Spooking the Tigers

China’s New Economy and Asean’s Position

By Richard Sine
The Cambodia Daily

For Asia, globalization may be a given. But the devil, to use a Western expression, is in the details.

Mainstream economists have long hailed the benefits of lowering the barriers to trade and the movement of capital. They have predicted that any country that fell behind in opening its borders would find itself sliding into stagnation. These days, it seems, it would be harder and harder for any political leader to argue with them. The region is being locked into more and more agreements to go along with the trend.

The Greater Mekong Subregion grouping has committed itself to providing roads, linking power lines, standardizing customs and taking other measures to link the six countries bordering the Mekong River—Cambodia, Vietnam, Laos, Thailand, Burma and China.

Meanwhile, talks continue to increase financial cooperation. Asian countries have concluded arrangements for six bilateral currency swaps, valued at $17 billion, designed to deter currency speculation and prevent a replay of the 1997 financial crisis.

But Asian countries are thinking even bigger. The 21-member Asia Pacific Economic Cooperation, has pledged to scrap all trade tariffs by 2010 for developed nations and by 2020 for developing nations. APEC also includes the US, Mexico and Canada.

Then there is the grandest globalizer of them all, the World Trade Organization. China joined the world trade body late last year, Taiwan on the first of January. Cambodia, and even Laos and Vietnam—both communist—are busily drafting laws and lowering tariffs in their own campaigns to join the world body. The rest of Asean has already joined.
It is China’s bursting onto the world economic stage that is accelerating the drive toward economic integration throughout Asia, analysts say. China’s portion of world trade doubled during the 1990s, to 4 percent. Its exports are up to more than 20 percent of GDP. Its gross domestic product has risen by nearly 50 percent over the last five years, as Japan’s has stagnated and the collective output of other main Asia-Pacific economies fell, says Jonathan Anderston, a China specialist at Goldman Sachs.

“Is it any wonder that it is frustratingly difficult these days to engage in a discussion of almost any broad economic issue without having China brought up as a prime mover,” Anderson wrote recently in the Asian Wall Street Journal.

China’s low labor costs—aided by official efforts to stifle unions and a dearth of health and safety regulations—are attracting increasing levels of foreign investment. Investment has risen from $4 billion in 1991 to $44 billion in 1997, and is expected to exceed $50 billion in 2002.

China has replaced Southeast Asia as Asia’s “main destination” for foreign investment since 1993, reports Societe Generale France, a French think-tank. It was relatively little affected by the Asian crisis in 1997, and now almost 80 percent of foreign investment flowing into Asia goes to China.

Before the 1997 financial crisis, Asean received about 70 percent of foreign investment flowing into Asia, with China getting about 30 percent. That ratio has more than reversed in the years since.

Meanwhile, foreign domestic investment in Asean tumbled by a whopping four-fifths in the first half of 2001 compared to the same period in 2000, Asean reports. Turbulent Indonesia is suffering from rapid capital flight, as is the Philippines.

China may threaten some economies more than others. China is still “largely a place for assembling imported components and re-exporting the finished goods,” Societe Generale France reports. “However, China is learning quickly, and is rapidly catching up on its neighbors in terms of the technological content of its products.”

The so-called second generation of Newly Industralized Countries in Asean—Indonesia, Malaysia, Philippines and Thailand—will have to “upscale,” or produce more sophisticated products, to keep up, the Societe says.

But even Taiwan’s sophisticated manufacturing industry is losing out as plants increasingly move to the mainland. Chinese companies are growing beyond toys and textiles and starting to make computers and DVDs. Exports of high-tech products to the US are up 47 percent in the first seven months of this year from a year earlier, the Far Eastern Economic Review has reported.

China’s rise has left “once-growling tiger economies caught in an unprecedented economic Catch-22,” Nick Cumming-Bruce wrote recently in the Asian Wall Street Journal. “[They are] losing the advantage of cheap labor to Chinese workers yet nowhere near the levels of technological knowledge needed to compete with developed economies like the US.”

Worried about losing foreign investment and being swamped by cheap, China-made goods, the Asean nations are hoping that integration will help them better compete as producers for the massive Chinese domestic market, and as a destination for foreign investment.

“We say to investors, don’t put all your eggs in one basket. Invest in China, but also continue to invest in Southeast Asia,” George Yeo, Singapore’s minister of trade and industry, told the International Herald Tribune.
Asean leaders like Philippines President Gloria Macapagal Arroyo point out that the Asean population is half that of China but its gross domestic product is equal to China’s.

China still presents problems to the investor, however.

“China is seen as the most problematic country in which to invest,” the Societe Generale reports. “Criticisms include the lack of a legal framework—lack of transparency, instability and holes in the legal system—and the existence of measures that discriminate against foreign companies.”

And it is “far too early in the game to trumpet the emergence of China as a dominant global power,” Anderson claims. China has weak financial markets and its growth is not high compared to Japan or the Asian “tigers” at their peak growth.

At the same time, Asian countries as a whole are learning that they must increase trade with each other if they are to avoid being dragged down by softenings in the US and Europe, until now their primary export markets. Last year, Asean economies that relied heavily on high tech saw their US exports drop by 20 percent to 35 percent, according to the World Bank.

“For us to depend on the United States alone as a market for growth will be much more difficult in the future because the US economy is likely to slow down,” Singapore Prime Minister Goh Chok Tong told the IHT. “We recognize the need to generate internal dynamism, and that we should do this through further cooperation among ourselves.”

Trade between Asean and the Northeast Asian countries increased considerably during the 1990s, Asean reports. It grew 27.5 percent, to $201.7 billion, despite the 1997 and 1998 economic crisis. But the volume is still low relative to the US and European partners, and some experts say Asean will only be as powerful as its external links.

“Intra-Asean trade volume is not high relative to Asean’s total global trade volume,” Han Sung Joo, a Korea University professor, told the IHT. He headed an Asean-founded committee, the East Asia Vision Group, which recommended a free-trade area covering all of East Asia.

“[The Asean Free Trade Area] can be an effective regional trading arrangement linked with Northeast Asia through bilateral arrangements (i.e. Asean-China, Asean-Japan and Asean-Korea), or within the context of Asean Plus 3,” he said. “Asean may also find it useful to consider forming a linkage with Australia and New Zealand.”

For any number of reasons—the rise of China, the downswings in the US and Europe, or the general imperative to increase trade—Asean has been hurrying to make those external links. China itself is expected to sign a framework agreement with Asean during this week’s summit to form a free-trade area within 10 years. The pact would cover trade in goods and services. China has offered rapid tariff cuts on some agricultural products over the next three years as a so-called “early harvest” on the agreement.
The Asean-China Free Trade Area would create the largest free-trade area in the world, with a combined market of 1.7 billion people and a combined GDP of $2 trillion, Asean says.
Asean experts predict that the trade area would increase Asean exports to China by 48 percent and Chinese exports to Asean by 55 percent. It would increase Asean’s GDP by 0.9 percent and China’s by 0.3 percent, Asean says.
The Asean-China pact may most directly benefit China’s impoverished Yunnan province. The province is already forging links—in roadways, telecommunications networks and power trading, as well as other areas—through development projects by the Greater Mekong Subregion grouping, sponsored by the Asian Development Bank. A project to blast a navigation channel from the province down through Laos to enhance trade is under way, though environmental experts and local communities have said the project will irreparably damage the river.

The booming economy in China’s coastal provinces has opened up an economic divide between those so-called special economic zones and the inner, landlocked provinces such as Yunnan, Guangxi and Sichuan. Opening up a “southern gateway” to the Asean countries and the South China Sea could help the poorer provinces catch up, said Medhi Krongkaew of Thailand’s Thammasat University in a conference hosted by the Cambodian Institute for Cooperation and Peace.

At September’s meeting of Asean economic ministers in Brunei, Japan also agreed to form a free-trade zone with Asean within 10 years.

An Asean study estimates that closer economic relations with Japan could pump up Asean’s exports to Japan by 44.2 percent and Japan’s exports to Asean by 27.5 percent. It could increase Asean’s gross domestic product by 1.99 percent and Japan’s gross domestic product by 0.07 percent.

The plan also calls for an “early harvest”—or rapid and early lowering of tariffs on certain products before the rest of the zone goes into effect—though there are few specifics on what products would be included.

Meanwhile, Asean meetings have become a nexus for economic discussions for leaders throughout the continent. Discussions are accelerating about forming an Asean Plus 3 bloc to include China, South Korea and Japan or about bringing in Australia, New Zealand and India.

There are storm clouds on the horizon nonetheless. Political tensions among Asean nations such as Thailand and Burma have diminished recently, but there are still worries that Asean may not be cohesive enough to present a united face to the world. Certain Asean industries—Malaysia’s auto industry, Thai petrochemicals—have proved especially resistant to free-trade negotiations.
Asean Secretary-General Rodolfo Severino, a proponent of the China free-trade agreement, has acknowledged that certain industries, such as textile, toy and motorcycles, will likely suffer from Chinese competition in the short run.
Leaders in Indonesia, the Philippines and Malaysia are especially fearful that their markets will be swamped by Chinese imports, the Asian Wall Street Journal reports.

Dissenters to the globalization trend say that less-developed countries such as Cambodia may be hardest hit by increased free trade, with little of their own industry with which to compete.

Outside of Asean, Asia’s Big Three of China, Japan and Korea still must confront historical tensions.

And sectors like Japan’s agricultural industry are notoriously resistant to opening up.

The considerable obstacles have left some wondering whether the move toward free-trade agreements is more of a public-relations ploy than a serious effort to open up economies.

But the accelerating talks seem to indicate, at the least, that Asean—once derided as a sinking ship full of bickering leaders—can become a serious player on the world stage, if it gets its house in order.

“Southeast Asia, the tiger that lost its stripes, is back with a roar,” claims Narendra Aggarwal in the Singaporean Straits-Times. “Five years after the outbreak of the Asian financial crisis in 1997, the region is regaining its reputation as an economic area with a future.”