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East Asian Regionalism:Managing the Noodle Bowl

Presented by

Theresa CarpenterResearch Fellow

Graduate Institute of International Studies, Geneva and World Trade Institute, Berne

On behalf of

Richard Baldwin

Professor

http:// hei.unige.ch/baldwin

University of Sussex, 30th October 2006

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Plan of talk• Introduction

– Bottom line: East Asia’s pressing need is for management, not vision.

• Current state of play

• Causes of East Asian regionalism

• Likely trajectory of EA regionalism

• Fragility of the current ‘system’

• Solutions

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Trade realities• Market size (GDPs)

• Direction of Trade flows

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Country size• Very uneven market sizes

• 2 big• 1 medium• many small

or tiny• ASEAN-10

is about 9% of EA GDP

• ASEAN-4 & Vietnam

Japan

Korea

China + HK24%

Vietnam

Singapore

Brunei

Cambodia

Philippines

Malaysia

Thailand

Indonesia

Laos

Asean

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Intra East Asian Trade, 2002(rounded to nearest $10 bill)

Korea

Japan

HK

China

Thailand

Malaysia

Indonesia

Philippines

Myanmar

Vietnam

Cambodia

Laos

Brunei

Singapore

Taiwan

- Dominance of N.E. Asia in regional trade flows.- Hub & Spoke pattern (J, C, K)- Almost no spoke-spoke trade (ex. Singapore)

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Intra-ASEAN Trade by HS Chapter, 2003

0102030405060708091011121314151617181920212223242526 2728 293031323334353637383940414243444546474849505152535455565758596061626364656667686970717273747576787980818283 84 8586 87888990919293949596979899

0 10,000,000 20,000,000 30,000,000 40,000,000

What do ASEANs trade?

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EXAMPLE: Parts Procurement of a Hard Disc Drive Assembler Located in Thailand

COVERDISKSCREWSEALRAMPTOP CLAMPLATCHPLATE CASELABELFILTERPCBASUSPENSION

Japan

SPNDLE MOTORBASECARRIAGEFLEX CABLEPIVOTSEALVCMTOP COVERPCBAHGAHAS

Thailand

BASEPIVOT SPACERVCMBASECARDTOP CLAMP DISK

COVERSCREW PIVOTPC ADPDISC

Singapore

PCBACARRIAGEHGABASEHEADSUSPENSION

DAMPING PLATECOIL SUPPORTPCBA

TOP CLAMP

DISKHEADSUSPENSION

USA

FILTER CAP

W.SUSPENSIONVCMPCBA

Malaysia Hong Kong

Taiwan

Philippines

Indonesia

China

HEAD

Mexico

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East Asian Regionalism• The ‘state of play’ in EA is easy to summarise:

• “It’s a mess”

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Mistaken view of EA regionalism

AFTA

ASEAN-Japan FTA

ASEAN-China FTA

ASEAN-Korea FTA

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AFTA’s true nature

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AFTA• AFTA, 1992 to 2010 (2015 for poorer ASEANs)

– At first: ‘conditional MFN’ & partial tariff cutting.– After AC FTA got going ASEANs agree to go to

zero (Bali II).– Each nation’s “sensitive” lists:

• don’t get preferential tariff on items on your sensitive list; • pay the higher of your tariff and ASEAN partner’s.

• Net effect: each bilateral trade flows faces a different tariff structure.

• ERGO, AFTA operates like 45 bilaterals– Some coordination (not as bad as could be).

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KoreaJapan

China

Thailand

Malaysia

Indonesia

Philippines

Myanmar

Vietnam

Cambodia

Laos

Singapore Brunei

HKTaiwan

Noodle Bowl Syndrome

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AC FTA• Signed Nov 2004.

• Nation-specific sensitive lists & conditional MFN, so de facto 10 bilaterals.– But AFTA ROOs, maybe common dispute

settlement procedure (so not as bad as it could have been).

• Appears to be some ratification problems in ASEANs. (watch carefully in 2006).

• Has not been notified to WTO.

• Tariff cutting started mid 2005, to zero by 2010.

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ASEAN Korea FTA• Similar to AC FTA, but more political difficulties

& started later.

• de facto 10 bilaterals.

• Tariff cutting to start in 2006, to zero by 2010 (’09?).

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ASEAN Japan Bilaterals• Japan-Malaysia signed Dec 05.

– Very different agreement to AFTA & ACFTA; reads like European or US FTA; much more structured.

– Form may matter (watch ACFTA).

• Soon with Indonesia, Thailand, Philippines, likely soon with Vietnam & Brunei.

• In parallel, AJ FTA with ASEAN as whole.

• Tariff cutting to start in 2006, to zero by 2010.

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Korea

Japan

China

Thailand

Malaysia

Indonesia

Philippines

East Asian Trade, rounded to nearest 1%, 2002; Width proportional to %.

Myanmar

Vietnam

Cambodia

Laos

Singapore Brunei

HK & Macao

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Korea

Japan

China

Thailand

Malaysia

Indonesia

Philippines

East Asian Trade, rounded to nearest 1%, 2002; Width proportional to %.

Myanmar

Vietnam

Cambodia

Laos

Singapore Brunei

HK & Macao

Eliminate flows without international FTAs

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Korea

Japan

China

Thailand

Malaysia

Indonesia

Philippines

Hub & Spoke system with 3 hubs

Myanmar

Vietnam

Cambodia

Laos

Singapore Brunei

HK & Macao

Eliminate flows without international FTAs& well-functioning FTAs

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Asian Manufacturing Matrix• Add back complexity

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East Asian Trade, 2002(rounded to nearest $10 bill)

Korea

Japan

HK

China

Thailand

Malaysia

Indonesia Philippines

USA

RoW

EU

USARoWEU

USA RoWEU

USA

RoW

EU

- The hubs all care more about extra-regional markets.- Same for most small nations in the region.

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Causes of East Asian Regionalism• Triggers & Dominos

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Dynamic development of Noodle Bowl• FTAs spreading like wildfire, but recently EA

only region with them.– Trigger = China’s approach to ASEAN in Nov 2000, – Domino theory but important precursors.

• Three phases of East Asian regionalism.

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Phase I (1980s to 1990) • “Rampant unilateralism”• Unilateral tariff cutting

– competition for jobs and investment linked to development of “Asian Manufacturing Matrix.”

• 3 key factors in development of the Asian Manufacturing Matrix

• 1. Erosion of Japan’s comparative advantage in manufacturing.– EA divides into “HQ economies” (Japan only to start with) &

“Factory Economies” (Advanced ASEANs). – Korea, Taiwan, Hong Kong & Singapore join later– “Triangle trade” becomes important.

• 2. Reduced cost of moving goods and ideas. • 3. China’s emergence & domestic reforms

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Phase II (1990 to 2000)• “Regionalism delayed”

– Accelerated the widening and deepening of Asian Manufacturing Matrix;

– intra-EA begins to matter. – Malaysian Premier Mahathir’s EAEC.

• US’s APEC diversionary tactic.– Classic tactic (UK used in Europe in 1950s)

• Setting stage for Phase III:– 1997 Asian Crisis: APEC’s hollowness & brotherhood– China’s impeding WTO membership: end of status quo. – A new player was joining the game; all must re-evaluate their

tactics and strategies.

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East Asian input-output matrix, 1985, 1990, 2000

1985 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia 8% Malaysia 16% Philippines 0% Thailand 0% China 2% 14% Taiwan 3% Korea Singapore 3% 7% Japan 3% 12% 14% 4% 9% 12% 7% 8% RoW 15% 19% 19% 14% 11% 10% 16% 8% 1990 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia Malaysia 5% Philippines Thailand China 3% Taiwan 3% 4% 3% 3% Korea 2% 2% Singapore 7% 2% 3% Japan 8% 10% 8% 14% 18% 10% 8% RoW 8% 23% 20% 21% 22% 44% 17% 13% 5% 2000 China Indonesia Malaysia Philippines Thailand Singapore Taiwan Korea Japan Indonesia 2% Malaysia 3% 4% 12% 2% Philippines Thailand 4% 3% 3% China 2% 3% 4% 5% 2% Taiwan 5% 5% 3% 3% Korea 2% 3% 4% 8% 3% 4% 4% Singapore 13% 6% 4% Japan 2% 7% 15% 20% 16% 19% 14% 7% RoW 4% 16% 20% 20% 17% 38% 15% 11% 4%

Manuf’d gds from

Manuf’d gds to manuf’d sector of:

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Rampant Unilateralism

02468

101214161820

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Philippine

Thailand

Korea

Malaysia

China

Indonesia

Singapore

Unilateral tariff cutting in Phases I &II.%

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Phase III (2000 to now)• “Rampant regionalism”

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Trigger Nov 2000• Chinese premier Zhu Rongji broached the idea

of an FTA between China and ASEAN at ASEAN-China summit.– Surprise move.– Why?

• ASEAN are receptive; study grp formed.

• Red lights begin to flash all over region.

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Actual & projected “vulnerability indices”Export dependence of Column nation on row market

Japan Korea

2003

ASEAN 17% 13%

ASEAN+China 36% 43%

Japan 10%

Korea 8%

2015

ASEAN 18% 14%

ASEAN+China 47% 56%

Japan 7%

Korea 8%

Japan and Korea “HAD” to have a plan to redress ACFTA discrimination, if it should arise.

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Japan’s options in 2000-2002• Plan A; join ACFTA

– Domino theory & history predicts, BUT– 1. ad hoc nature of ACFTA rules out enlargement (ACFTA is

not a group, so it cannot to be joined).– 2. China & ASEANs fear Japanese industry

• Lock in as Factory Economy status; prevent development of new Sonys, Hondas, Samsungs.

• Plan B? Two classic responses– Form own trade bloc with other excluded nations.

• EFTA in 1959; Mercosur 1991.• => JKFTA

– Sign FTA with smaller partner.• Chile, Caricom with Mexico.• =>AJ FTA

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Table 1: Actual and projected “exclusion indices” Japan Korea China Malaysia Thailand Indonesia Philippines Singapore Vietnam

2003

ASEAN 17% 13% 8% 29% 22% 11% 19% 31% 15% ASEAN+China 36% 43% 8% 43% 36% 22% 34% 45% 23% Japan 10% 14% 10% 15% 25% 14% 6% 15% Korea 8% 4% 4% 2% 8% 4% 4% 2%

2015 ASEAN 18% 14% 11% 31% 25% 14% 21% 35% 17% ASEAN+China 47% 56% 11% 51% 46% 30% 45% 55% 31% Japan 7% 12% 8% 12% 20% 11% 4% 13% Korea 8% 5% 1% 3% 9% 4% 4% 3% Note: The exclusion index shows that share of a nation’s exports that would be discriminated against by an FTA among the listed partners. Figures show share of column nation’s exports to the markets listed on the rows. Projections are based on standard gravity model estimates of the impact of importer and exporter GDP growth on bilateral trade. Projections assume no change in trade policy. GDP growth rates equal to IMF’s projected growth rates for 2007 for all the major trade nations in the world.

Source: Author’s projection

JKFTA redresses discrimination?

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Likely Trajectory?• AK FTA will get done• Japan bilaterals with big ASEANs will get done• AJ FTA ??

– Opportunity for largesse– Fast or slow, doesn’t matter much to other nations; basically

more GSP.

• Next round of dominos (if any)– Hub-hub (JK, KC, JKC)– US moves? (K US?)

• If domino theory is right, it will spread beyond EA.– cf. EU has preferences with 141 of 148 WTO members.

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Conjectures about hub-hub FTAs• JK FTA is most likely, but still difficult

– Pressure to finish depends upon whether ACFTA turns out to be ‘for real’ i.e. create discrimination for J & K exporters.

• Possible counter by China is to push forcefully for JKC talks on a long deadline for talks and long deadline for transition.– Might be a good idea to diffuse tensions.– No one “in charge” talks would be long & slow but

better than not talking.

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Fragility of the Current situation • 1. Extreme interdependence of ‘Factory Asia’

– Worrying asymmetry of interdependence

• 2. Lack of WTO discipline– ‘tariff bindings overhang’

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2000

0% 10% 20% 30% 40% 50% 60% 70% 80%

Indonesia

Malaysia

Philippines

Singapore

Thailand

China+HK

Taiwan

Korea

Japan

RoW Japan Taiwan ASEAN5 Korea China+HK

Interdependence (asymmetric)- Source of manufactured intermediate inputs of

manufacturing sector:

2. Natural leaders care less.

1. Collective action problem.“Linked competitiveness”

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Lack of WTO discipline

Binding Coverage Final bound Applied

Import duties as share of total imports

Japan 99.6 2.3 2.5 n.a.

Korea 94.5 10.1 6.7 3.2

China 100.0 9.1 9.5 2.7

Malaysia 83.7 14.9 9.1 3.1

Thailand 74.7 24.2 13.3 3.4

Indonesia 96.6 35.6 6.7 1.2

Philippines 66.8 23.4 5.8 5.4

Vietnam

Taiwan 100.0 4.8 5.5 n.a.

Singapore 69.2 6.3 0.0 0.3

Disciplined

Not disciplined

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System Fragility• Think of East Asia as a magnificent factory.

• Think of regional trade as “conveyor belts” in fantastically complicated, just-in-time factory.

• If a few ‘conveyor belts’ break down, whole factory suffers.– Competitiveness of Japanese firms in US market

depends upon intra-regional trade. – Ditto Korean & Chinese firms.

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System Fragility• Set up and run by companies (middle-level

managers).– They’ve done a great jobs, but

• Where is the top-level management?

• East Asia’s collective action problem.

• Asymmetric dependence makes matters worse.– ASEANs are more dependent on the conveyor belts

than are China and Japan.

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Emerging pressures• East Asian trade has worked wonderfully for 2

decades (even 1997 shock), so why worry?

• No real discrimination yet– ASEAN China & ASEAN-Japan, not yet

implemented.– AFTA implemented but not used

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0

1

2

3

4

5

6

7

8

Indonesia Malaysia Philippines Thailand Total

Form D Utilisation (% of Intra-ASEAN trade)

1998

1999

Low utilisation rates• Almost no one uses the AFTA preferences• “Utilisation rates” for AFTA under 10%

– JETRO (2003): 11.2% of Thailand's imports from AFTA used CEPT.

– 4.1% of Malaysia's exports to AFTA used CEPT.

Source: PriceCooperWaterhouse

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Solutions

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Solutions• What East Asia needs now:

– Management, not vision

• Urgent– Discrimination is a source of conflict.– Discrimination is scheduled to start 2006 – 2010.

• New East Asian Management Effort:– 1. Use ASEAN+3 group & add a Secretariat.

• Management is a ‘club good’; • Membership should be limited to those most involved in

the collective action problem.• Reduce likelihood of free-rider or strategic behaviour.• Include all that are most affected.

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Solutions• 2. Management priorities:

– #1: Bind the MFN applied rates.• Get credit in DDA.

– #2: Transparency and confidence building deliverables

• information clearinghouse, • ASEAN+3 compliant standards for new FTAs, • ROOs & cumulation (European example, PECS).• customs cooperation, • trade facilitation, • Keep talking.• etc.

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Solutions• Longer term goals:

• Set up a proper organisation akin to EFTA.– EU’s institutions are too supranational.– NAFTA’s institutions are too intergovernmental.– EFTA’s are in between.

• Begin trilateral talks, CJK– Aim to finish talks by 2010 with FTA within 15 years

later.• Long, long horizon reduces resistance.

– Keep talking; no one nation ‘in charge’– Avoid tensions from next hub-hub domino effect.

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Bottomline• East Asian regionalism based on a grand vision

would have been best.– Window of opportunity was missed.

• Concrete foundations of EA regionalism have already been poured and are hardening.

• What East Asian needs now is management, not vision.

• Need is urgent since discrimination is about to begin to emerge & discrimination can foster tensions.

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End.Thank you for listening.

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AFTA didn’t work• Utilisation rates for AFTA under 10%

– JETRO (2003) 11.2% of Thailand's imports from AFTA took advantage of the CEPT. Malaysia's data suggest that just 4.1% of its exports to AFTA enjoyed the CEPT preference.

Table 3: Intra-ASEAN exports as a share ASEANs total exports, 1985 to 2000

1985 1990 1995 2000

Intra-ASEAN exports 16% 17% 21% 19%

Source: DOTS database.

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Why didn’t AFTA work?• Political economy of failure is easy

• Facts suggesting this happened.

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MFN v. CEPT on MachineryTable 1: Intra-East Asian preference margins vis-à-vis EU and North America

Exporter to East Asia Preference margins:

Sector:

East Asia North

America EU

over N.Amer. Exporters

over EU Exporters

Mining products (HS25-27) 1.7 2.6 1.7 0.9 0.3

General machinery (HS 84) 1.5 1.9 2.5 0.4 1.4

Electrical machinery (HS 85) 1.4 1.5 2.2 0.1 -0.3

Others 1.4 1.7 2.6 0.3 -0.6

Wood and paper 1.4 1.3 1.5 -0.1 0.5

Precision apparatus 1.2 1.3 2 0.1 0.7

Agriculture 41 29.7 30.9 -11.3 10.7

Light industry 26.8 8.3 12.8 -18.5 4.1

Food and beverages 21.8 26.4 25.8 4.6 9.8

Textiles and clothing 7.3 7.6 7.8 0.3 -3.1

Transportation machinery 4.6 2.8 8.6 -1.8 5.3

Pottery products 2.9 3.6 4.4 0.7 -1.3

Chemicals 2.4 3 2.7 0.6 -1.4

Basic metals 1.8 2.6 2.3 0.8 -0.7

All products 7.4 5.5 7.2 -1.9 1.5 Note: Tariff data for 2002; see the paper for aggregation schemes.

Source: Author’s reorganisation of data drawn from Freudenberg and Paulmier (2005), Table 3.

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DOT & Composition

45% 57% 58%

29%

59%

0%

20%

40%

60%

80%

100%

Direction ofAggregate

Trade

Machinery'sshare of each

flow

Direction ofTrade,

MachineryParts

Direction ofTrade,

MachineryFinal Gds

RoW

Intra-EA

• About ½ of EA exports are to EA.

• About 60% of EA-EA & EA-RoW exports are Machinery

• EA-EA, parts are dominante

• EA-RoW final goods dominant

• =>

Source: Ando & Kimura (2005)

“Triangle Trade”