East Asian Economic Integration and its Impact on Future Growth

EAST Asian economic integration appears on the brink of becoming de jure, not de facto. From the 1980s, East Asia developed high levels of intraregional trade in response to market forces, not preferential trade agreements (PTAs). One reason was rising incomes in Japan and the newly industrialised economies (NIEs) of Hong Kong, Korea, Singapore and Taiwan, creating an incentive for these economies to relocate the labour-intensive stages of production to lower-wage countries in the rest of East Asia. Another reason was reductions in information and transport costs, which allowed this fragmentation of production to be managed logistically. A final incentive was the unilateral cuts in tariffs throughout the region, either generally or through duty drawbacks and duty-free export processing zones, which further reduced trade costs. Now over 50 per cent of East Asia’s trade is with itself, and Japan and the Asian NIEs account for a rising proportion of foreign direct investment in ASEAN and China. This integration occurred largely without preferential trade agreements. The ASEAN Free Trade Agreement (AFTA) came into force in 1992, but this did not create much preferential trade. The preferential and non-preferential tariff rates were the same on about two-thirds of tariff lines. With successive rounds of unilateral liberalisation, the margins of preference on the remaining lines were small. Many producers did not find it worthwhile to retool to meet the 40 per cent The World Economy (2007) doi: 10.1111/j.1467-9701.2006.00826.x