MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | MICHAEL VATIKIOTIS
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | MICHAEL VATIKIOTIS
Striving for Growth
in a Challenging Environment PBEC 35th International General Meeting
Kuala Lumpur, Malaysia May 3-7, 2002 Michael Vatikiotis One of the fundamental reasons for Asean's success in the past decade was that the rest of the world paid attention to it. Superpowers came courting, great debates occurred at its meetings, and at times it seemed like the future of all of Asia hung on the outcome of deliberations over regional security at Asean meetings. Hardly ever was there talk of trade, which was one of the cornerstones of the regional association. The ASEAN Free Trade Area, or AFTA came along in 1992. It laid out a comprehensive program of regional tariff reduction. Over the course of the next three years, the program of tariff reductions was broadened and accelerated, and a host of "AFTA Plus" activities were initiated, including efforts to eliminate non-tariff barriers and quantitative restrictions, and harmonize customs nomenclature, valuation, and procedures. But before the impact of these measures could be significantly felt, along came the financial crisis of 1997. Asean economies shrunk in size, which had an impact on perceptions of the region's importance. At the same time, China's economy loomed larger. The focus in Asean and APEC shifted away from regional security issues that had dominated in 1990s; China became less of a security threat and more of an economic opportunity. And so the centre of gravity shifted. Commerce and trade loomed larger as confidence building measures, and North Asia assumed more significance in the eyes of foreign investors than Southeast Asia. Asean was no longer the centre of things, but gave way to an expanded Asean plus three, which included the three major Asian powers, China, Japan and South Korea. Then in November 2001 something interesting happened. China and ASEAN took the bold step of announcing the intention to form a bilateral free trade area by 2010. By some estimates, the free trade area created by this initiative will have 1.7 billion consumers, a combined gross domestic product (GDP) of approximately 2 trillion US dollars, and total international trade of 1.23 trillion US dollars. Skeptics doubt that an Asian-wide free trade area will ever get off the ground. They cite lingering protectionist sentiment and tough WTO parameters. Nevertheless, the challenge for the East Asian region in my view is to integrate. There is no reason why China's fast growing economy should act, as some have said, like a vacuum cleaner, sucking up all the FDI and leaving the rest of the region bereft of investment. China may have cheaper labour for now, but it lacks basic primary resources, and so needs to help of regional neighbours to ensure its economic security. That's why we're seeing China invest so rapidly in Indonesia's oil and gas industry. China needs to have a friendly economic hinterland, and the benefits are plainly mutual. Experts estimate that a free trade arrangement will help ASEAN increase its total GDP by 1%, and the PRC by 0.3%. In addition, the volume of bilateral trade between ASEAN and the PRC could grow by 50%. The China-ASEAN Free Trade Area is thus economically important to both parties. But more than the economic effect, China needs an integrated East Asian economy to pursue its strategic and geopolitical goals. A more integrated East Asian economy, one where China plays the role of growth driver, not growth spoiler, will be hard for the U.S. and other Western powers to criticize or attack because they will have so much at stake. For China, economic integration, especially across the Taiwan Strait, is also helping to speed up the reunification process with Taiwan. There is no doubt in my mind that the China-Asean free trade area proposal marks one of the boldest moves China has made to assert its economic clout in the region. The next most significant move would be the liberalization of its currency, which in my view will undoubtedly will gain strength assuming that current growth trends continue and there is stability in the financial system. Meanwhile, there's a lot of talk about China and Japan limbering up as regional rivals. From an economic standpoint, however, China needs Japanese investment and manufacturing know-how; Japan needs the Chinese market for its goods. True, both countries have their eye on the wider Asian market-but that's something China and Japan could tackle using converging regional free trade mechanisms. In sum, the larger economic story for the coming five years will be how successfully East Asian economies integrate and grow off one another instead of relying on traditional Western markets. But behind the smiles and the rhetoric, Japan is concerned and scrambling to maintain its role in the region. "With China growing and Japan in recession the balance of power is shifting," says a senior ASEAN official. Sure, Japan's aid and investment far outweighs anything China brings to the table in the region. But the stakes are long term, and in my view, private enterprise, foreign investment and market mechanisms will soon begin to swing the balance of economic power in China's favour-helped by an opening market and eventually a convertible currency. Meanwhile, Japan's capacity to frame and execute a forward mercantilist policy will be hamstrung for some years to come by the weakness of its private sector, giving China the chance to catch up. In his policy speech in Singapore, Prime Minister Koizumi spoke in symbolic terms about the "fate" that governs Japan's ties with Southeast Asia, using the story of a little boy in Japan who put a message of friendship in a bottle that washed up on a Malaysian beach. It will take more than a bottle or two for Japan to regain its stature in the region, because China's supertankers are already beginning to call in at Malaysia's ports. |
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