Economic Structure and Regional Institutions: A Political Economic Analysis of TPP and RECP

Transcription

1 Economic Structure and Regional Institutions: A Political Economic Analysis of TPP and RECP Xiaoming Huang Paper for 2nd ADB - Asian Think Tank Development Forum, Seoul November 2014 Abstract This paper investigates whether TPP and RCEP are pathways to economic cooperation and integration in the broad Asia-Pacific and how they contribute to the economic growth and development of the region. The paper examines the political economy of multilateral institution building in the region and how the underlying economic structure impacted the direction of their development. It shows that the projects of multilateral institutions are shaped by (1) the regional economic structure and the historical evolution of multilateral institutions in the Asia-Pacific; (2) the changing domestic political economy of key countries in the region and shifts in their growth structure and strategy, and development priorities, and (3) the shifts in the global economic structure. The paper finds that while TPP and RCEP are important part of the momentum in search of a more effective platform for economic cooperation and integration in the region, and there is a great level of institutional innovation to make them inclusive, the dominant interests, forces and relations in and over the region are driving the Asia-Pacific into further blocs, leaving the projects of regional institutions somewhat ambiguous in their purpose: whether they are for a FTA area or for an economic community of integration on a single market, and how they contribute to the economic growth and prosperity of the region.

2 Economic Structure and Regional Institutions: A Political Economic Analysis of TPP and RECP Xiaoming Huang, Victoria University of Wellington This paper undertakes a political economic analysis of the emergence of the two latest major multilateral trade regimes under negotiation in the Asia-Pacific: the Trans-Pacific Partnership (TPP 1 ) and the Regional Comprehensive Economic Partnership (RCEP 2 ), and their implications for the development of multilateral institutions in the Asia-Pacific and indeed for the economic growth and development of the region. The rapid progressing in the past few years of the two projects has taken Asia-Pacific watchers by surprise. After years of complaining about more funerals than weddings in projects and initiatives for a free trade area/an economic community in the Asia-Pacific, 3 and that they are too many, too complicated, and ineffectual, as a noodle bowl, 4 the new developments have been embraced with much excitement and unprecedented fanfare. For those who have followed how projects of multilateral institution building in the region have evolved over the years, many of which have come and gone, and who have professional interest in some institutional form of economic cooperation and integration in the region, there is a question: why these new projects, and now? Are they serious this time? Would they work? Where would they possibly lead us to, and whether perhaps they will lead us to an ultimate regional institution? More importantly, how they contribute to the economic growth and prosperity of the 1 TPP is a FTA negotiation from 2005 among the four original members of the Trans-Pacific Strategic Economic Partnership (P4), and 8 countries subsequently under negotiation to join: USA, Australia, Peru, Vietnam, Malaysia, Mexico, Canada and Japan. 2 RCEP is a FTA negotiation from 2012 among the 10 members of ASEAN, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, and six ASEAN FTA Partners, Japan, China, Korea, Australia, India and New Zealand. 3 There was an announcement of an end of APEC and ASEAN and a shift of hope for a regional institution to the East Asia Summit 10 plus years ago. See Douglas Webber, Two funerals and a wedding? The ups and downs of regionalism in East Asia and Asia-Pacific after the Asian crisis, The Pacific Review 14 (3): , Even agreeing on the fact that regional trade agreements and initiatives are too many, multiple, complicated, and overlapping, views are different on whether this is good or problematic. Representing the former is the Peter A Petri, Multi-track Integration in East Asian Trade, Noodle Bowl or Matrix, Asia Pacific Issues, 86, The East West Center, 2008; and the latter, Richard E. Baldwin, Managing the Noodle Bowl: The Fragility of East Asian Regionalism, Regional Economic Integration Working Papers, Asian Development Bank, Baldwin called this Spaghetti bowls on the global scale, as building blocks to global free trade. Richard E. Baldwin, Multilateralizing regionalism: Spaghetti bowls as building blocs on the path to global free trade, World Economy 29: , 2006.

3 Huang ADB Forum 2014 Paper Page 3 of 27 region? Excellent work has been done on why and how of TPP and RCEP, and on what has driven the two. Most of the analyses are part of making the business case and providing a roadmap for policy makers. They focus on the economic effects of the proposed arrangements, different scenarios and pathways in the shaping of these arrangements, and how the national economies relate to these effects. 5 The question of why and how of TPP and RCEP is treated in these cases largely as to explain who, when and how the particular project is initiated by a country and the most likely strategy of a particular country in approaching the initiatives. These are excellent work at the policy level for individual counties. When they are used in reverse to explain why and how of TPP and RCEP in a broad historical and political economic context for the shaping of multilateral institutions in the region, they seem insufficient. Indeed, most of these works take as given that TPP and RCEP are big things to come and stay, and many of them have already worked on the premise that TPP and RCEP are likely, if not would be, pathways to a FTAAP. 6 Not much attention has been paid to helping us understand the large political economic structure in the region that provides incentives and motivations for building of regional institutions such as TPP or RCEP; enables or constrains a particular type of regional institutions (in their scope, membership and purpose); and generates conditions necessary for regional institutions to develop, perform or achieve, and how these relate to the broad interest of economic growth and development of the region and countries within it. For some, such an understanding may not be necessary as the inevitability or even necessity of TPP or RCEP, is already given and such an understanding will never have practical and meaningful value. For many others, an understanding of these issues is particularly necessary and important, given the fact that the region has had a long list of various projects of regional institutions in recent decades. These projects all had a very convicting case made on its necessity and feasibility, as well as its value of contributing to national economic gains, in well executed modelling and analyses of the economic gains of one particular project amidst alternative scenarios and pathways. After several years of fanfares, bargaining and politics, suddenly new projects and initiatives emerged and we have all moved on to the next big ones. Moreover, given that the pathways to a FTAAP are already embedded in TPP and RCEP planning, design and analysis, we can end up going back to square one, a quarter century after APEC was first set up precisely for this purpose. A political economic analysis of the forces and conditions that have driven TPP and RCEP is useful, not necessarily to make a case to either justify or 5 For example, Peter A. Petri, Michael G. Plummer, and Fan Zhai, The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. Washington: Peterson Institute of International Economics, 2012, which looks at the economic effects, or trade and welfare gains of the alternative tracks, and difference scenarios in their pathway to a FTAAP; and lately, Tang Guoqiang and Peter A. Petri, New Directions in Asia-Pacific Economic Integration. Honolulu: East West Center, 2014, which looks largely a thet national perspectives and strategies as well as preferred scenarios on TPP and PCEP, and perhaps represents the national interest analyses that countries must have done on TPP and/or RCEPT. 6 In both Petri, Plummer and Zhai, and Tang and Petri studies, TPP and RCEP are clearly seen as the most likely pathways to a FTAAP.

4 Huang ADB Forum 2014 Paper Page 4 of 27 refute the projects on the basis of the economic gains these countries can achieve through these two sets of arrangements, but to unpack the political economic forces and conditions, national, regional and global, that are driving countries to opt for TPP/RCEP, and the economic conditions in the region which these arrangements are meant to advance and promote and which would influence, if not determine, the shape, scope, structure, and indeed the potential fate of these projects. An understanding of the political economy of TPP and RCEP is useful as it shall allow us some confidence as why TPP and RCEP now, whether they would be bunch of epiphyllous flowers, and what future they will pathway to. Political economy analysis examines how economic interests are satisfied and outcomes are achieved through use of political capacity and influence, and vice versa. Often they are not one directional either from the economic to the political or from the political to the economic. The natural, uneven distribution of economic resources and endowments across jurisdictions require institutional arrangements for efficiency to be generated over these jurisdictions to achieve optimal economic outcomes which would otherwise not be possible. Politics is at the core of making such institutional arrangements. As classically put by others, it explains who gets what and how in the arrangements for an agreed purpose. This very much sums up the key dimensions of the framework this political economic analysis of TPP and RCEP will utilize. The paper will be divided into several sections. The first part will establish the underlying economic condition in the region that bear heavily on the development of regional institutions and how they have shifted over the past decades condition that I call regional economic structure that underlies a real or envisaged economic community, and justifies and rationalizes multilateral institutions. It will then briefly trace the evolution of regional institutions over the past few decades and examines how lessons in the past experiences of building regional institutions have influenced the current TPP and RCEP, and how close these various projects reflected or correlated to the underling regional economic structure. An underlying argument here is that TPP and RCEP are logical steps forward in the decades long evolution of multilateral institutions in the region and the consequences of the problems of the projects in the past being top down with large, region -wide memberships; the boundary of the region itself being in constantly contested, and the political base of the regional institutions not necessarily corresponding to the underlying economic structure. The second part will examine the interests, capacity and strategy of individual parties to TPP/RCEP. We will single out four of them, Japan, China, USA and ASEAN, to demonstrate how the individual parties relate themselves to the regional institutions, relating in the sense that growth interests, strategy and priorities of these countries determine their approach to regional institutions, but sometimes however, their policy options towards regional institutions can be complicated, if not compromised, by their broad political interests and considerations. We focus on the growth structure, development stage and economic strategy of the individual countries and what regional institution their conditions would require and how much TPP and RCEP can satisfy that. The intention here is to demonstrate that even the economic gains between the national economy and the regional institutions are not all that straight-forwardly clear for many, politics and political considerations can conceal the real link between national economic interests and regional institutions.

5 Huang ADB Forum 2014 Paper Page 5 of 27 The third part investigates the global economic structure and their shifts in recent decades, and how they affect the shaping of regional institutions in the Asia-Pacific, and how they help us understand the pattern of the development of regional institutions in the region. We are particularly interested in the change in the global destitution of economic capacity, output, and activities, as well as consumption, investment and trade, and how East Asia is positioned in the evolving world economic structure. It will also look at whether and how other regions organize themselves and building regional institutions in response to the changing global economic structure. This is where we can demonstrate much more clearly the precise nature of the efforts for regional institutions in the Asia-Pacific, and the purpose and role of TPP and RCEP. 1. The Regional Economic Structure Regional economic conditions have experienced significant change since APEC was launched a quarter century ago as a multilateral platform to promote trade and investment liberalization in the region. We look at the regional economic conditions today and compare them to those of 25 years ago, with the assumption that economic interests, outputs and capacity in the region are the driving forces for regional cooperation and integration, and shape the purpose and scope of a particular form of multilateral arrangements. We look particularly at macroeconomic indicators. These indicators measure the overall economic activity, output, capacity, as well as consumption, investment and trade that regional institutions are designed to promote and work with. We measure them at the national level. Institutions of regional economic cooperation and integration are intended to promote the wellbeing of the regional economy. In reality, there is no integrated economy in the region. There is no agreed scope of an economic community for the region. The scope of the intended trade groupings in the name of the Asia-Pacific cut across potential regional economic communities. The regional institutions are platforms fought by the countries to create the best institutional arrangements for their national economies. Consequently, the value and purposes of a multiple regional institution is measured mostly by the economic benefits individual countries can gain from it, rather than how they contribute to the regional economy. In Figure 1 below, I present the measures of the regional economic conditions on 6 indicators in both as a reference point when APEC was launched, and, the latest year that the data used here are available. 7 These indicators are GDP, capital stock, consumption, 8 investment, 9 merchandise export and 7 I use Penn World Tables 8 for data here unless otherwise indicated. PWT8 is one of the principal databases that provides information on relative levels of income, output, inputs and productivity, covering 167 countries between 1950 and, using purchasing power parity and national income accounts converted to international prices. See Robert C. Feenstra, Robert Inklaar and Marcel P. Timmer, "The Next Generation of the Penn World Table" 2013, available for download at 8 Household consumption and government consumption 9 Gross capital formation

6 Figure 1 Regional Economic Structure GDP ASEAN 1,112 3,016 NEA 5,718 16,839 China 2,179 10,686 Japan 2,715 3,849 Korea, S 414 1,332 Taiwan India 1,002 4,471 Australia USA 7,824 13,352 Russia 2,466 2,668 Capital Stock ASEAN 1,956 10,629 NEA 13,422 72,390 China 4,044 45,264 Japan 7,924 18,432 Korea, S 7,96 5,638 Taiwan 411 1,935 India 1,502 10,100 Australia 1,318 2,968 USA 21,575 41,501 Russia 7,078 7,296 Consumption ASEAN 821 2,038 NEA ,343 China ,784 Japan ,027 Korea, S Taiwan India 873 3,217 Australia USA ,568 Russia ,050 Gross Capital Formation ASEAN NEA ,742 China 556 5,310 Japan Korea, S Taiwan India 173 1,312 Australia USA ,179 Russia Merchandise Export ASEAN 207 1,188 NEA 840 4,631 China 93 2,428 Japan Korea, S Taiwan India Australia USA 541 1,485 Russia Merchandise Import ASEAN 217 1,171 NEA 708 4,167 China 97 2,127 Japan Korea, S Taiwan India Australia USA 714 2,184 Russia Source: rgdpe, cgdpo, ck, csh_c, csh_i, csh_g, csh_x, csh_m, in PWT8, Unit: PPP in Billion USD 2005

7 import. These indicators are used as measures of economic activity, output and capacity of the countries in the region that form the regional economic structure and drive economic activities, relations and movements of economic factors in the region. I present them in visual form with all countries in the region to show the regional distribution of these economic activities, outputs, and capacities in relative weight as reflected in the size of the shape. These are further accompanied by the positions in the regional economic structure in actual value of the key parties to the multilateral institutions in the region, Japan, China, S. Korea, USA, India, Australia and Russia, and two particular areas: Northeast Asia (NEA - Japan, China, S Korea, Taiwan, Hong Kong, and Macau), and Southeast Asia (10 ASEAN member states). These two areas are intended to reveal further structural features of the regional economic conditions which are often concealed in accountings and assessments of the economy in the wide region, such as Asia, East Asia, or the Asian-Pacific. 10 These economic conditions form the regional economic structure that motivates, incentivizes as well as constrains countries in seeking economic cooperation and integration in the region, and hence link national economic growth to regional economic development. Several observations can be made of the regional economic structure and their change over the quarter century from the late 1980s. First, there is a clear shift in the region s economic structure (Table 1). In the 1980s, the material center of the regional economy is Japan. In the 2010s, China outweighs any other countries in the region in economic activity, output, and capacity, consumption, investment and trade, and in much larger Table 1 Relative Position of Japan and China in East Asia (NEA and ASEAN),, (%) GDP Capital Stock Consumption Investment Merchandise Export Merchandise Import Japan China Japan China scale than Japan was in the 1980s. China s GDP, for example, has 54% of the total GDP in the region (NEA+ASEAN) in, while Japan had 40% in. For another example, China has 71% of the total investment in the region in and Japan had 48% in. This fact is uniquely important given that regional economic cooperation and integration was largely driven by Japan in the early years and there has been an underlying tension from the very beginning between a Pacific vision/model and an East Asian one in regional institution building. Second, ASEAN s position in relation to NEA in the regional economic structure has not much changed, and remained relatively small (Table 2). ASEAN s position to China and Japan, however, has significantly changed, in the reverse direction. 10 For example, the study on trade patterns and global values chains by World Trade Organization and IDE-JETRO, WOT and JETRO, Trade patterns and global value chains in East Asia: From Trade in Goods to Trade in Tasks, Geneva: WTO,, treats major East Asian countries plus United States and India as Asia, a region for intra region and inter regional trade analysis.

8 Huang ADB Forum 2014 Paper Page 8 of 27 ASEAN s merchandise export and import, for example, were more than 4 times larger over those of China in. In, these shrank to 49% in export and 55% Table 2 ASEAN s Relative Position vs. NEA in Regional Economic Structure GDP Capital Stock Consumption Investment Merchandise Export Merchandise Import ASEAN/ NEA (%) ASEAN/ China (%) ASEAN/ Japan (%) in import. ASEAN s GDP was 48% of China s in, and became 24% in, The same pattern is found in investment, with 45% in, and 14% in. In relation to Japan, the situation is reversed. ASEAN s export and import were 52% and 74% of Japan s in, but 157% and 168% in. This shift in regional economic structure is important as it indicates that the progress of regional institutions of particular scope and purpose and membership over the past 30 years, from the Pacific Economic Cooperation Council (PECC) to Asia-Pacific Economic Cooperation (APEC), and from ASEAN+3 to the East Asian Summit (EAS), have not in a positive correlation with the pattern and dynamism of economic growth and development in the region. Moreover, much of the bargaining, negotiation and politics in the development of different platforms proposed for regional economic cooperation and integration involved the problem of the scope, membership and the steering-ship of the process of institutional building in the region, centered around debates over Japan s leadership, 11 the ASEAN centrality, 12 and the United States as the principal mover and shaper of economic regionalism in the Asia-Pacific. 13 Third, the relative positions of the major out-of-region parties to the regional economic structure, India, Australia, United States and Russia (Table 3), have declined across the board except in the case of India. This, one can argue, has much to do with the much faster growth of India itself than a decline of either ASEAN or NEA. The actual position of India to the regional economic structure is 11 See T J. Pempel, Gulliver in Lilliput: Japan and Asian economic regionalism, World Policy Journal. 13(4): 13-27, 1997; Terada, Takashi, Directional leadership in institution-building: Japan s approaches to ASEAN in the establishment of PECC and APEC The Pacific Review, 14(2): , 2001; Nobuo Okawara and Peter. J. Katzenstein, Japan and Asian-Pacific security: regionalization, entrenched bilateralism and incipient multilateralism, The Pacific Review 14(2): , See Peter A. Petri and Michael G Plummer, ASEAN Centrality and ASEAN-US Economic Relations, Policy Studies 69, East-West Center, Yang Razali Kassim, East Asian Regionalism: End Of ASEAN Centrality? RSIS Analysis July 9, Joakim Öjendal, Back to the future? Regionalism in South-East Asia under unilateral pressure, International Affairs. 80(3): , Mark Beeson, American hegemony and regionalism: The rise of East Asia and the end of the Asia-Pacific, Geopolitics 11 (4): , 2006.

9 Huang ADB Forum 2014 Paper Page 9 of 27 still very weak, particularly in export and import. Australia and Russia have become less significant to the regional economic structure. This is more of the case to NEA than to ASEAN. The United States relative position has also significantly declined though it is still dominant with ASEAN. These structural conditions again Table 3 Relative Position of External Parties to Regional Economic Structure, GDP Capital Stock Consumption Investment Merchandise Export Merchandise Import India /ASEAN /NEA Australia /ASEAN /NEA USA /ASEAN /NEA Russia /ASEAN /NEA suggest that the overall direction of the development of multilateral institutions have not matched with the underlying economic conditions in the region where the prevailing platforms have continued to seek to expand and brings more countries, particularly those external to East Asia into the framework and process, and raise further questions over the vision and purpose of these regional institutions, whether they are building a FTA area which requires rearranging bilateral trade relations for mutual gains, or an economic community which would integrate the growth of the national economies, or their sectors and industries, into the structure and process of production, market, capital and consumption in the region. Preferred or free trade arrangements can be formed between and among countries without them necessarily being in/from the same region. An economic community, with the prospect of forming a single market, does tend to evolve in a geographic area, largely for economic reasons, but also for political, social and international reasons. In the actual process of development of regional institutions, this distinction may not be necessary or even useful. Indeed, open regionalism in East Asia can, in some way, be also seen as being open or hybrid precisely in this sense. On the other hand, for a region that has been long in tension and debate over who are building what Asian regional institutions for what purpose, this distinction can be helpful for our understanding of why and how certain institutional arrangements have prevailed and in explaining why the overall progress of regional institutions building in the Asia-Pacific has seen a lot of proposals and initiatives but not much real progress as many would have expected to see already.

10 Huang ADB Forum 2014 Paper Page 10 of The Evolution of Regional Institutions in the Asia-Pacific We have looked at the basic economic conditions relevant to multilateral institution building in the region. The relations and structural shifts identified are not necessarily causal, a case of which would require further evidence and analysis which is not intended here. They however reveal some of the key features of the regional economic structure that motivate and constrain the countries in advancing projects of multilateral institutions and influence the scope, shape and purpose of the emergent institutions. This is the context in which we understand and analyze TPP and RCEP. But before we do that, let s briefly look at the major projects of multilateral institutions in the region in the past few decades. Contemporary efforts to develop a regional platform for economic cooperation and integration in the Asia-Pacific started in the 1960s, driven largely by Japan s rapidly growing economic interests, capacity and influence regained in the early Cold War decades. The Asian Development Bank (1966) and The Pacific Trade and Development Conference (PTDC, 1968) are some of those initial projects. These initiatives arose on the underlying structure of real economic activities and movements across the region in production networks, exports and imports, and massive investment, from Japan to Southeast Asia. The main thrust of these early efforts was to expand Japan s economic growth to the region, particularly to Southeast Asia, and bring them into the structure and process of production, market, capital and consumption. In a broad historical and international context, this is logical that industrialization and development of countries at different stages interacted and pushed to create a larger area than a single nation for greater efficiency in resources, market and production. The difficulties arose from the fact that this was led by Japan. Given the political and geopolitical circumstances, Japan was not strong or capable enough to advance these initiatives effectively on its own. In reality, these initiatives were packaged in a broad Pacific framework. Pacific Economic Cooperation Council (PECC, 1980) for example suggests such trend developed well into the 1980s. The Asia-Pacific Economic Cooperation (APEC, ) took this Pacific dimension much more seriously. It brought in the interests of the United States along with many other on the Pacific Rim into the process of East Asian regionalism. Reflecting the world economic structure and the prevailing international economic policy and ideas of the 1990s, APEC was to promote trade and investment liberalization in the Asia-Pacific, not just in Southeast Asia, but Japan, other newly industrializing countries (NICs S. Korea, Hong Kong, Taiwan, Singapore), and later on, China, countries that manufactured their miracle economic growth, industrialization and development on a model that features the separation of domestic and international markets, state managed competiveness, and barriers to foreign imports and investment. The principal vehicle to achieve this was free trade and investment by 2010/20, so called the Bogor Goals APEC Leadership Summit in Bogor, Indonesia in 1994, declared to achieve free and open trade and investment by 2010 for industrialized economies and by 2020 for developing economies. These have become known as the Bogor Goals.

11 Huang ADB Forum 2014 Paper Page 11 of 27 Figure 2 Scope and Evolution of Multilateral Institutions in the Asia-Pacific (Size of GDP in PPP ) ASEAN APEC ASEAN+3 JACK RCEP TPP APEC has seen much of what it was intended to achieve. The region is much freer than 30 years ago. Trans-Pacific flows of trade and investment have grown impressively in both directions. 15 Along with these are some further developments in the region that have brought to the forefront of some of the underlying issues in regional institution building in the Asia Pacific. First, the phenomenal economic rise of China has brought significant shifts in the regional economic structure. Second, trade and investment liberalization in the Asia-Pacific is accompanied by massive movement of global manufacturing capacity, along with capital, technology, export and import, into East Asia. Third, ASEAN s position in the regional economic structure has not much changed. Finally, there is an exponential expansion of economic wealth, output, capacity and influence of Northeast Asia, much because of the economic rise of China in recent decades, adding to the already global economic power and influence of Japan. All of these has brought in a much higher level of intra- and inter- area economic exchange, interdependence and integration within and between ASEAN and Northeast Asia. The study on the trade patterns and global value chains in East 15 So much so that some start to treat Asia and US as an Asia-US region (WTO-IDE-Jetro, ).

12 Huang ADB Forum 2014 Paper Page 12 of 27 Asia by WTO and IDE-Jetro, 16 for example, provides excellent evidence and analysis on this high level and the particularly pattern of economic interaction, interdependency and integration in East Asia. The development of regional production networks in , for example, shows that the regional production networks have become more substantive and sophisticated in East Asia. The center of the network has shifted to China, pushing the United States and Japan to the periphery. On development of supply chains in East Asia, the study shows that the supply chains towards China are characterized by a high degree of fragmentation and sophistication, incorporating substantial amounts of value added from each country involved in the region. 18 In 1985, the network was quite thin, with a singular circular centered on Japan from Malaysia, Singapore and Indonesia. In 2005, there are more complicated sets of networks in the region, all centered ultimately on China, from not only all major ASEAN countries, but more substantively from NEA economies, Korea, Taiwan, Japan. Within ASEAN and NEA respectively, there are further networks centered on Singapore in ASEAN and China and Japan in NEA. The same pattern is also found in cross national production linkages 19 where the study found high complementarity of the national production systems in strength of linkages or interconnectedness between countries in East Asia, both as a cause and a result of the deepening economic interdependency between countries. 20 In industrial specialization of countries in East Asia, 21 while the study concludes diversity and heterogeneity among the countries, one can see from the evidence provided that there are clearly two sets of countries, ASEAN and NEA, and each set forms the same, complete range of areas of socialization, which suggests a strong level of complementarity among countries within ASEAN or NEA. In ASEAN, Singapore has high specialization on the high end of the codes of industry sectors, and followed, in the order of level of specialization, by Thailand, Malaysia, Indonesia, and the Philippines toward the old end. In NEA, Japan leads the chart, along with Korea, Taiwan, and then China. On intra-regional export and import, 22 the study found that for most of the countries, the share of intra-regional imports of intermediate goods increased significantly between 1995 and The intra-asian trade represented more than half of their trade in intermediate productions. Further look at the data, one 16 WTO and IDE-Jetro, Trade patterns and global value chains in East Asia: From Trade in Goods to Trade in Tasks, Geneva: WTO. 17 WTO and IDE-Jetro,. Figure Evolution of regional production networks , on p ibid. p WTO and IDE-Jetro,. Figure Development of cross-national production linkages, , on p Ibid. p WTO and IDE-Jetro,. Figure Industrial specialization of selected Asian countries, 1985 and 2005 (index), on p WTO and IDE-Jetro,. Figure, Intra-Asian imports and exports of intermediate goods, value and shares in total trade, 1995 and 2009 (in billions of US$ and percentage), on p. 87.

13 Huang ADB Forum 2014 Paper Page 13 of 27 can see ASEAN countries have higher shares of their intra-asian trade in their total trade of intermediate goods than NEA countries, with the exception of Hong Kong which has more than 83% of its total trade is intra-asian, presumably most of it with China. ASEAN is more dependent on intra-asian trade than NEA. Finally, on contribution to employment opportunities creation by source of demand, 23 domestic demand is dominant in employment creation in NEA countries, 77% for China, 87 for Japan, 73 for Korea, and 60% for Taiwan, much high than ASEAN countries, with Singapore, 37%; Malaysia, 39%; Thailand, 63%. For employment opportunities created by foreign final demand, China, US and Japan are primary sources across the board. ASEAN 4 final demand is more important for ASEAN countries than for NEA countries. It is evident from the above that there is a significant increase in the extent, complicity and sophistication in intra-area economic exchange, interconnectedness, complementarity and interdependence between and within AEAN, NEA, and East Asia as a whole. There is significant growth in the substance of a regional economy in ASEAN, NEA, and East Asia. NEA has more economic substance on their own, is dominant in their economic relations with ASEAN which is part of their overall economy on the global scale. The intra-area relations have a much high share in ASEAN s economies. Over these areas of growing economic interaction, interdependence and complementarity, there have been efforts to develop multilateral institutions for economic cooperation and integration. ASEAN has been making steady process on this. ASEAN was not an economic institution when it was first set up in After the end of the Cold War, it has significantly expanded its functions and purposes. In the Declaration of ASEAN Concord II in Bali, Indonesia, in 2003, ASEAN decided to establish by 2020 the ASEAN Community, including the ASEAN Economic Community. In 2007, a master plan was adopted for the establishment of the ASEAN Economic Community by The envisaged Economic Community includes a single market and production base, a highly competitive economic region, a region of equal economic development and a region integrated into the global economy. 24 On Northeast Asia, there have been quiet but also steady efforts among China, Korea and Japan to develop multilateral arrangements and institutional framework for economic cooperation and integration in NEA. Japan, China and Korea moved out of the ASEAN+1 and ASEAN+3 processes in 2008 to develop tripartite arrangements on their own. The three have set up mechanisms for currency cooperation, investment agreements, and stared a FTA negotiation. They started to have their annual trilateral summit in 2008, set up their Trilateral Cooperation Secretariat secretary in. At the 2012 Summit, they formed the Trilateral Agreement for the Promotion, Facilitation and Protection of Investment and launched the process of the Trilateral FTA negotiations. Japan and China seemed to be on the same page around for the need of a real East Asian community on the basis of the NEA economies, with Japan and China 23 WTO and IDE-Jetro,. 24 ASEAN Economic Community (AEC) Blueprint, 2007.

14 Huang ADB Forum 2014 Paper Page 14 of 27 working together. However, politics in each of the countries and the evolving regional geopolitical environment have not been entirely behind the momentum. Change in government in Taiwan and Korea opened policy space for them to develop a closer economic relation with China, and to engage and position themselves in the shaping of the Chinese economy. Taipei and Beijing established a PTA arrangement, Economic Cooperation Framework Agreement (ECFA), in 2010, and are working on Phase II of that. Beijing and Seoul are working toward concluding a FTA agreement by the end of this year. Politics between Beijing and Tokyo has gone in a different direction. With the gradual firming up of the strategic relations between Japan and United States on the one hand, and China and the United States on the other, the idea of a NEA-centered economic community has become politically and strategically inappropriate. The US rebalancing in Asia moved the countries in the region back to its traditional lines of allies and friends, lines that cut through the NEA economic community. In some way, the economic dimension of the rebalancing brought on the old tensions between a Pacific vision and an East Asian vision of a regional economic community. This is the overall background from which we see the emergence of TPP and RCEP. The above analysis has shown that significant efforts in building regional institutions in organizing economic cooperation and integration in the region are marred with the changing regional economic conditions and shifts in the regional economic structure. Along with the successive and competing ideas and projects for a regional economic community, we have witnessed an unprecedented economic growth, interaction and integration in the region. These regional institutions however are not built on a clear, consistent, coherent economic rationale for regional economic institutions, whether they are for trade and investment liberalization, or for an economic community to promote a single market. They are not on a coherent area of economic substance that would justify economic integration for a single market. As the financial economy to the real economy, these regional institutions have somewhat detached from the regional economic conditions and structure. Without such a clearly defined economic substance to support these regional institutions, how the process of multilateral institutions contribute to economic growth at the regional and national levels is not always clear. Without that, also, the scope, membership and purpose of these institutions are shaped predominately by political interests and considerations of the principal stakeholders. This has led to the long, but piecemeal process of building multilateral institutions for the region, with some level of frustrations for the parties concerned to move substantially further beyond the initial impetus. Views are different as whether regional economic institutions have been successful or have achieved what they are expected to achieve. The intended or perceived purposes of these institutions - whether they are for a FTA area, and/or regional integration - have evolved and shifted over time and are contested by member states from time to time. One explanation for why we have not been unable to settle on a regional framework and make progress beyond institutional building, is perhaps the initial platform, APEC, is too broad in scope and membership for countries to work out arrangements on complex issues and interests in modern trade, investment and economic organization. The Doha Rounds have not worked so far, and APEC is not too far away from that level of scale and complexity in the

15 Huang ADB Forum 2014 Paper Page 15 of 27 interests, relations, and technical mechanisms involved at which the Doha logic would ultimately prevail. More importantly, without a clear economic rationale for building a multilateral institution, and indeed, without a clearly defined economic substance in a region that multilateral institutions are designed to promote, politics prevails. Politics prevailed in the projects of regional institutions in the Asia Pacific, with top-down approaches to working out a pre-set framework over a politically contested area that sees little logic and coherence of an economic community. It s not just that politics prevails. Prevailed has the politics of major powers, as small members do not have the scale and capacity to be effective in influencing the shaping of the multilateral institutions. TPP and RCEP reflect some of the lessons we learnt from building multilateral institutions in the region in the past decades. The basis for TPP, P4, came to exist in 2005 among 4 small countries with a clear and single purpose, for a conventional FTA among themselves. Given the ineffective experiences of building the mega regional institutions and the top down approach to building them in the past, this is a clear, simple and doable project. Whether it was intended or not, the framework also gave the small countries the collective power they need to advance their interests in larger multinational platforms or in their bilateral relations with major powers. This successful project was quickly and timely picked up by others, notably the United States. TPP was proposed to build on the extension of the P4 project. The emergence of TPP thus has been through a bottom up process. It is bottom up also because it reflects a bit more closely the economic conditions in the region both in terms of an economic community for multilateral institutions, and the distribution of the economic interests and capacities required for the proposed arrangements to work. To the extent it has expanded so far (including 12 countries now), one can still see this as having a relatively smaller scope. It reflects a striking element in the shifting regional economic structure that Northeast Asia and Southeast Asia may have to be treated separately in the building of multilateral institutions, as the two collectively bring in distinct and different sets of economic interests, activities and capacity, and the efforts in the past often mismatched the two in their role and position in the development of the regional institutions. RCEP, under negotiation since 2012, are moved largely by two immediate factors. First, RCEP is in fact a step forward from the ASEAN Plus processes, not an alternative starting from scratch. The parties to the negotiation process are the same parties to ASEAN Plus Six, except one of the six is India rather than Russia. It is in some way an inherent of the East Asian vision. Secondly, RCEP is clearly influenced by the shaping of TPP. The ASEAN Plus processes were not able to move forward in the 2000s largely because the uncertainty over the direction of the further development of multilateral institutions for an economic community in East Asia: whether it would include the United States (and Australia and New Zealand) on the one hand, and India and Russia on the other. The onset of TPP removed that concern. RCEP is influenced by TPP also in the nature and quality of the arrangements being negotiated. Inspired by TPP, RCEP committed to achieve a modern,

16 Huang ADB Forum 2014 Paper Page 16 of 27 comprehensive, high-quality and mutually beneficial economic partnership agreement. 25 In other words, RCEP and TPP are more than a FTA in its conventional sense. They are to develop a workable high quality template for regional integration - than immediate gains from trade. 26 As Petri, Plummer and Zhai observe, [TPP] would cover issues such as services, investment, competition, and regulatory coherence. These issues are widely seen as crucial for the next wave of economic integration and often involve sectors in which the United States has comprehensive advantage. 27 RCEP and TPP therefore have inherited a key feature of previous projects of multilateral institutions in the region. They are processes and frameworks for a FTA area but also platforms for deeper economic integration. The difficulties in the membership of these two illustrate this further. For a FTA area, it does not surprise anyone that Vietnam, Singapore, Chile, Brunei, New Zealand seek trade liberalization with, for example, US and Japan. But for economic integration, either to advance the interest and influence of the national economy in the area or to build a genuine, coherent, single market, do these countries constitute an economic community, or potentially they would? The problem of the tension between the purpose of the multilateral institutions and the economic foundation for these institutions to work has led to their ineffectiveness in the past in either developing a FTA area or promoting economic integration. Mixing the purposes without a clearly defined economic rationale increases the costs for institutional commitment, as, in these two cases, a simple commitment to a FTA area would have to come with a more costly commitment to broad economic obligations for an economic community and potentially a single market. On the other hand, the broad economic commitment to regional integration lacks the support of a clearly defined economic community against which parties can assess the cost and benefits of their commitment to their position in the economic community. 3. Growth Conditions, Priorities and Strategy of Key Countries The shaping of regional economic structure is also closely related to the conditions, structural change, and shift in growth strategy and priorities of the countries involved, a factor that has not always been properly reflected in our thinking and analysis of regional institutions. Post-World War II economic growth and development of East Asian economies, particularly those of Northeast Asia, have significantly changed the global economic structure. These economies have in turn reached a point where the growth strategy and development model they have relied upon for their successful economic growth and transformation in the past are no longer effective or useful. Xiaoming Huang looked at the growth pattern of Japan, Korea, Taiwan, Singapore and China for the 50 years from and found an average growth rate among them over the period at 7.93%. Huang uses 8% therefore to define and identify the period of rapid economic growth for each 25 Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership. 26 Petri, Plummer and Zhai : Petri, Plummer and Zhai, : 6.

17 Huang ADB Forum 2014 Paper Page 17 of 27 growth at the annual rate above the 8% (Figure 3). 28 Japan had its rapid economic growth period in the 1950s through 1970s. Structural transformation that required for Japan to continue to grow and establish itself as a leading economy in the world economic structure had not been entirely successful. The currency arrangements, the Plaza Agreement 1985, forced significant depreciation of the US Dollar to the Japanese Yen. Trade arrangements with the United States, such as, voluntary export restraints in the 1980s and subsequent Japanese transplants in the United States, and the Structural Impediments Initiatives in /90 were part of the pressure on Japan to be more open for imports, and shift its manufacturing capacity to the United States. In the Asia-Pacific part, Japan s strategy in regional economic relations, as reflected in the Fukoda Doctrine of 1977, to advance relations with ASEAN and build production networks across Southeast Asia, were politically complicated, overshadowed by the emerging Pacific framework for regional economic institutions. While international arrangements and developments had not supported the economic structural reform necessary for Japan at this stage of its development, domestically, much of the accumulated capital flooded to real-estate and to the finance economy, rather than the real economy. The institutional setting that had facilitated the organization and promotion of its rapid economic growth in the early decades started to fall apart. T. J. Pemple detailed in his analysis of the regime shift in Japan s political economic model in the 1990s. 29 The LDP dominance and the state-business alliance for economic growth broken down. The new electoral system, MMP, introduced in 1993, institutionalized alliance politics and party politics that made a coherent economic policy and growth strategy very difficult to form, if not all impossible. The 1990s became a lost decade for Japan for economic growth. And then another decade added on. Japan s normal GDP in 2013 was the same level as it had in Abenomics is addressing this in a quite interesting way, to revitalize the Japanese economy. The monetary and fiscal components, including stimulus package and radical quantitative easing, and expansion of public spending, are to inflate the economy. These are largely Keynesian inspired, consumption driven economic growth strategy. They are easy to implement and quick to come into effect. The structural reform part, to increase birth rate, reduce corporate tax and introduce competition in the agricultural sector, has taken time to roll out. But they are institutional reforms to create a better environment for economic growth. They are not growth itself. 28 Annual rate on 5 year moving average. On Figure Grey box on each is its rapid growth period. The grey data line on the background was the growth rate of the United States as a reference point. See Xiaoming Huang, The Rise and Fall of the East Asian Growth System : Institutional Competitiveness and Rapid Economic Growth London and New York: Routledge, Pp T. J. Pempel, Regime Shift: Comparative Dynamics of the Japanese Political Economy Cornell University Press 1998.

18 Huang ADB Forum 2014 Paper Page 18 of o 277 Figure 3 Post WWI Patte ernss of Growth in East Asia Sources: Huang 2005: Japan ss rapid ecoe nomic growth of the 1950s too 1970s was built on a parp rticular growth model thatt combinedd different growth factors - capital, production, consumption, essentiall for an a economyy to operatee - frof om across the national boundaries inn a larger economic platform: financingg andd manufacturing in Japan andd markets and consumption outso side JapJ pan. Thee changee inn the international economicc environment in thet e 1980s complicated the working of this growth mo odell for Japan. In the meam antime,, ass it moved upp inn the growth ladder, Japan, driven by thee logicc off comparative advantage, graduallyy vacated from laborr intensive industries, movedd too capitall and technology intensive industry sectors, shifted low level manufacturing too East Asia,, Southeastt Asia, anda d to China, providing real substance to thee flying geese area of economic integrationn in the region. Given the limited domestic basis forr a coherent economyy on its own,, Japan ss sustainable economic growth does requiree a large internationall areaa too providee support in market/ /consumption, immediatee goods supply, capital, and pro oduction, as well as labor. In this sense, ASEA EAN anda d JACK (Japan, China andd Korea) aree important for f Japan ss economicc revitalization. In I a way, JACK is perhapss morem e valuable than ASEA EAN given Japan ss experience with the Pacific-vision informed regionall institutions soo far and the factt that JACKK iss more substantivee and complementarily than ASEAN. Abenomics does not addresss how Japan wouldd do to formm a mor re favorable internationall economicc environment to achievee that.. But judged in some of f itss initial steps in jugglingg overr TPPT P and RCEP, Japan s thinkingg on this is nott that clear. Itt seems Japan, at least underr the current gov vernment, hass allowed its consideration of o the valuee of TPPP and RCEPP for its economic growth to bee influencedd by its broader strategic interestss and political conditions. Japan however iss in bothb h TPPP and RCEP. China inn many ways is like Japann inn the ss when its rapidd economic growthh has reachedd a pointt thatt the structural conc nditions that madee the rapr pid economic growth in the pastt 30 years possiblee are nott alll that effective. 3 0 China s growth rate fell f below 8% 8 As many of its felloww Eastt Asiann economies, China s rapid econe nomic growthh was builb lt on institutional com mpetitiveness where the problem of the initiall lack of capital andd consumption 30 A

19 Huang ADB Forum 2014 Paper Page 19 of 27 in the past few years, indicating an end to its rapid economic growth. The growth conditions that supported its particular model of growth organization and promotion - export driven, foreign investment led, with domestic consumption long underdeveloped - have significantly changed. China s production capacity greatly exceeds what its exports can absorb. It has more capital accumulation which as in the case of Japan in the 1980s, does not all go into investment in the real economy. New growth basis is needed. Deeper structural reforms announced by the ruling Party at its 18 th Party s Congress late last year laid out a long list initiatives for structural rebalancing and growth strategy adjustment. As a strategy for economic growth, the reform program essentially called for promoting consumption (vs export and investment), as a principal source of growth, and more balanced growth for broader economic and social interests tax reform to close up income gaps among different income groups, urbanization for urban-rural integration, further reform in state-market relations for more competition and better regulation, etc. In China s policy and strategy in response, preference for structural reform over monetary and fiscal policy of stimulus is clear. China tried the fiscal and money policy of stimulus and quantitative easing during the last few years, but the more comprehensive structural reform program intended to deal with the problems at a deeper level. To stimulate domestic consumption, for example, the reform program seeks a more evenly distribution of income so that more purchasing capacity would be effective in growth generation; and urbanization which will ease labor pressure and pressure for cost to rise, but also enhance the consumption capacity of the wider sectors of society. Unlike Japan today, China is still largely a manufacturing superpower. Simply the expansion of domestic consumption will not be sufficient or quick enough to absorb production capacity and reduce employment pressure. Moreover, global value and supplies chains are essential for the Chinese economy as it reaches out globally and searches for most efficient access and deployment of growth factors. A large amount of capital China has accumulated over the decades allows it both the desire and capacity to expand its economic activities around the world and build the worldwide basis to support and sustain China s economic growth at the desired rate. China s international economic interests are global. They are more than just trade but to develop a global division of labor and distribution of resources for the sustainable growth of the Chinese economy. It is evident that the global expansion of the Chinese economy brings China a significant presence and influence in the region, and sees broader economic interests, and diverse and innovative forms of and organizational efficiency was compensated with the huge influx of foreign direct investment, and open access to international market, as well as low production and labor costs. These factors were effective for China s rapid economic growth as it was still able to separate and manage the interaction of the domestic economy and the international economy. The state was able to create an institutional/policy environment that attracted foreign direct investment, promoted exports and kept production and labor costs low. See Xiaoming Huang, Institutional competitiveness and institutional aging: the dynamism of East Asian Growth," Journal of the Asia Pacific Economy 13 (1): , and Xiaoming Huang, The Rise and Fall of the East Asian Growth System : Institutional Competitiveness and Rapid Economic Growth London and New York: Routledge, 2005.

20 Huang ADB Forum 2014 Paper Page 20 of 27 its economic activity in the region going significantly beyond trade. Even on trade, it is perhaps China that now holds up the banner for trade and investment liberalization. Moreover, China s economic growth and industrialization in the past 30 years took place in a significantly different international economic environment where it was able to rely heavily on foreign direct investment to finance its growth, and international markets for its productions. China is a principal beneficiary of APEC and of the larger liberal institutional environment for international trade and investment. Like Japan 40 years ago, and perhaps in a much larger scale, China has developed great interests and capacity to generate and shape economic activities in the region. as its economy is industrializing, it draws global manufacturing capacity to China and Asia, along with capital, resources and technology, and the devolvement of market and production networks and supply chains. The economic rise of China has affected the economic basis for multilateral institution for the region. Even when the Pacific vision prevailed in the 1990s, debates, proposals and efforts never stopped for an alternative regional institution on the basis of the East Asian region. Malaysian then Prime Minister Mahathir proposed in 1990 a free trade zone, East Asia Economic Group (EAEG), consisting of ASEAN, and China, Japan and Korea. No one then had both the interests and capacity to advance the idea further. The idea was picked up again, through the regular meetings of exchange and consultation among ASEAN countries and China, Japan and Korea since the late 1990s. ASEAN Plus Three (APT), so named, was considered a strong candidate for an East Asian regional economic community. The idea reflects a gap between predominately Pacific-vision informed initiatives and efforts in regional institution building thus far and the underlying, evolving regional economic structure that provides economic substance for an economic community in the region to develop, and shifts in the concentration of economic activities, outputs and capacity as well as consumption, investment and trade to East Asia, and indeed to Northeast Asia. The economic rise of China in the regional economic structure added much to the trend in the structural shifts. Korea and Taiwan are seeking to position themselves in the region and with the regional institutions. The gravity of the Chinese economy can and indeed are drawing them to integrate more with the Chinese economy than before. Taiwan s rapid economic growth ended in the mid-1990s in a less violent way than many of its fellow Asian economies in the Asian Financial crisis in Since then, its strangled relations with Beijing have largely marginalized it in the evolving multilateral institutions in the region. At the same time, very close, interdependent economic relations developed between Taiwan and China. Taiwan has been a main source of investment, production networks and channels for international market. In 2010, a preferential trade agreement, Economic Cooperation Framework Agreement (ECFA), was signed between China and Taiwan. Along with the Closer Economic Partnership Arrangement between China and Hong Kong in 2003 (CEPA), between China and Macau in, closer economic arrangements within the greater China area have taken shape. The same underlying economic structure and growth dynamics in Northeast Asia have also driven Korea to have invested substantially in its economic relations with China. Korea, Taiwan and Hong Kong were the second tier economies in the

21 Huang ADB Forum 2014 Paper Page 21 of 27 rapid growth and expansion of East Asian economies. As in Taiwan, South Korea is an important part of the East Asian network of production, capital, industrial progressive upgrading and technology development, and market share and market access share. Korea s post World War II rapid economic development raptly ended in the mid- 1990s under the crash of the Asian financial crisis. Korea has continued to follow the path of industrial upgrading and move towards capital and technology intensive industries, and revitalized its economic on a new, more solid international basis, of which its substantively boosted economic relations with China is a crucial. China is South Korea's largest trading partner and South Korea is China's third largest trade partner. The two countries pledged to conclude a FTP agreement this year. The economic power, capacity and influence of these countries individually and together as an area are of global scale. Moreover, these are the Asian model economies that have successively gone through stages of industrialization and rapid economic growth over the past 60 years on a very similar model of organizing and promoting economic growth and industrialization. In a picture perfect goose-flying pattern, with Japan leading, followed by the NICs, and then by China, Northeast Asian economies are very complementary in their stages of economic growth and development; industrial structure; production networks and value and supply chains; market, technology and capital. There is a high level of economic interdependence among these economies in the great China area and among China, Korea and Japan. ASEAN has been a key beneficiary of the process of regional institution building. Southeast Asia was a primary area in Japan-led regional economic expansion and integration. ASEAN however emerged as a key player in the development of multilateral institutions in the region in the post-cold War years. In looking for ways forward for more effective and appropriate institutional frameworks beyond APEC in the 2000s, ASEAN found itself in the central position in various alternative proposals and ideas for a regional economic community. ASEAN+n symbolizes the ASEAN centrality, including ASEAN+One (China, Japan, or Korea), ASEAN+Three (China, Japan and Korea), ASEAN+6 (China, Japan, Korea, Australia, India, New Zealand), and the East Asian Summit (ASEAN+6+USA and Russia). The ASEAN centrality is facing significant challenge. When in 2005, Japan proposed an East Asian Community and Australia offered an Asia-Pacific Community as new platforms for organizing regional economic cooperation and integration, the question of where ASEAN fits dominated the subsequent debate, along with whether the US would be in or out. At a more substantive level, ASEAN s position in the regional economic structure has not much changed over the years, and in some way, has relatively declined. Overall it has remained marginal in the regional economic structure. ASEAN countries have been at the center of the waves of efforts in building regional institutions for economic community, connecting them to Japan dominated Northeast Asia in the 1960s and 1980s, to US dominated Pacific in the 1980s and 1990s, and more recently, to a changing East Asia where China is increasingly dominating. One is wondering what this centrality means for ASEAN? It can mean, for example, these regional institutions are essential for ASEAN. This is probably not what that is meant but it should. The ASEAN s centrality should mean that ASEAN should be the principal beneficiary of the regional institutions. The ASEAN centrality can also mean, as

22 Huang ADB Forum 2014 Paper Page 22 of 27 Petri and Plummer suggest, that ASEAN, with its internal coherence and successful relations with its external partners, can serve as a benchmark for regional integration. 31 One step further from here, the centrality also means ASEAN should be the principal mover and shaper of regional institutions and ASEAN plays a central role in regional integration policy decisions. Regional institutions have continuously evolving in successive frameworks and platforms. For ASEAN to be a central player in regional institutions, it requires a substantive level of economic interests, activities and capacities to be able to influence the shaping of regional institutions. The evidence is weak that ASEAN or any of ASEAN countries has such scale and capacity. Multilateral institutions have special value for ASEAN countries precisely because the relatively insignificant weight of their economies in the region. Literature suggests that multilateral institutions give small and weak countries a collective bargaining power and delivering capacity. ASEAN countries have been actively pursued economic integration and political cooperation among themselves - an ASEAN economic community for regional economic integration and an ASEAN political-security community for political and security cooperation by This seems a much more effective way of building up such capacity. Finally, the United States. The question of US economic growth, strategy and priorities is a large subject. We focus here only on one important aspect that relates Washington s macroeconomic policy and growth strategy to its international policy and strategy in the Asia-Pacific. Trade and investment liberalization in the Asia-Pacific in the past 20 years has been accompanied by massive movement of global manufacturing capacity into East Asia. This is facilitated by successive waves of industrialization and economic expansion of East Asian countries, which created, or at least significantly contributed to, what is called global structural imbalance in Washington. 32 Manufacturing is an important part of the national economy. It involves capital and technology, labor and employment, income and consumption, and export and import. For Washington, APEC has facilitated trade and investment liberalization and therefore contributed to economic growth and prosperity in East Asia. It may have also contributed to the erosion of competitiveness of the real economy of the United States and to the social and economic tensions arising within the US economy that are believed to suppress the potential for its sustainable growth. This has a significantly impact on US s thinking and approach to regional institutions in East Asia and perhaps formed the basis of the economic dimension of the US pivot to, or rebalancing in, Asia. The intention and design of the TPP reflects much of Washington s thinking of US s economic relations with the 31 Petri and Plummer 2013: ii 32 Jane Sneddon Little, Global Imbalances and the Evolving: World Economy, Boston: Federal Reserve Bank of Boston, Robert A. Blecker, Global Imbalances and the U.S. Trade Deficit, pp in Barry Z. Cynamon, Steven Fazzari, Mark Setterfield, After the Great Recession The Struggle for Economic Recovery and Growth, Cambridge University Press Stephen J. Ezell and Robert D. Atkinson, The Case for a National Manufacturing Strategy (Information Technology & Innovation Foundation, April. White House: Fact Sheet: The President s Plan to Make America a Magnet for Jobs by Investing in Manufacturing.

23 Huang ADB Forum 2014 Paper Page 23 of 27 Asia-Pacific and its strategic interests and purposes in regional institutions that appear to go far beyond trade and investment liberalization in the Asian-Pacific. 4. The World Economic Structure and multilateral economic institutions in the Asia-Pacific The shaping of the regional economic structure in the Asia-Pacific is an inevitable, and indeed critical, part of the global economic structure, given how economies in the region are closely integrated with the global economy in the first place. Most of them are more connected to the world economy than to the regional economy, and many of them are now the principal components of the world economic structure. The shaping effects of the global economic structure come in through the influence of the world dominant economies, notably Japan and China in NEA; the prevailing economic ideologies, values and policy priorities of the time; and the institutions and processes in which the world economy is governed. These forces have formed a strong drive behind the efforts to build regional institutions in the Asia-Pacific. The global distribution of economic activities, output, capacity as well as consumption, investment and trade in the 1980s (Figure 4) features the emergence of three areas of concentration of these economic forces and factors of global significance: North America (largely the United States), West Europe (largely EEC) and East Asia (centered around Japan). The United States had about a quarter of the world GDP, capital stock, consumption. EEC had around 20-30% of the world s investment, exports and imports. NEA had around 15% of the world in these factors except investment where gross capital formation was a quarter of the world dominated. Neoliberal economic values and policy priorities of the 1980s and 1990s, predominantly in the US and the UK, and other advanced economies, pushed for the opening up of East Asia economies, and for a unified, integrated institutional platform for international economic activities, primarily for forwarding flows of trade and investment to East Asia. The late 1980s also witnessed worldwide efforts to develop regional trade blocs, and economic communities on a single common market. Negotiations were under way for a trade bloc in North America among Canada, Mexico and the United States. NAFTA went into force in Efforts to build a single common market in West Europe started in the 1950s. These efforts were accelerated in the late 1980s and early 1990s. In 1993, Maastricht Treaty went into effect and formally established the European Community as a single market for free movement of people, goods, services, and capital, with the monetary union, Eurozone, established in In East Asia, APEC was launched in, which was designed to advance trade and investment liberalization in the region. The ambiguity in the purpose and role of APEC in terms of what the regional institution was intended for, whether they are for a FTA area as in the NAFTA case, or for a single market as in the EU case, has left the region and the parties to the regional institutions constantly looking for a more appropriate multilateral framework or platform.

24 Huang ADB Forum Paper 2014 Page 24 of 27 Figure 4 World Weight and Global Distribution of Economic Activities, Output and Capacity (-) ASEAN GDP NEA Eurozone Japan China USA Capital Stock ASEAN NEA Eurozone Japan China USA Consumption ASEAN NEA Eurozone Japan China USA Investment ASEAN NEA Eurozone Japan China USA Merchandise Export ASEAN Source: Data PWT8, Unit: World Share % NEA Eurozone Japan China USA Merchandize Import ASEAN NEA Eurozone Japan China USA