My Say: Asian integration at new stage, with China taking the lead

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THE past few weeks have seen a flurry of summit meetings that have produced an impressive series of ini­tiatives to promote greater economic cooperation and integration in Asia. The trouble is that there have been so many such worthy efforts over the years, most of which have left businesses feeling rather underwhelmed because the grand plans rarely made a material difference to the ease of doing cross-­border business.

Will this latest round of initiatives be any different? Our view is that while they may take a while to deliver on their promises, they do mark a positive departure from previous times.

China takes the lead

The first major difference from the past is that many of the new initiatives are initiated by ­China. ­After joining with the other BRICS countries (Brazil, Russia, India, ­China and South Africa) to create the New Development Bank (NDB) that would rival Western-led international lenders such as the World Bank, China has followed up with several other major ini­tia­­tives. It has persuaded 20 other countries to join it in setting up the Asian Infrastructure Investment Bank (AIIB) with it contributing the first US$50 billion of capital. This institution will be a clear challenger to the Asian Development Bank (ADB), which is typically led by a Japanese official and seen as greatly influenced by the US.

China has also set up the New Silk Road Fund to which it is contributing US$100 billion, to expand its own as well as other countries’ infrastructure to recreate the ancient trade routes from China to ­Europe. The NDB itself will be complemented by a Contingent Reserve Arrangement under which US$100 billion will be made available to countries ­facing international financial pressures, such as specu­lative attacks on their currencies. China will provide US$41 billion of the capital for the CRA (Contingent Reserve Arrangement). Indeed, with this and with China hosting the NDB as well as the AIIB, and contributing a substantial part of the NDB’s US$100 billion capital, ­China is making a huge commitment of capital and political goodwill to get these initiatives off the ground.

China has also moved vigorously on the trade front. In the past few weeks, it has ­completed free trade agreements with two ­important ­trading partners, ­Australia and South ­Korea, and relaunched the Free Trade Area of the Asia-Pacific (FTAAP), an idea proposed some years ago, but which had been ­neglected. China is also actively promoting the Regional Comprehensive Economic Partnership, a broad arrangement that aims to reduce trade bar­riers across Asia.

Other trade agreements also making progress

In addition, the Trans-Pacific Partnership is advancing, albeit ­slowly. The TPP, now led by the US, is a more narrowly based economic partnership agreement involving just 12 countries that aims to be a “high standard” trade agreement. This means that it goes beyond just cutting tariffs to include issues relating to standardising regulatory approaches across members, ensuring fair competition and faci­litating business. In other words, the TPP would intrude much more into each country’s ­sovereignty. The reward for countries ­giving up some of their sovereignty would be access to a huge market, dominated by the US and cover­ing about a quarter of world GDP. The TPP is notable for China’s absence, which has led to accusations that it is an effort by the US to exclude the country, although there is nothing to prevent ­China from joining the TPP after it is launched.

Finally, there is the ­Asean Economic Community, scheduled to take effect at end-2015. But ­several questions hover over the AEC. About 75% of the measures needed to make it effective have been put in place. With barely 13 months to go before the AEC is supposed to be in effect, a huge amount of work needs to be done within a re­latively short period of time. However, many analysts are con­fi­dent that with Malaysia taking over the Asean chairmanship in January, a big push will be made by policymakers to meet the deadline.

There is little doubt that the AEC will indeed take formal effect, in some form or shape, as planned. The real question is whether it will really make a practical difference to the companies that need to trade goods or services across Asean borders. The feedback from companies that have regionwide operations has been fairly downbeat, with many insisting that the AEC has not changed things much.  

What does all this mean for businessmen and consumers?

First and foremost, these initiatives are essentially political contests, primarily between the US and China. Disappointed by the ­legacy ­powers’ unwillingness to cede their dominant positions in global institutions such as the International Monetary Fund (IMF) and the World Bank, China is creating new global institutions that give it a role befitting its growing weight in the global economy.

China was not given much of a say in the foundation of major multi­lateral institutions such as the World Bank, IMF and ADB. As such, the rules of the game were designed by others, mainly the US, and in some cases, these rules do not favour ­China and other ­rising powers. In the IMF, China has 4% of the votes, less than that of the UK, even though its economy is about five times the size. The ­result of the recent ­flurry of new institutions will be ­greater Chinese in­fluence in the global economy.

China has every incentive to demonstrate that its initiatives will work well and this determination could make a difference to the effect­iveness of the many trade and financial ­initiatives it has launched. Thus, we are likely to see the NDB and AIIB take shape and have a positive economic impact fairly quickly. China will also work hard to demonstrate that its trade deals with Australia and South Korea produce benefits for those countries.

Second, many of these initiatives are res­ponses to a genuine need. The AIIB, for instance, will complement the ADB in ­providing funds for building infrastructure across Asia and, hopefully, greatly accelerate the construction of ports, roads, airports, mass transit systems and power generation to plug the gaps that hold Asian growth back. The ADB alone would not have been able to fund the roughly US$8 trillion of infrastructure spending needed in Asia over the coming decade, so the additional funding from the AIIB will be helpful.

Having said that, the availability of funding is not the only major constraint on infra­structure: In many ­cases, the main hindrances have been issues such as difficulty in acquiring land to build infrastructure, or regulations that deter private-sector involvement. In ­order to make a real difference to infrastructure in the region, these policy obstacles need to be addressed first. It is not clear if the AIIB has the expe­rience and expertise to tackle this constraint.

The third impact will be, unfortunately, to weaken global economic governance. ­Ideally, the world should not have several competing multilateral institutions duplicating activities that are more efficiently carried out by a single ­agency. The IMF, World Bank and ADB may not be perfect, but over the years, they have built up not just a capital base but also a huge database of unique know­ledge, experience and sector expertise which the new institutions will take many years to replicate. There is also a fear that the new institutions might be more lax in the conditions attached to lending, or that lending may be influenced by the foreign-policy objectives of the main funding countries. Critics of the AIIB argue that it would never do what the ADB has done, such as cutting off lending to infrastructure projects built on land from which poor ­farmers were unfairly evicted.

Fourth, the trade agreements may prove to have a greater impact on economic growth in the longer term. China’s trade deals with South Korea and Australia will help open up markets significantly, including the market for ser­vices, which has been ­relatively closed. These trade deals will put more pressure on economies such as Indonesia and Taiwan — which have few bilateral trade deals — to more aggressively pursue trade deals because their exporters will have to compete against rivals who will have easier access to markets.  


China’s initiatives will help accelerate the pace of Asian economic partnerships and trade agreements, and that is a positive. How­ever, the under­currents of big-power rivalry in the various trade and integration efforts will ­complicate these efforts and may dilute some of their benefits.

Manu Bhaskaran is a partner and head of ­economic research at Centennial Group Inc, an economics consultancy

This article first appeared in The Edge Malaysia Weekly, on December 01 - 07, 2014.