Growing East Asian Trade and Economic Integration: Implications for Economic Relations Across the Taiwan Straight

Abstract

Economic integration is evolving rapidly in East Asia, driven by a multitude of factors. The most important of these has been the entrenchment of China in the global division of labour and its increasingly important role as an independent engine of growth in the global economy. Business-led East Asian economic integration is now being complemented by a growing web of regional and bilateral free trade agreements within the region. This paper takes up the following questions: How deep is Asian economic integration today and how much further might it go? How does the deepening of regional economic links interplay with globalization? What factors will bear on the evolution of global and regional patterns of trade in the coming years? What are the implications for individual economies of being part of, or not being part of, regional trading agreements? The main conclusions are that the forces driving regional integration in East Asia are far from spent; that the unwinding of global trade imbalances and higher relative costs of transportation will increasingly force East Asia to rely on regional sources of final demand to sustain growth; and that parties to preferential agreements within the region will have an advantage in capturing the expanding intra-regional trade opportunities, although this advantage will be partly offset in the longer-run by continued multilateral trade liberalization that squeezes the margin of preference that regional trade agreements can offer. While many equate greater economic inter-dependence with heightened risk, in reality deep trade and investment ties mitigate risk compared to a world in which there is no or only limited commercial interaction between states. In East Asia, deepening inter-dependence, in practical terms, largely involves deepening commercial ties with mainland China. Recognizing this intuitively, business has already voted with its feet and beaten the path to the Chinese market.