Spotlight on Geopolitics

The current economic tsunami has accelerated integration moves between ASEAN countries, China and other regional powerhouses. The planned launch of Asia’s and the world’s largest trade bloc has prompted me to ask Professor Bruce McKern, a renowned International Management expert, for an interview concerning its prospects in emulating the European Union’s economic integration experience. Professor McKern teaches International Business at the Universities of Sydney and Stanford Graduate School of Business. During the 1980’s, as a Director of Macquarie University’s (Australia) Graduate School of Management, he has accomplished extensive work with and on behalf of ASEAN countries’ academic establishments.

Florian Pantazi: Ever since the 1998 Asian financial crisis, most ASEAN countries and China have intensified their economic integration drive. Do you believe the current crisis might lead to a European-style common market in Asia ?

Bruce McKern: The area already has a significant degree of integration. Intra-regional trade within East Asia was more than 53% of total trade in 2003, which is higher than the proportion within NAFTA. Japan is a major investor within the Asian region. The current crisis will accelerate this trend towards integration, partly because China will be unable to rely as strongly on the United States as it has in the past.

However, I believe this trend will not culminate in a common market or an economic union such as the EU, because of persistent differences between countries in terms of their current stage of development and policies on growth. Countries in the Asian region have already ratified some 37 Free Trade Agreements between themselves and countries outside the region, and China, Japan, Korea and Australia-New Zealand have implemented individual FTAs with ASEAN. I expect to see this patchwork of agreements evolving towards a broader Free Trade Area, rather than in an economic union, as a Free Trade Area will allow individual countries more freedom to set their own economic policies.

FP: In your assessment, will China replace Japan as the main economic powerhouse of Asia in the years ahead ? To what extent would reunification with Taiwan contribute to this ?

BM: China will very soon be a larger economy than Japan, if the current difference in growth rates between the two countries continues. In 2008, China’s GDP at nominal exchange rates was $4.2 trillion whereas Japan’s was $4.8 trillion. While there is reason to expect that China’s growth rate will fall somewhat over the next few years, which could make the catch-up somewhat slower, Japan is also experiencing a severe recession at the moment. So we can expect to see China on an equal footing with Japan as a major power in the region within the next decade. China will be an equal to Japan, not only in terms of its economic weight, but because of its great importance in trade in the region and its growing outward and foreign investment.

Reunification between mainland China and Taiwan would of course make a unified China a larger economic entity. But Taiwan, despite its high standard of living, has a GDP of only $400 billion at nominal exchange rates, only one tenth that of mainland China. So, important as reunification is for China politically, it is not significant in terms of China’s economic importance in the region.

China’s economic power has to be seen in relation to the ASEAN grouping. The ten ASEAN countries have a population of 570 million people, third after China and India and a combined GDP of estimated at around US$1 trillion, second only to China in emerging Asia. However, although their combined weight is substantial, they do not operate as a single bloc and no one country could be seen as a challenger to China. Indonesia, the most populous country in the region after China, has a GDP of $500 billion, not much greater than Taiwan’s.

FP: The ASEAN-plus-one trade bloc should become operational by 2011. Will Japan, South Korea and Taiwan follow suit and apply for membership ? How about Australia ?

BM: Japan and South Korea have been actively discussing closer relationships with the ASEAN bloc and it is likely that they will seek membership. It will be more difficult for Taiwan unless it becomes integrated with mainland China, as China will likely oppose its admission. Australia has already signed a Free Trade Agreement with the ASEAN (along with New Zealand), although it is not formally a member of the group. So enlargement is already under way, and it will no doubt continue, subject to the important caveat that all countries are at present concerned about their trade relationships, and protectionist sentiment could slow down the integration movement.

FP: How realistic are ASEAN politicians’ expectations that lost ASEAN exports to the United States could be compensated by stimulating domestic consumption and intra-ASEAN trade ?

BM: The United States will take some time to recover its economic growth, and it is very likely that US consumers will be more focused on repairing their balance sheets than on the high consumption patterns of recent years. So ASEAN and China will be less able to depend on the US consumer to restore the heady growth of recent years. Likewise, the European Union is not going to provide a replacement either. Nor is Japan. So the only realistic alternatives are to focus on domestic consumption growth and to promote intra-ASEAN trade. China is proposing steps to strengthen domestic infrastructure spending, and this is a possible path for the ASEAN countries. But this shift in spending will rely to a greater extent on government deficits, and will take some time to have an impact on employment and growth. Likewise, intra-ASEAN trade will be affected by the slowdown in all of the regional economies. The best opportunity for the ASEAN countries will be to focus on China and look to expand their exports to that country. There should be opportunities in areas related to infrastructure spending, foodstuffs, raw materials and capital goods.

FP: From a macro-economic point of view, is the planned Asian Currency Unit (ACU) feasible ?

BM: I don’t believe the proposed ACU is a feasible alternative as a reserve currency. A reserve currency requires three things: the backing of a central bank; a mechanism by which other nations can acquire assets denominated in that currency; and unshakeable faith in the issuer of the reserve currency. A common Asian currency unit would require a much higher degree of economic integration than I envisage for Asia for many years, and there is no country in the region that could provide the backing and credibility for the unit. Also, the long string of current account deficits that the United States has run over the last few years have resulted in huge holdings of dollars in the hands of creditor countries and the liquidity expansion which has led in part to our recent troubles. For an ACU to have comparable liquidity would require the Asian countries to run current account deficits, which is opposite to their recent history. Although the Euro is now traded widely, and even held amongst the reserves of central banks, it still has a relatively minor role compared with the US dollar.

FP: Could the United States continue to rely on Asian investment money to finance its budget deficits ?

BM: As American consumers contract their spending over the next few years, we will see the US narrowing its current account deficit with other countries, and that means that the growth of US dollar holdings amongst creditor countries will slow. So there will be a somewhat lesser dependence by the US on other countries to finance its twin deficits. However, it is very likely that the US will continue to look to other countries to hold liquid dollar assets. What I think we will see more of is countries swapping their short-term assets for longer term direct investments in the US.

FP: In your opinion, would the creation of the Asian trade bloc force the US and the EU into adopting protectionist policies ?

There is debate about the impact of free trade agreements on global trade relationships, and most economists argue for multilateral agreements as being a first-best solution. We should recognize that since the creation of the Bretton Woods system there has been enormous progress in trade liberalisation across the globe, with the resultant explosion in international trade and undoubted economic benefits. So the preference is for multilateral agreements, but progress is currently stymied by the difficulties in completing the Doha round.

In the absence of comprehensive agreements, regional trading blocs such as NAFTA, ASEAN and the European Union have been employed to expand the benefits of trade integration between members. Provided that countries within such blocs continue to be open to negotiating bilateral agreements with other countries, the pace of integration we have seen in recent years can continue. More recently we are seeing some agreements between trading blocs and individual countries, such as the recent agreement between ASEAN and the Australia-New Zealand free-trade area. There is no reason why this development should not continue, although more slowly, as the climate for expansion will be less favourable for some time.

The increasing integration we have seen over the last decades between the United States and Asia, and between the EU and Asia, has brought great benefit to all parties, and has resulted in a much higher degree of mutual interdependence than hitherto. It’s unlikely that this will disappear with the formalisation of a larger Asian trading bloc. I believe there is also a strong belief in economic integration amongst the world’s policy makers, and I am hopeful that this will counter calls for protectionism arising from opportunistic politicians.

(C) Florian Pantazi. April 22,2009
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  1. The EU-ASEAN relationship has transformed and developed for some decades. It’s an example of what can the EU development policy be, shaped by internal EU motivations and external globalisation. Indeed, if the EU policy that has been implemented there first appears as a regular development policy according to the European Union, the reality isn’t so idyllic, because of self interests and both global and domestic pressures. It’s obvious that some challenges remain for future, and notably fostering a more united and coherent action for development, graduating ASEM from its symbolic origins, strengthening ties that can enable to resist globalisation and EU enlargement changes, and above all managing to impose some values as important as Human Rights.

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