Making East Asian Regionalism Works

Regionalism has now become a very popular phrase since this action has taken place into every inch of the World, East Asian region is no exception. For the past few years, regionalism has been progressing in East Asia in the form of Free Trade Agreements (FTAs) and Economic Partnership Agreements (EPAs). Unfortunately, the newly signed ASEAN-China Free Trade Agreement (ACFTA) has created growing concern among public. From Indonesian point of view, even without the FTA Chinese products has already overwhelmed the market. Given low price and better quality, the products surely hamper domestic industry. This concern is a rational one given the facts and putting the imposition of region-wide FTA in East Asia at stake. But one should bear in mind that the benefit of East Asian Regionalism (EAR) may outweigh the cost that is if the intertemporal factor included. In the short run, there might be a rivalry competition between China and ASEAN, then again the mind set in viewing the economic opportunity or threat depends on whether China’s economy is perceived as complementary or competitive vis-à-vis individual ASEAN economies and on whether the latter economies are able to exploit their complementary opportunities and overcome the competitive threats.
Chia (2006) argued that the differences in resource and factor endowments, production structures, and productivities lead to a complementary relationship, whereas similarities in these areas lead to a competitive relationship. Data from the rapidly growing intra-industry trade in electronic products and components shows that at high levels of disaggregation, product differentiation creates complementarity in production and trade. Even in non manufactures such complementarity can be found: fruits and vegetables produced in China’s temperate region are complementary to those produced in ASEAN’s tropical region. In the long run, regionalism is expected to accommodate welfare for East Asia. The growing significance of China market for ASEAN will serve as the basis for regionalism. Thus, a unified East Asia could accelerate the momentum of overall trade liberalization and boost regional economic growth, as proved by the econometric simulation done by the author.
The next task is to shape the future of EAR, but then will the future exist? Using the test of convergence, it is found that EAR will be there to stay. The robust finding surely creates optimistic view for EAR. But knowing the future is not enough, we still need to find out the clear path to reach the future. What are the paths then?
From a static simulation it is found that sound physical infrastructure, good governance, reliable exchange rate, competitive taxation policy, sizeable market and the trend towards industrialization are the main factors that serve as building blocks for EAR. The factors are described as follows: the first factor is physical infrastructure such as roads, bridges and electricity that will provide steadiness and assuredness in making investment among members. In other words, good infrastructure will only lead to a sustainable intra trade and investment. If Indonesia wants to get benefit from the FTA, she should at least solve the latent problems of unprepared infrastructure especially on the electricity sector.
The next factor that also matters is governance which is measured by the six governance indicators estimated by Kaufmann (2003). These indices describe various aspects of the governance structures of a broad cross section of countries, including measures of Voice and Accountability (VA), Political stability (PS), Government Effectiveness (GE), Regulatory Quality (RQ), Rule of Law (RL), and Control of Corruption (CC). In general, the Governance index provides explanatory power to explain the capability and quality of governance from each member country. The better indicator a country has the more it has the chance to capitalize regionalism. This is surely an ongoing home work for Indonesia.
Another factor that supports EAR is exchange rate. One should know that volatile exchange rate will hamper not only EAR but also the initial macroeconomic condition. The financial crisis happened over a decade ago has surely thought us a lesson. Moving to the next factor is the taxation policy, the higher the rate the more it will diminish the prospects of EAR. Fortunately for Indonesia, the latest general taxation policy (UU KUP) has most likely accommodated this aspect. The success story of tax reform is expected to become dominant actor for creating optimal trend of EAR.
Large market together with the ongoing industrialization process sums up the last aspects of EAR formation. The sheer size of the East Asian population creates not only the potential demand for the goods traded in the region but also the supply of labor force and the low absolute level of wages. In other words, Lewis’s unlimited supply of labor will persist longer in East Asia. The process will lead to an upward trend towards industrialization in the region. The trend is very important since homogeneity in industrialization among countries in the region will smooth the progress of EAR.
To wrap up, EAR will enable the region to cope with the future challenges of globalization and remain internationally competitive. An integrated East Asia would lead to the advancement in economies of scale, fuller development of production networks. Moreover, Chia (2007) stated that EAR could hold close the less developed East Asian economies which would otherwise become marginalized as they lack the attraction of sizeable market and lack negotiating resources.