Monday, February 4, 2013

The power of proximity in Asia

The facts of geography shape much that is important in a country’s external economic and political relations, and a destiny from which it often seems there is no escape

Australia may have drifted up from Antarctica towards Indonesia over the millennia and Japan is 2.4 metres closer to North America after the great Tohoku earthquake in 2011, but countries are fated to their neighbourhoods in the world for generation upon generation.

The current tensions over the Senkaku, Diaoyu or Tiaoyutai islands between Japan, China and Taiwan, the Takeshima or Dokdo islands between Japan and Korea, and the Spratlys in the South China Sea between Vietnam, the Philippines and China are the legacy to the toing and froing of neighbours over the waterways that have separated them and brought them together down the years. History is replete with examples of fractious relations between neighbours that stretch over centuries. Neighbouring economic giants, China and Japan, have a host of unresolved historical issues and a natural rivalry for regional, and now global, influence. Asia’s two big emerging powers, China and India, have common borders, but each has its own vulnerabilities, and both carry baggage from the history of the Sino–Indian conflict of 1962. And there are noisy protagonists on both sides who hark back to the past and reflect the instinct for hostility. The Association of South East Asian Nations (ASEAN) was born out of confrontation between Indonesia and its neighbours in the Sukarno period.

Proximity is clearly no automatic guarantor of amity or co-prosperity in Asia. In South Asia, economic integration has been hampered in the past by hostile relations between India and Pakistan. South Asia is one of the world’s least integrated regions and, measured in terms of intraregional trade as a share of total trade, is the region with the lowest integration globally. Intraregional trade in South Asia is 4 per cent of total South Asian trade, up from a low of 2 per cent in 1967 but significantly lower than the 19 per cent in 1948. It is only 2 per cent of GDP. Yet, despite the political and diplomatic tensions, East Asia has prospered and economic relationships have thrived. Intra-regional trade in East Asia is over 50 per cent of total trade and 30 per cent of regional GDP. Unlike Japan and China and most of East Asia, in South Asia, Pakistan has not extended most-favoured-nation trading treatment to India under WTO trade rules and both have been less than fulsome participants in the global trading system until recent times.

East Asia is a global centre of economic, and increasingly, political power. Only North Korea and Myanmar have remained apart from East Asia’s spectacular economic integration. Up to this point, they have been a major source of regional security anxieties, though Myanmar has made a decisive commitment to changing course. Positive economic relationships have also, overwhelmingly, come to dominate conflictual political relationships even between Japan and China, despite the current troubles.

A factor that was crucial to Asia’s economic transformation was strong government commitment to opening up the role of markets domestically and in external economic relations. Once the East Asian economies committed to open economic policy strategies, economic relationships across the region burgeoned despite an unusual number of heterogeneous political landscapes and troublesome political relationships. Diplomatic relations were not normalised between China and Japan until 40 years ago, and the China–Japan political relationship has had many ups and downs over the years — especially during the six years of Junichiro Koizumi’s prime ministership. Yet over this time the bilateral economic relationship burgeoned. South Korea did not have diplomatic relations with China until 20 years ago. After the Indochina War, Vietnam was isolated diplomatically by the United States until half a decade ago. And the political stand-off between Beijing and Taipei has been an ongoing feature of the regional political terrain since the Chinese revolution. This was because both countries could commit to a global system of trade rules in the WTO that allowed their bilateral economic relationship to flourish.

In this week’s lead essay, Shiro Armstrong argues that, for Australia, ‘The tyranny of distance is being replaced by the prospects of proximity’. Australia is in the right place at the right time, he says, because Australia’s neighbourhood is the most dynamic growth centre in the global economy. Although Australia is quite a long way from most places, it is relatively close to Asia, and in international economic relations it is relative proximity plus the size of your economic partners that determine the intensity of trade and other economic relations.

Given where it sits in the world, with its closest trading partners in Asia, Australia is an important part of what is going on in Asia.

Asia’s economies, including Australia, have been significant beneficiaries of the open multilateral trading system that was set in place in the post-war period. Their growth was initially driven by labour-intensive exports and, with rising incomes, higher rates of investment in human and physical capital have allowed progress up the value-add chain. Cross-border flows of goods, investment, services, know-how and people associated with Asian production networks have more recently transformed the regional economy into a powerhouse of global manufacturing. East Asia now accounts for almost one-third of world trade in manufacturing, and the intermediate goods trade accounts for more than half of all interregional trade in East Asia. China’s size and the growing interconnectedness of production networks across Asia mean that China has become the main trading partner for almost all regional nations. Now the world’s largest exporter, China has seen its share of global value-add manufacturing double over the past decade.

The growth of the Asian economy and trade has global reach and impact, but the intensity of its regional impact and importance — in trade in manufactured goods, components and parts as well as in raw materials from the neighbourhood — are the product of the power of proximity.

The open global trading system has had other benefits. It has strengthened bilateral economic relationships — built on increasing trade flows and greater levels of integration — but it has also acted as ballast in sensitive bilateral political and strategic relations. Growing regional economic interdependence has offered the prospect of a more stable strategic and political environment in the region. That alone may not be enough, but it is a critical element.

Keeping the global economic system strong and open will remain key to both the economic and the political pay-off from Asian integration and will allow the power of proximity to help deliver Asian prosperity. Peter Drysdale is Editor of the East Asia Forum.

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