NS3040 Winter Term 2013 Regional Integration

1. NS3040 Winter Term 2013Regional Integration

2. TransPacific Partnership (TTP) I • The current U.S. initiative in the trade area is the TransPacific Partnership (TTP) • The United States and China are offering competing frameworks for security, trade and economic cooperation in the Asia Pacific Region • In the U.S. case this involves binding traditionally strong bilateral treaty allies and states concerned by China’s rising economic heft and territorial claims into a mutually beneficial multilateral framework • China considers these arrangements as designed to contain that country • More subtly, the approach is centered on regional trading arrangements and strategic plans intended to make it difficult for China to alter the status quo even as its economic power grows.

3. TransPacific Partnership (TTP) II • Countries currently in negotiations for the TTP are: Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the United States and Vietnam. • If signed, it will represent one of the world’s most expansive trade agreements • If Canada, Mexico and especially Japan also sign the agreement will add billions to the U.S. economy and solidify Washington’s political financial and military commitment to the Pacific for decades to come. • China which is the main trading partner for almost all other Asian states has promoted its “Association of Southeast Asian Nations (ASEAN) Plus Three (China, Japan and South Korea) framework • It offers an easily implemented multilateral trade partnership based on a lowest common denominator formula in which countries remove only some trade barriers resulting in rapid, albeit narrow gains

4. TransPacific Partnership (TPP) III • The US aware that the Chinese framework would marginalize the U.S. -- argues that the TPP would yield superior economic gains. • The TPP requires a greater commitment among members regarding binding rules and standards, but offers the potential for deeper gains through progress on investment, property rights, competition provisions as well as reducing trade barriers. • While the U.S. has not formally excluded China from joining the TPP, the country would need to revalue its currency, reduce subsidies to state-owned companies, provide better protection to intellectual property, as well as reduce trade barriers– all improbable steps • Given the complexity of the TPP, its creation may not be a realistic prospect until early in the next decade – until then it does hold out an alternative to China’s ASEAN Plus Three.

5. TransPacific Partnership (TPP) IV • One thing is certain: the TPP will not derail Asia’s intra-regional trade integration for a number of reasons: • Asia is likely to be the fastest-growing region in the world for the foreseeable future and to increasingly provide the bulk of incremental global demand. • This means that intra-Asian trade will continue to outpace trade with the rest of the world • Countries in the region have undertaken investments in transport infrastructure connecting the SE-Asian economies with each other and with China • Rising real wages and land prices in China and the country’s appreciating exchange rate will drive labor intensive Chinese firms to eventually relocate in labor-abundant SE-Asian economies further generating trade and investment flows • In sum, trade and investment agreements like the TPP can only facilitate market forces, not fight them. • Several scenarios see an eventual merging of a China-led Asian track and a U.S. led TPP track with the center of the world’s economy in the Pacific basin

6. Scenarios for the Trans-Pacific and Asian tracks

7. Regional Integration: Latin America/East Asia I • Regional Differences in Integration: LA/East Asia • Effects extend beyond formal FTAs • East Asia has developed regional value chains linking manufacturing production between neighboring counties. • In Latin America, despite integrationist political rhetoric, economic links are absent • Between 2000-08, 50% of East Asian exports went to regional neighbors compared to less than 18% in Latin America • In 2008, East Asia received 45% of exports from Korea, 47% of those from Japan, 50% of those from China and 56% of those from Taiwan • In Mercosur – Latin America’s most developed regional market those percentages are below 15%.

8. Regional Integration: Latin America/East Asia II • The composition on intra-regional exports also differs. Between 2000-08, 60% of Asian intra-regional exports were machinery and manufacturing exports compared to less than 40% for Latin America • In East Asia, regional leaders like Japan and Korea have built close relations with suppliers in countries like Vietnam • -responding to rising domestic labor costs by relocating different stages in production process • In Latin America, large countries have limited relations with small neighbors • Argentina fundamentally exports primary goods to China and elsewhere • Brazil also exports primary goods to the rest of the world and capital intensive manufacturing goods produced with local inputs or inputs from developed countries • Mexico is a major manufacturing exporter but is more integrated with the United States than with its Central American neighbors

9. Regional Integration: Latin America/East Asia III • Differential regional integration patterns result in asymmetric growth processes • In Latin America the expansion of global demand boosts primary goods sales to the rest of the world • However does not a significant regional multiplier effect • In East Asia any increase in demand for Korean, Japanese and even Chinese goods has a direct positive impact on exports from neighboring courtiers. • The development of regional markets also has a positive effect on learning and innovation • Knowledge generated by Korean or Japanese leading firms has some spillover effects on suppliers in poorer neighbors. • In Latin America – much lesser extent. Brazil contributing to specialization in small economies – Bolivia by investing in the gas sector.

10. Regional Integration: Latin America/East Asia IV • In East Asia informal economic integration has led to gradual but significant advances in political integration within ASEAN and other agreements • In Latin America by contrast, insufficient economic integration has limited the success of political agreements like Mercosur or the Andean Community • In recent years South America’s integration efforts have focused on non-trade issues like monetary and financial integration, infrastructure and military cooperation. • Yet long term success of these processes may be minimal unless accompanied by advances in regional trade and investment.