THE IMPACTS OF TRADE INTEGRATION ON OUTPUT GROWTH OF ASIAN COUNTRIES

Arunnan Balasubramaniam

Master of Science (Economics)

2013

Pusat Khidmat Makiumat Akademik UNiVERSTfI MALAYSIA SARAWAK

P. KNIDMAT MAKLUMAT AKADEMIK IMA$

iiiiiiiiiliiiii 1111111111 1000246920 THE IMPACTS OF TRADE INTEGRATION ON OUTPUT GROWTH OF

ASIAN COUNTRIES

ARUNNAN BALASUBRAMANIAM

A thesis submitted In fulfilment of the requirements for the degree of Master of Science in Economics

Faculty of Economics and Business UNIVERSITI MALAYSIA SARAWAK

2013

Statement of Originality

The work described in this dissertation, entitled "The Impact of Trade Integration on Output Growth of Asian Countries"

is to that best of the author's knowledge that of the author except where due reference is made.

(Date submitted) Arunnan Balasubramaniam 09021534

ABSTRACT

THE IMPACTS OF TRADE INTEGRATION ON OUTPUT GROWTH OF ASIAN

COUNTRIES

By

Arunnan Balasubramaniam

(This study examines the impact of trade integration on output growth of the

ASEAN-5 countries namely Indonesia, Malaysia, the Philippines, Singapore and

Thailand. This study also assesses whether trade integration with China and India has any

important impact on their growth performances. In tandem with these objectives, the

Cobb-Douglas type of production functions estimated using ARDL Bound Testing

approach to assess the long run relationships between regional trade and output growth

for the period 1980 to 2009, )The results suggest that outputs of ASEAN-5 countries are

spurred by improved ASEAN trade integration. Moreover, integration with China and

India appeared to be important to promote ASEAN-5 countries output growth. The

ASEAN long increased trade integration has boosted the output growth implies that it is

essential to accelerate the progress of integration to deeper stage by bringing various

ASEAN's dialogue partners to result in considerably larger contribution to potential

economic growth.

ABSTRAK

KESAN INTEGRASI PERDAGANGAN TERHADAP PERTUMBUHAN

PENGELUARAN DI KALANGAN NEGARA-NEGARA ASIAN

Oleh

Arunnan Balasubramaniam

Kajian ini menyelidik kesan integrasi perdagangan terhadap pertumbuhan

pengeluaran bagi lima buah negara ASEAN iaitu Indonesia, Malaysia, Filipina,

Singapura dan Thailand. Kajian ini juga menilai sama ada integrasi perdagangan dengan

China dan India mempunyai kesan yang penting terhadap prestasi pertumbuhan lima

negara ini. Selaras dengan objektif ini, fungsi pengeluaran berjenis Cobb-Douglas telah

dianalisis dengan menggunakan pendekatan Ujian Bound ARDL untuk menilai hubungan

jangka panjang antara integrasi perdagangan dengan pertumbuhan pengeluaran bagi

tempoh dari tahun 1980 hingga 2009. Hasil kajian ini menunjukkan bahawa peningkatan

dalam integrasi perdagangan negara-negara ASEAN mendorong pertumbuhan

pengeluaran bagi lima buah negara ASEAN. Di samping itu, integrasi dengan China dan

India adalah penting untuk menggalakkan pertumbuhan pengeluaran dalam kalangan

lima buah negara ASEAN tersebut. Seterusnya, integrasi perdagangan antara negara-

negara ASEAN yang telah lama wujud meningkatkan pertumbuhan keluaran. Keadaan

ini mencadangkan bahawa proses integrasi harus dilanjutkankan dengan membawa

pelbagai rakan dialog ASEAN agar dapat menyumbang kepada pertumbuhan ekonomi

yang lebih berpotensi.

ACKNOWLEDGEMENT

I wish to record my deepest gratitude and heartfelt thanks to my main supervisor

Professor Dr Shazali Abu Mansor for his time, patience, comments, guidance and

encouragements throughout the period of the study. My heartfelt appreciation also goes

to my co-supervisor Associate Professor Dr Puah Chin Hong for his supervision and

valuable comments during the course of this study. My sincere appreciation goes to

UNIMAS for the financial support under the program vice Chancellor's Zamalah

Research Award (ZPNC). I wish to thank to various personnel of Centre of Graduate

Studies (CGS), for their efficiency in preparing number of processes during the project

undertakings.

I also would like to record my gratitude to all lecturers, staff and friends at

Faculty of Economics and Business, Universiti Malaysia Sarawak (UNIMAS) for their

support during the course of this study. Greatest thanks to my family members and loved

ones who always given strong motivation, godly hold up and especially for tolerating the

vacuum I created during the period of this study. I thank them for enabling me to

accomplish my lifelong dream. Finally, I am indebted to my mum and dad for their long

and continuous support for my education, always instilling the spirit and value of

learning. It is therefore fitting that I dedicate this study to them.

Pusat Khidmat Makiumat Akademik UNIVERSITI MALAYSIA SARAWAK

TABLE OF CONTENTS Page

LIST OF TABLES iv LIST OF ABBREVIATIONS v

CHAPTER ONE: INTRODUCTION 1.0 Overview 1 1.1 Background of the Study 2 1.2 Momentum for Regionalism among East Asian Key Players 7 1.3 The Roles of China and India 9 1.4 The Evolution of Trade Integration 11 1.5 Problem Statement 14 1.6 Objectives of the Study 18 1.6.1 General Objective 18 1.6.2 Specific Objective 18, 1.7 Significance of the Study 19 1.8 Organisation of the Study 20

CHAPTER TWO: LITERATURE REVIEW 2.0 Introduction 2.1 A Brief Review on the Theory of Economic Integration 2.1.1 The Dynamic Effects of Economic Integration 2.2 Empirical Evidences on the Effects of Economic Integration 2.2.1 Empirical Evidences on Economic Integration and International

Trade 2.2.2 Empirical Evidences on Economic Integration and Investments 2.2.3 Empirical Evidences on Economic Integration and Economic

Growth 2.2.4 Empirical Evidences on Trade Integration, Openness, Trade

Policy, Globalisation and Economic Growth 2.3 Summary

21 21 22 23

25

31

32

42

47

CHAPTER THREE: RESEARCH METHODOLOGY 3.0 Introduction 60 3.1 Analytical Framework 61 3.2 Measure of Economic Integration 61 3.3 The Production Function 65 3.4 Data Description 68 3.5 Econometrics Methodology 69 3.5.1 Unit Root Hypothesis Testing 70 3.5.2 The Autoregressive Distributed Lag (ARDL) Approach 72 3.5.3 Long-run and Short-run Dynamic Bound Testing Approach 75

1

CHAPTER FOUR: EMPIRICAL RESULTS AND INTERPRETATIONS 4.0 Introduction 4.1 Preliminary Analysis 4.2 Descriptive Statistics 4.3 Unit Root Hypothesis Testing Results 4.4 Results of the ARDL Approach Estimates 4.5 Optimum Lag Length 4.6 The Impact of ASEAN Trade Integration on ASEAN-5 Outputs 4.6.1 Results of ARDL Bound Testing 4.6.2 Error Correction Term Estimates 4.6.3 Results of Long-Run Coefficients 4.6.4 Results of Short-Run Coefficients 4.7 The Impact of ASEAN-China Trade Integration on ASEAN-5 and

China Outputs 4.7.1 Results of ARDL Bound Testing 4.7.2 Error Correction Term Estimates 4.7.3 Results of Long-Run Coefficients 4.7.4 Results of Short-Run Coefficients 4.8 The Impact of ASEAN-India Trade Integration on ASEAN-5 and India

Outputs 4.8.1 Results of ARDL Bound Testing Analysis 4.8.2 Error Correction Term Estimates 4.8.3 Results of Long-Run Coefficients 4.8.4 Results of Short-Run Coefficients 4.9 The Impact of ASEAN-China-India Trade Integration on ASEAN-5,

China and India Outputs. 4.9.1 Results of ARDL Bound Testing Analysis 4.9.2 Error Correction Term Estimates 4.9.3 Results of Long-Run Coefficients 4.9.4 Results of Short-Run Coefficients 4.10 Summary of ARDL Bound Testing Analysis 4.11 Summary of Error Correction Term Estimates and Diagnostic

Checking 4.12 Summary of ARDL Long-Run Coefficients Estimates 4.13 Summary of ARDL Short-Run Coefficients Estimates 4.14 Summary of Findings

CHAPTER FIVE: CONCLUSION AND POLICY IMPLICATION 5.0 Introduction 5.1 Summary 5.2 Major Findings 5.3 The Policy Implication 5.4 Recommendations for Future Research

78 78 80 82 84 85 86 86 88 89 90

92

92 93 94 95

97

97 98 99

100

102

102 103 104 106 107

108

110 112 112

117 117 120 125 127

ii

REFERENCES 129

APPENDIX 136

111

Table 1.1:

Table 2.1:

Table 2.2:

Table 2.3:

Table 2.4:

Table 2.5:

Table 2.6:

Table 2.7:

Table 2.8:

Table 2.9:

Table 2.10:

Table 2.11:

Table 4.1: Table 4.2: Table 4.3: Table 4.4: Table 4.5: Table 4.6: Table 4.7: Table 4.8: Table 4.9: Table 4.10: Table 4.11: Table 4.12: Table 4.13: Table 4.14: Table 4.15: Table 4.16: Table 4.17: Table 4.18: Table 4.19: Table 4.20:

LIST OF TABLES ASEAN's Average Trade Shares and Growth Rates by ASEAN's Significant Trading Partner Countries, 2001-2011 Summary of Related Reviews of Economic Integration Impact on International Trade Summary of Related Reviews of Economic Integration Impact on International Trade (Continue) Summary of Related Reviews of Economic Integration Impact on Foreign Direct Investment (FDI) Summary of Related Reviews of Economic Integration Impact on Economic Growth Summary of Related Reviews of Economic Integration Impact on Economic Growth (Continue) Summary of Related Reviews of Economic Integration Impact on Economic Growth (Continue) Summary of Related Reviews of Economic Integration Impact on Economic Growth (Continue) Summary of Related Reviews of Economic Integration Impact on Economic Growth (Continue) Summary of Related Reviews of Openness, Trade Policy and Globalisation Impact on Economic Growth Summary of Related Reviews of Openness, Trade Policy and

Page

13

49

50

51

52

53

54

55

56

57

Globalisation Impact on Economic Growth (Continue) 58 Summary of Related Reviews of Openness, Trade Policy and 59 Globalisation Impact on Economic Growth (Continue) Descriptive Statistics 81 Unit Root Hypothesis Testing Results 84 Results of Bound Tests to Cointegration 88 Results of Error Correction Term (EC,., ) 89 Results of Long-Run Coefficients 90 Results of Short Run Coefficients 91 Results of Bound Tests to Cointegration 93 Results of Error Correction Term (ECt. 1) 94 Results of Long-Run Coefficients 95 Results of Short Run Coefficients 96 Results of Bound Tests to Cointegration 98 Results of Error Correction Term (ECr_1) 99 Results of Long-Run Coefficients 100 Results of Short Run Coefficients 101 Results of Bound Tests to Cointegration 102 Results of Error Correction Term (EC,. 1) 103 Results of Long-Run Coefficients 105 Results of Short Run Coefficients 107 Summary of Findings 115 Summary of Findings (Continued) 116

iv

LIST OF ABBREVIATIONS

AAC AEC AFAS AFTA AG AIA AIFTA

ANZCERTA

APEC ARF ARDL ASEAN BIMP-EAGA

BIMSTEC

CACM CAFTA CARICOM CECA CEECs CEGPL CEPT CIS CLMV CM CU DK EC EFTA EU FDI FTA GATT GDP IFS IMF IRL JACIK LAFTA LSDV MRA MFN

ASEAN Agreement on Customs ASEAN Economic Community ASEAN Framework Agreement on Services ASEAN Free Trade Area Andean Group ASEAN Investment Area ASEAN-India Free Trade Area Australia-New Zealand Closer Economic Relations Trade Agreement Asia-Pacific Economic Cooperation ASEAN Regional Forum Auto-Regressive Distributed Lag Association of Southeast Asian Nations Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation Central American Common Market ASEAN-China Free Trade Area Caribbean Community Comprehensive Economic Cooperation Agreement Central and Eastern European countries The Economic Community of the Great Lakes Countries Common Effective Preferential Tariff Commonwealth of Independent States Cambodia, Laos, Myanmar, Viet Nam Common Market Custom Union Denmark European Community European Free Trade Area European Union Foreign Direct Investment Free Trade Area General Agreements on Trade & Tariffs Gross Domestic Product International Financial Statistics International Monetary Fund Ireland Japan, ASEAN, China, India & Korea Latin American Free Trade Association Least Squares Dummy Variables ASEAN Mutual Recognition Agreement Most-Favoured Nation

V

MERCOSUR NAFTA OCA OECD OIC OLS

PATCRA

PPP PTA RTA R&D ROW SITC TEI TFP TOT UDEAC UK USA US-Israel FTA WDI WTO

Southern American Common Market North American Free Trade Area Optimum Currency Area Organization for Economic Cooperation and Development Organisation of Islamic Cooperation Ordinary Least Squares Papua New Guinea-Australia Trade-Commercial Relations Agreement Purchasing Power Parity Preferential Trade Area Regional Trade Agreement Research and Development Rest of World Standard International Trade Classification Total Economic Integration Total Factor Productivity Terms of Trade Economic Community of Central African State United Kingdom United States of America United States-Israel Free Trade Area World Development Indicators World Trade Organization

vi

CHAPTER ONE

INTRODUCTION

1.0 Overview

This study aims to analyse the benefits that could arise when a group of countries

participate in regional trade integration. This analysis is essential as the outcome could

provide positive indications about the importance of economic integration in a region.

One way to appraise the impacts is by measuring the extents of contribution towards

output growth spurred from increased regional trade. This is to observe whether countries

are actually gaining or worsening by participating in regional trade integration. This

research is crucial to be carried out for the case of Association of Southeast Asian

Nations (ASEAN) as there are growing challenges from the global environment.

Recognising growing challenges, ASEAN had executed several strategies to

remain resilient in the Asia. The strategies include reduction in tariff rates', increase in

number of member countries'`, customs facilitations for goods that traded through custom

collaboration, joint recognition of standards, liberalisation of trade restrictions on

services3, and the launch of ASEAN investment area (AIA). In addition, ASEAN

developed its goal to form a regional digital network which bridges 16 Asia-Pacific

largest and fastest growing economies towards the world's biggest free trade market in

For example, ASEAN has implemented free trade zones and "single market and production zone" plans to eliminate the tariffs rates more than 94%. 2ASEAN has enlarged from ASEAN-6 member to ASEAN-10 members between the years from 1995 to 1999. Beginning from the year 2001 onwards, ASEAN-10 countries has enlarged through market based cooperation with "+3" members, "+4" and more recently "+6". 3Refer ASEAN Agreement on Customs (AAC) signed in 1997, ASEAN's Mutual Recognition Agreements (MRAs) signed in 1998 and ASEAN Framework Agreement on Services (AFAS) signed in 1995.

1

the form of Asian Economic Community (AEC) by the year 2020. In order to achieve it,

ASEAN begun its early efforts through de facto economic cooperation with the Japan,

South Korea, China (ASEAN+3) and more recently with India (ASEAN+4 or JACIK4),

New Zealand and Australia (ASEAN+6). The ASEAN+6 regionalisation are

comparatively new, yet it can become highly significance as it comprises China and

Indian. The China, India and ASEAN countries may contribute the economic

development and also to shape a new version of integration in this region. As a result, the

relationship between economic integration and economic growth is the subject of this

study.

1.1 Background of the Study

The concept of regional economic integration can be defined as a process of

eliminating the obstacles to trade and permit for a free movement of goods, services and

factors of production. There are few stages of integration and countries commonly initiate

at a lowest stage of integration and progress to higher stages as the state of affairs become

more suitable among the countries in a region (Balassa, 1961). The initial implementation

and attainment of highest stage of integration is by the European countries or the

European integration. The European integration began after the 1950s with high hopes on

the benefits for countries in a union and it is designed as one of the economic

development strategies for the European economies'. As the rapid transfers of ideas,

4The abbreviation `JACIK' means economic cooperation among Japan, ASEAN-l0 member states, China, India and Korea. Note: According to International Monetary Fund (IMF) estimates, China and India are the world's largest and fastest growing economies which have more than one-third shares to global labor market. "Since 1952, the idea of establishing the European economic and monetary union was a vision of the political leaders. They founded the European Coal and Steel Community (ECSC), which consisted of six countries namely Belgium, Germany, France, Italy, Luxembourg, and Netherlands.

2

knowledge, novelties, development of trade, capital as well as the opening up of the

economy to international forces reflect the importance of joining a union among the

nations all over the globe.

Academicians have been interested in understanding whether countries will be

better or worse off after they have committed in a regional economic integration. Past

studies had shown the beneficial effects of economic integration. From theoretical

perspective, economic integration contributes to the growth performance through several

channels from the supply side of an economy. The main channel which economic

integration affects growth performance is through technological diffusions (Baldwin and

Seghezza, 1996) from increased regional trade volume as a consequent of a reduction in

mutual trade barriers among countries (refer Baier and Bergstrand, 2007 and Hur and

Park, 2012, for examples). Past works done by Grossman and Helpman (1991), Rivera-

Batiz and Romer (1991), Coe and Moghadam (1993), Haveman et al. (2001) and

Economidou et al. (2006) added on the fact that growth performance of a country can be

accounted from intensified regional trade as it could capture the beneficial effects which

led from efficiency and competition caused by specialisation, resource allocation,

discovery of new ideas via knowledge transfers and learning by doing.

The importance of economic integration can be argued based on number of

economic integration agreements which are in existence. The number of regional trade

agreements (RTAs) has increased from 110 agreements in 1990s to nearly 400

7 Refer Coe and Moghadam(1993); Italianer and Pisany-Ferry(1994); Haveman, et al. (2001) and Economidou, et al. (2006).

3

agreements in the year 2010, under the General Agreements on Tariffs and Trade

(GATT) and World Trade Organization (WTO)8. Researches predicted that the world

possesses a renewed trade as there is a rapid move towards regionalism9. The progress

brought about majority of the world countries that belongs to more than an economic

integration agreement10. The agreements are largely on bilateral agendas of preferential

free trade agreements and less number of agreements that have been enforced in broader

liberalisation with higher stage of agreements such as the custom unions, common

markets, and monetary unions. It has been argued that these conditions are caused by the

deteriorating multilateral trading system as a result of declining United States' (US)

confidence towards the GATT (Limo, 2006 and Bhagwati, 2008). In addition, the

security issues such as the 1980 debt crisis in Latin American and African economies,

1997/1998 Asian financial crisis, international terrorism and the outbreak of Severe

Acute Respiratory Syndrome (SARS) were also stressing countries to impose cooperation

in a quicker pace via bilateral frameworks.

The formation of bilateral PTAs and FTAs are prevalent in the midst of high-

performing Asian economies (HPAEs)' '. These countries shifted to bilateral trade

agreements in order to improve the productivity and competitiveness through economies

of scales, efficiency and deeper economic integration (Kawai, 2005 and Dee, 2007). For

5The number of RTAs increased more than 300 since the year 2003 onwards (see WTO's report of Regional Trade Agreements Notified to the GATT/WTO Entry into Force for the period from 1958 to 2003. The number has reached close to 400 agreements by the year 2010. QThe integration has been evolving on the regional basis since there are increasing stresses to enhance the regional security among the major industrial countries (Baharumshah et al., 2007, p. 386). 10Bonapace (2005) claims that regional integration is complementary to multilateralism as most of the countries belong to more than one regional trading arrangements and some cover more than the two-third of the international trade. "According to the World Bank, the eight HPAEs or high performing East Asian economies are Japan, Korea, Hong Kong, Taiwan, Singapore, Malaysia, Indonesia, and Thailand.

4

Pusat Khidmat Maklumat Akademik j, JNIVERSITi MpLAYS1A SARAWAK

example, Japan, Hong Kong and South Korea have moved to bilateral trade agreements

with countries like Singapore and Thailand. In addition, these agreements are moreover

intensifying across the Asian continent. To name a few, Singapore has signed bilateral

free trade area (FTA) agreements with New Zealand, US, Australia, European FTA

(EFTA) and Jordan. Thailand has signed bilateral trade agreements with Australia and

New Zealand. Thailand seems to continuously negotiating bilateral trading agreements

with the US, Mexico, Russia and EFTA (Vandoren, 2005, p. 530).

The notion of bilateral trade agreement provides smaller markets with lower

degree of integration. It may not be advantageous to a region as the bilateral trade

agreements may not expand the size of markets. The bilateral trade agreement agendas

are known as harmful to integrating members in a broader framework through the

spaghetti bowl syndrome (Bhagwati and Panagariya, 1996). This form could cause costly

trade diversions to the members. It may undermine growth performance of the members

in the integration (Tumbarello, 2007), particularly for the countries that have lower rates

of most-favored-nation (MFN)'`. It possesses threat to shrink the internal market and to a

closed bloc in the long-run (Viner, 1950). This development retains pressures for

sustainability of Asian countries as it has the risk of welfare worsening through the

shallow bilateral or hub and spoke integration agendas especially with the highly

integrated union such as the EU (Angresano 2004, p. 913). The bilateral preferential or

free trade agreements with EU will only become market openings for European countries

to trade their products in Asian markets as the price of European products become

"According to WTO Annual Report (2003), RTAs are discriminating based on the Most Favored-Nation (MFN).

5

cheaper through liberalisation. In contrast, the Asian products remain undertaking price

competition in the European market as Asian countries merely committed in a shallow

integration with the highly liberalised union.

Besides, the process of liberalisation among rest of the world countries results in

diminishing Asian shares to the global trade. For example, the previous work done by

Kreinin and Plummer (1992) stated thatSoutheast Asian countries had been affected by

the trade diversions which were caused by the barriers elimination among the European

economies. Kreinin and Plummer (1998) have also illustrated that European Single

Market Programme caused the fall in commodity exports of East Asian to the European

countries. Similarly, Liu (1996) claimed that East Asian countries experienced

deterioration in trade as a result of liberalisation among countries in North America.

'Thus, dependence of Asian economies towards third world is not a commendable

approach as the liberalisation and protectionism in other regions may lead to costly trade

diversions and income losses to the regional groupings in Asia.

The lesson from the European integration has directed other parts of the world

countries to engage in a regional economic integration. Regional liberalisation and

protectionism through integration agreement in a broader framework (larger market)

enhances the assurance for regional security and welfare gain of countries through

positive economic growth. There are number of studies supported positive growth effects

of European's various integration schemes. On the other hand, Asian regional groupings

are still at infancy compared to European and North American countries. Regionalisms in

6

Asia are essentially means the economic integration through trade or expansion in intra-

regional trade to create large market which could profit all the member countries. This

implies that there is a need to investigate about long span ex-post beneficial effects from

the economic integration through trade among these countries.

1.2 Momentum for Regionalism among East Asian Key Players

The regional groupings within the Asian continent have been mostly driven by the

market forces (de facto) rather than governmental direction (de jure). The countries in

Asia are initially regarded as the global traders rather than known as regional traders. In

the beginning, the Asian countries were not depending much on Asian markets and they

were heavily relied on the global market. It is also one of the reasons why Japan and the

NIEs such as the South Korea and Taiwan have not shown much interest in regional

cooperation in the beginning. However, as the rapid economic development, international

forces, and threat and security issues had driven towards regionalism, there had been

several efforts that brought to economic cooperation and these progressed in shaping new

Asian regionalisms. The initial attempt was the formation of Association of Southeast

Asian Nations (ASEAN) in 1967, among the six Southeast Asian countries namely

Brunei, Indonesia, Malaysia, the Philippines and Thailand. This effort has been

undertaken to promote political peace and regional security among the nations. In the

year 1989, these six ASEAN economies participated together with Japan, Korea, United

States (US), Canada, Australia, and New Zealand and later on in early 1990s with China,

Russia Mexico in the Asia-Pacific Economic Cooperation (APEC) that route to

encourage free trade and economic cooperation. These economies had long enjoyed the

market driven trade and investment through the cooperation.

In the interim, as the design of the APEC was being discriminated for the most-

favored-nation concept and at the same time non-preferential, the ASEAN countries

proposed for the East Asian Economic Group (EAEG) in 1990. However, the EAEG

proposal was unsuccessful as it has been strongly protested by the US. In 1992, the

ASEAN-6 economies launched for deeper economic integration scheme of ASEAN Free

Trade Area (AFTA). Beginning from the year 1995, ASEAN executed the widening

integration strategy progressively as the Cambodia, Laos, Myanmar, and Vietnam

became the members of the association between the years from 1995 to 1999. As the

formation of NAFTA in 1994, EMU in 1999 and also the 1997/1998 Asian Financial

crisis have further raised the Southeast Asian countries' momentum for regionalism with

the Northeast Asians and few other economies of Asia.

In 2000, the East Asian countries engaged in ASEAN+3(the ten ASEAN

economies plus China, Japan and Korea). The market based cooperation of ASEAN+3

mainly instigated as the failure of EAEG proposal. The failure of the EAEG proposal was

caused by the strong disagreement from the US and the absence of support from the

Northeast Asian countries. In particular, Japan was unwilling to support the EAEG

proposal due to avoid trade conflicts with the US. In response, the Northeast Asian

countries were called to ASEAN leaders meeting and the ASEAN+3 has been formed

amongst the North and South East Asian countries. The momentum of ASEAN+3

8

countries stopped and recently they expanded to ASEAN+6 (inclusion of new members

which are India, New Zealand and Australia). Furthermore, these countries have launched

its future vision towards the single market and production base plan by the year 2020.

1.3 The Role of China and India

The emergence of China and India as the key players in the global system initially

provoked a vulnerability stance to the other Asian countries. China and India emerged

with large labor pools about more than 35% of global labor force in 2010. These nations

have grown more than twenty-fold (China) and nine-fold (India) in three decades. This

has been a threat to the East Asian countries to participate in labor-intensive competition

for business and investment environments. In contrast, these two Asian giants are seen as

an opportunity for the East Asian countries. This is because China and India offer

positive multiplier effects to the neighboring countries via large resource abundances

(Abeysinghe and Lu, 2003; Rajan, 2003; Cox and Koo, 2003 and Okamoto, 2005).

According to Ravenhill (2006), China and ASEAN are in zero-sum competition for

foreign investments and they are more complementing since China and ASEAN

committed in comprehensive economic cooperation (CECA) in 2003. The recent launch

of China free trade zone with Southeast Asian economies (in 2010) is known as the

China's first involvement in a broader framework of regionalism under the tariff

reduction schemes. Prior to that, China only joined APEC in the year 1991 and after that,

it became a member of WTO in the year 2001 (Long and Zhang, 2005). The trade bloc

that comprising China and the Southeast Asian countries being the third largest

integrating trade bloc in the world after the EMU and NAFTA. China has been a member

9

of APEC and it has been promoting and exploiting potentials market for trade with the

ASEAN-6 economies and other remaining APEC members since 1990s.

Likewise, India is looking for further economic cooperation with ASEAN and

other trading partners in order to generate its country's economic growth simultaneously

to build strong international political relationships (Sen et al. 2004). According to Ahser

and Sen (2005), integration arrangement between ASEAN, India and other Asian

economic powers will provide considerable win-win situations. The ASEAN and India

integration deliberation begins after India's implementation of "Look East Policy" (LEP)

in 1991 (Shalin, 2003). ASEAN-India partnership firstly begins in the year 1992 as the

sectorial dialog partnership in four main sectors which are trade, investment, tourism and

science and technology. With the shallow cooperation, ASEAN and India intensified the

integration process by implementing ASEAN-India full dialog partnership at 5th summit

in Thailand (Bangkok) by formally including the India in the ASEAN regional forum

(ARF).

The subsequent event is the first ASEAN-India summit in Cambodia in the year

2002 (Gaur, 2003). In the following year, India-Thailand FTA signed in October 2003

and full implementation by the year 2010. The highlights is the India's comprehensive

economic cooperation agreement (CECA) with Singapore initially and lately with

ASEAN-10 countries. Moreover, India's effort on sub-regional cooperation with Viet

Nam, Thailand, Myanmar and Laos such as Mekong-Gangga cooperation (MGC) and

Bangladesh, India, Myanmar, Sri Lanka, Thailand Economic Cooperation (BIMSTEC)

10

also can be claimed as imperative indication that growing liberalization progress.

ASEAN-India ongoing effort on integration particularly on the preferential trade

agreements (PTA) proves that there is a gradual increase in intra ASEAN-India trade and

this further motivates towards unification as it somehow satisfying certain precondition

of regional cooperation. The CECA between ASEAN-India has paved the way to for the

recent formation of free trade zone (ASEAN-India FTA). The CECA and FTAs placed an

extensive basis for the subsequent establishment of trade and investment zone.

1.4 The Evolution of Trade Integration

The ASEAN progress of liberalization intensifies through various formal

agreements with the emerging economies, however China and India are claimed as

relative latecomers compared to the member countries of Asia-Pasic Economic

Cooperation (APEC). APEC is known as informal economic cooperation that has been

formed in late 1980s in order to stimulate trade and investments liberalization. The

members include ASEAN-6 countries, Japan, Korea, United States (US), Canada,

Australia, New Zealand, and more recently China, Russia and Mexico. This shows that

ASEAN has engaged to market integration via a unique cooperation to strengthen

regional trade prior to its formal agreements on FTAs. The ASEAN's market based

cooperation efforts implies that there is intensified intra bloc trade of ASEAN with its

significant trading partners. The ASEAN intra and extra bloc trade statistics indicate that

ASEAN's leading trading partners are the members of ASEAN/AFTA itself, as well as

the member countries of APEC and AEC (forthcoming). It has been confirmed as roughly

about 24% of ASEAN trade to world comprises ASEAN itself with average growth rates

11

of 13.4% in 10 years. This suggests although ASEAN economies are bounded by

structural heterogeneity, the growing intra-bloc trade shows ASEAN has benefited for

long span of years from the regionalism.

The other ASEAN significant trading partners are Japan, China, EU, North

America and the four East Asian Tigers13. Roughly about48% of ASEAN trade shares to

the world has been contributed by Japan, China and the four East Asian Tigers. The EU

and North America contributed approximately 30% from the ASEAN's total extra bloc

trade and 22.4% of ASEAN trade to the world in recent times. Interesting, Japan and

China are being the most significant trading partners of ASEAN among all. Both the

countries contributing more than 20% of ASEAN trade to world for the past ten years.

Beginning from the year 2008, China has over tacked Japan in terms of the shares to

ASEAN trade. Japan's shares to ASEAN trade recorded about 20% in the year 2001 and

it has reduced gradually to 11 % in the year 2011. As the launch of ASEAN-China CECA

in 2003 onwards, China shares towards the ASEAN trade have been regularly growing

with average growth rate of 24.5% between the years from 2001 to 2011 (see Table 1.1).

Similarly, India's shares to ASEAN trade are also rising rapidly from 0.9% in the year

2001 to 2.1% by the 2011. India's shares of ASEAN trade progressed twofold in 10 years

with average growth rate of 23%. Although India holds smaller size of shares of ASEAN

trade (1.5), India's trade shares being the second fastest growing after China (see Table

1.2 & 1.4). This implies that China and India have shown the importance in

intensification of market based integration with the ASEAN in the recent decade. The

progress may have consequence to various issues on economic that are critical for the

13Note: The four East Asian Tigers are Singapore, Hong Kong, Taiwan and South Korea.

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