ASEAN is in the center of regional integration, facilitating the process and enriching its substance. Hence, it is important for ASEAN to improve its competence, credibility and capacity to substantiate RTA negotiations (such as the RCEP) for further regional integration. ASEAN needs to fulfill its promise to transform itself into a rules-based organization and build a credible AEC. To ensure the full and effective implementation of the AEC 2025, monitoring and assessment of its implementation do matter. However, with limited human resources and overloaded responsibilities, ASEAN Integration Monitoring Office (AIMO) has not been competent enough. Thus, the ASEAN Secretariat may as well introduce more human and technical resources from third parties like regional research institutions with rich expertise in key policy areas through some partnership arrangements. Such collaboration in monitoring will be more effective when actual policies implemented by members could be examined to ensure the full implementation of regional commitments. In order to maintain credibility in creating common markets in the region, and bring real gains for ASEAN countries, as the driver, ASEAN should set a clear goal of higher level of commitments for the RCEP negotiations while leaving enough flexibility to the least-developed members. The Plus Three countries should stand and work together to provide strong support for the realization of the AEC and ASEAN capacity-building, especially human resources development in the least-developed AMSs. The two most important areas shall be infrastructure connectivity and narrowing of the development gap.

B. To develop an EAEC blueprint. EAEC-building is an evolving process. It is therefore important to chart the future direction and turn vision into reality through concrete actions. Specific follow-up work plans need to be developed, not only by 2020, but also beyond 2020. In consideration of ASEAN centrality in regional cooperation and ASEAN experiences in the AEC building, it is sensible to refer to both AEC Blueprint 2015 and 2025 and develop an EAEC Blueprint 2025. A pressing matter of the moment is to designate a High Level Task Force (HLTF), comprising thirteen high-level representatives from all the APT countries to develop a robust and feasible EAEC Blueprint specifying the outcomes to be achieved by 2020 or 2025 (or a two-phase arrangement) to guide the region’s integration efforts. Due monitoring process also needs to be in place to track the implementation. In this regard, maybe the function of the AMRO as an international organization can be expanded and strengthened.

C. To take advantage of the existing cooperative frameworks and mechanisms. In order to make concerted efforts for the EAEC building, all cooperation for regional economic integration should be encouraged and supported. For example, the AEC can play a centrality role in guiding East Asia’s economic integration and cooperation; the upgrading of ASEAN’s FTAs with its partners (such as the CAFTA) can strengthen their bilateral economic ties and especially improve ASEAN’s competence in shaping the region’s economic architecture; and sub-regional cooperation frameworks in the region (e.g. Brunei, Indonesia, Malaysia, Philippines East ASEAN Growth Area—BIMP-EAGA; Indonesia, Malaysia, Thailand Growth Triangle—IMTGT; Greater Mekong Sub-region—GMS, Lancang-Mekong Cooperation—LMC) can also contribute to regional connectivity, narrow the development gap, help CLMV countries augment their capacity to implement regional agreements and accelerate the regional integration process as a whole.

D. To conclude the CJKFTA and RCEP negotiations as soon as possible. The CJKFTA, involving the three largest economies in the region, can provide the region with main market potentials. The conclusion of CJKFTA is not only good for the Plus Three countries themselves, but also crucial for the integration of a larger East Asia. Therefore, the Plus Three countries should prioritize economic collaboration. The RCEP should be prompted not only as an economic integration process but also as a process towards a regional community in the long run. Considering the relationship between the RCEP and the TPP, competition is actually not the whole story. Most believe that the two arrangements offer different approaches towards deepening economic integration in the Asia-Pacific region. The TPP requires much deeper economic liberalization from its members and contains provisions to protect labor rights, environment and intellectual property, reform state-owned enterprises and boldly eliminate tariff, while the RCEP places more importance on providing developing members with economic and technical cooperation to narrow the development gap. Because of these differences, the RCEP and the TPP should complement each other rather than substitute one another. Furthermore, for the most part, the TPP and the RCEP offer benefits that are largely complementary—one focuses on deeper integration with the Americas, and the other on improved access to Asian markets. Indeed, these two frameworks can be considered as two different stages. Developing countries that cannot meet high requirements for the TPP membership may achieve economic development under the RCEP, and then may later join the TPP when they can meet the membership requirements. Therefore, RCEP and TPP can just be two complementary building blocks for the realization of the long-term objective of a Free Trade Area of the Asia-Pacific (FTAAP).

E. To promote all-round functional cooperation. Apart from efforts on institutionalization of regional integration (such as the RCEP and the CJKFTA), East Asia should still give high priority to functional cooperation focusing on the following areas: First, improve regional connectivity. In this regard, the development assistance from the Plus Three countries, the ADB, the AIIB as well as the Silk Road Fund, will provide much needed financial support for the execution of the Master Plan on ASEAN Connectivity (MPAC). Especially, the Belt and Road Initiative shares striking similarities with the MPAC in envisaging transport connectivity as a way to bring participating countries closer to one another and to facilitate better access to trade, investment and people-to-people exchanges. Hence, the two can complement one another very well and produce effective and efficient cooperation in both hard and soft connectivity. Second, promote the ramification and implementation of the WTO’s TFA as soon as possible. As the first multilateral trade agreement adopted since the conclusion of Uruguay Round in 1994, the TFA represents a landmark achievement for the WTO. According to World Trade Report 2015, developing countries have the most to gain from swift and full implementation of the TFA, as both their exports and GDP growth will increase at higher rates than those of developed countries. Taking open regionalism as its doctrine, East Asia welcomes any achievement in the WTO. What’s more, trade facilitation provisions in the WTO and in the AEC and even the EAEC almost converge. Third, deepen regional financial cooperation. In order to make the CMIM a more effectively-functioning financial safety net within Asia’s regional financial architecture, it is quite necessary to further eliminate IMF conditionality by further raising the de-linked portion to 40% or even higher. In terms of regional development finance, more channels for financing development projects should be encouraged. At the same time, collaboration between the existing institutions such as the WB, the ADB, the AIIB as well as the BRICSDB, should also be encouraged to contribute to the region’s development projects, especially infrastructure and environmental projects. In terms of regional financial system stability, the AMRO, as a regional macroeconomic surveillance unit of the CMIM, urgently needs to be strengthened in interior governance structure and its regional supervision function. Fourth, narrow the development gap. Equitable economic development and narrowing down of the development gap in East Asia are necessary for regional peace, stability, and the long-term goal of an East Asia community. In order to achieve a balanced growth, APT countries need to further cooperate in poverty reduction, industrial capacity improvement and human resources development in less-developed countries by sharing expertise and technical know-how and promoting investment in a responsible manner.

(Zhu Caihua is Dean and Professor of School of International Economics of China Foreign Affairs University and Feng Xingyan is Associate Professor and Director of the International Economics and Trade Department, School of International Economics of China Foreign Affairs University. This article was received on Dec. 2, 2016.)