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ASEAN: Redefining Regional Integration

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ASEAN: Redefining Regional Integration

ASEAN Economic Community: Redefining the Concept of Regional Integration

Kenneth Thomas Stiller

Abstract: This paper examines the level of integration among countries within the Association of Southeast Asian Nations (ASEAN) and assesses the prospects of a fully-fledged customs union. Pulling evidence and research from international trade patterns, the paper argues that trade liberalization in general and in this very region could hamper development. This economic reality poses impenetrable limits to the harmonization of member state policies, resulting in a significant gap between declared aims and actual integration processes among ASEAN nations. Furthermore, based on these findings and the experiences of the European Union (EU), a stable economic union will require collaborative politics. Given the disparity of national preferences in Southeast Asia, however, political obstacles are likely to hinder ASEAN from achieving deep economic cooperation.

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Introduction

The Association of Southeast Asian Nations (ASEAN) continuously reaches new dimensions of plurilateral cooperation. As such, it has confronted questions about the potential depth of further integration and the suitability of emulating the European Union (EU) model in the long run or taking another approach to regionalization, which would be more focused on strengthened ties to outsiders. This paper examines the past development and current economic and political structures of the ASEAN member states to underscore a well-founded analysis of the strategy that members will likely prefer to pursue.

Understanding ASEAN’s economic structure, and primarily its trade relations among members and the enforcement of tariffs, provides a lens through which to better comprehend how contemporary economic relations can affect the prospect of further integration. Reducing the national economic welfare of an individual country is likely to result in suspicion and hesitancy among member states toward heightened levels of cooperation. At the same time, even if further integration would indeed guarantee enhanced welfare for all member states, reaching a consensus toward that end would entail significant hurdles. Increased regional integration might possibly be advantageous vis-à-vis the status quo, however, it is not necessarily the most promising of all policy choices available to the states of Southeast Asia.

Theories of Market Integration

Assessing the significance and prospects of ASEAN integration requires identifying general criteria to evaluate such economic and political ties before diving into the discourse on potential scenarios for the development of ASEAN. Although the EU has long been perceived as a role model in regional integration, such comparisons to ASEAN are seldom backed up with sufficient evidence and therefore unfounded. More generally, some argue that regional organizations or federations can be expected to become an integral part of a post-national global governance structure (Walzer 2010: 57-8). Further, even if regional entities factor into the governance framework, nation states in different regions start from different points of absolute development, relative interdependence, and national preferences, thus resulting in diverging feasible and desirable levels of integration.

While the public discourse on regional integration often lacks unambiguous terms, the sequence of integration considered in this paper follows from Frankel (1997: 16-24): i) relatively loose preferential trading arrangements; ii) free trade areas without restrictions in terms of tariffs and trade; iii) custom unions that undertake unified actions toward outsiders and at minimum have common external tariffs; iv) common markets/single markets entailing the free flow of factors of production; and v) economic unions subject to joint economic policies and thus requiring some type of political federation.

In this progression, the first three stages almost exclusively touch on economic issues and might include loose coordination of policies, but thereafter the development of these regional unions to achieve full liberalization and harmonization as defined in terms of joint economic policies will require some level of political collaboration and surrender of national sovereignty (Balassa 1961: 7). Employing a binary approach, Lawrence (2000: 8) distinguishes between shallow integration, which solely comprises liberalization, and deeper integration, which comprises harmonization processes and in particular the latter two stages of Frankel’s classification. As the integration of ASEAN still remains in the beginning stages of the five-step progression, the following paragraphs will detail the effects of trade liberalization so as to better understand the current, shallow integration of ASEAN before exploring scenarios and conditions for deeper integration.

A Case for Integration?

In the context of ASEAN, two dimensions are of particular interest in assessing the impact of regional integration: 1) How integration affects trade patterns, namely whether it predominantly results in trade creation or trade diversion, and 2) the impact of integration on national development and welfare.

Integration and Trade Patterns

A longstanding debate has existed over whether trade liberalization between countries has enhanced trade without adversely affecting the ability to trade with outsiders. For regional or plurilateral integration, the actual economic structure within the integrating economic area and its relation to outsiders exert a decisive impact on trade relations. Two opposing effects can result from economic integration, namely trade creation and trade diversion (Viner 1950). Trade creation, as associated with an increased volume of trade, might result from policies related to integration, such as the reduction of tariffs or other trade barriers within the integrating entity. Trade diversion, on the other hand, appears when such policies incentivize states not to trade with the most efficient trading partner. This is generally linked to a loss in total welfare and, thus, in many cases to a reduction of the total volume of trade. For instance, trade diversion might result from an increase in tariffs due to the integration of a state in a customs union. While in 2009 market integration in the case of ASEAN appeared to have benefited insiders without harming external trade, (Calvo Pardo et al. 2009: 4) such a situation might shift in the course of deepening integration.

Hence, examining underlying incentives to trade and the potential impact of integration is essential to assess the prospect of deeper integration in Southeast Asia. One well-known fundamental theory of international trade based on factor endowments, the Heckscher-Ohlin-Model, predicts that heterogeneous economies have more incentives to trade. However, Staffan Burenstam Linder (1961: 17) has challenged this conception, claiming that “a country cannot achieve a comparative advantage in the production of a good which is not demanded on the home market.” According to the theory of comparative advantage a state will produce and trade goods which it can produce at lower opportunity costs than its trading partners, even if this state does not have an absolute advantage regarding that good. As a result, Linder argues that trade would be most intensive among states with similar demand structures and, since per capita income generally serves as a suitable indicator for demand structures, that trade will be more intensive the more equal per capita incomes are.

By considering the demand for a certain good necessary to gain a comparative advantage regarding that good, different consequences might arise for integration between “unequal” states. On the one hand, trade liberalization could enhance demand for higher-value goods in less developed states by reducing expenses for consumers. This could then support the emergence of more sophisticated domestic industries. Alternatively, trade liberalization in the Linder view could hurt domestic industries and thus potentially prevent a change in the economy’s comparative advantage. This scenario would be a possible consequence if already established external producers gain access to a state’s domestic market and overtake the competition with emerging domestic industries.

Confirming empirical evidence underlies both of these theories. For instance, Leamer (1995) analyzed a small sample of industrialized economies and found factor endowments (the entity of a state’s resources of land, labor and capital that can be exploited for production and decisively impact the state’s trade relations) a decent determinant of trade patterns, thus supporting the Heckscher-Ohlin-Model. However, when employing a conceptually different research design that assesses the interaction of trade, factor endowments, and factor input requirements, there seems to be no solid empirical evidence in favor of the Heckscher-Ohlin-Model (Bowen et al. 1987). Assuming both heterogeneous supply and demand structures among ASEAN economies, this finding would indicate that trade with outsiders might be relatively important for the heterogeneous states of Southeast Asia. Further studies tend to confirm the theory of increased trade among “equals” (Thursby/Thursby 1987; McPherson et al. 2001; Hallak 2010)

Balassa and Bauwens (1987) specifically identified per capita income equality, a proxy for general similarity of economic structures, as one decisive factor for increased trade relations. Even though the authors highlight that this correlation is less pronounced among developing countries as opposed to trade patterns among developed countries, this finding of increased trade between economies at similar stages of development still holds among developing countries. Furthermore, an analysis of six African developing countries shows them engaged in trade with fellow developing countries rather than in trade with developed, industrialized economies (McPherson et al. 2001). In the same vein, the same pattern can be found in trade among industrialized nations as the vast majority of the share of global trade is restricted to the relations between economies of the triad, namely North America, East Asia, and Europe. Hence, from the empirical support for Linder’s hypothesis follows that, ceteris paribus and in terms of trade, economically homogenous states are more predestined for economic integration than heterogeneous ones. In the latter case, nations are more likely to have stronger economic ties to outsiders on a similar stage of development with analogous demand structures.

Regional Integration and National Development

The sole increase in volume of trade as a result of integration or trade liberalization largely dismisses the ultimate purpose of national economic activity: increasing the welfare of its citizens. This can be accomplished through an increase in output or income with the addition of continuously higher value-adding industries. Hence, this paper argues that it is not as relevant whether a comparative advantage can be exploited by opening the economy for trade, but much more how comparative advantages shift and develop. This question in the context of the theoretical foundations of free trade has not received significant consideration. Strikingly, in the “The Wealth of Nations, the most classic work on the perks of free trade, it was only shortly mentioned and deemed irrelevant. In his book, Adam Smith stresses the benefits of free trade and proceeds to conclude that “[w]hether the advantages which one country has over another be natural or acquired, is in this respect of no consequence” (Smith 1838: 186).

However, it is not irrelevant how a comparative advantage is acquired. Processes of economic integration themselves can affect comparative advantages or possibly limit an economy’s capacity to develop a more beneficial comparative advantage. The idea of opposing free trade to enhance the development of domestic productive powers has been put forth by Friedrich List.  In his work, he accused the contemporary free trade policy as paradigm of the English-dominated international economic order. However, according to him this liberal policy was only adopted after English primacy was achieved and therefore beneficial to England as it contributed to impeding that other states would follow its path of industrialisation (List 1856: 440).

Recalling the Heckscher-Ohlin-theory, an essential but often ignored aspect of its conception of comparative advantage concerns the actual relation between factor endowments and trade patterns. While the theory states that trade patterns are shaped by factor endowments, it must be considered that the emerging trade structures also “stimulate further specialization” (Angell 1934: 126).

As follows then from this model, heterogeneous economic structures enhance trade relations, and trade among these economies affects specialization, which in turn can potentially shape a country’s comparative advantage. It would then be possible for some countries to become locked in to their comparative advantage of low value-adding industries because of trade liberalization. Thus, more developed economies with established internationally acting enterprises could potentially benefit from halting the developmental process in less advanced ones. However, most governments understandably do not seek to maintain a comparative advantage in raw materials or unskilled labor, but would prefer to develop their economy, workers’ skills, and citizens’ wealth. For a less developed economy though, being integrated into a highly globalized and liberalized system with established and cost-efficient external suppliers can reduce the necessity for domestic producers. In that case, the emergence of domestic producers is neither necessary for the good’s availability in the domestic market nor sufficient to decrease production costs, due to the likely existing knowledge advantage of established producers. In such a case, free trade may not be an appropriate strategy for enhancing domestic economic development. Therefore, increasing welfare may not rely on liberalizing trade relations.

A simple example illustrates how under certain circumstances a reduction in trade volumes can actually foster national welfare in the long-term. Let’s assume a certain country, Indonesia for instance, produces natural rubber. The government of Indonesia might have followed protectionist recommendations and imposed tariffs on rubber products, with higher tax rates on processed goods made of rubber (tariff escalation). Even if Indonesia is not highly integrated in the global economy, its natural rubber will sell in the domestic market and a certain share will go to foreign markets.

In this scenario, to choose the most suitable trade policy, it is not sufficient to solely consider the state of Indonesia’s economy. The decisions of another country abundant in natural rubber that already has an established industry will likely influence how Indonesia crafts its trade policy, and particularly so if this country hosts an industry capable of producing high value-added products based on natural rubber. In such a scenario, abolishing all tariffs on processed rubber products might, ceteris paribus, reduce the incentives of Indonesia’s domestic rubber industry to enhance its capacities to process rubber. A transformation of the rubber industry to remain competitive concerning high value-added rubber goods would not only require significant investments in research and development, but also the ability to compete with a foreign, globally established industry. As a result, the transformation costs necessary to produce more sophisticated rubber products in Indonesia could become prohibitive, and Indonesia would likely not benefit from liberalizing its rubber trade policies.

Although Indonesia’s rubber industry would not be able to face an experienced foreign competitor, its production levels may have been sufficient to satisfy domestic demand for processed rubber products. Instead, Indonesia might maintain its role as a supplier of unprocessed natural rubber, potentially increasing its exports of raw rubber and, more probably, imports of processed rubber. The abolition of tariffs in this case would have contributed to decelerating the country’s industrial development, even though the volume of trade would have increased. Neoclassical economic theory would probably consider Indonesia’s protectionist trade policy a cause for reduced total welfare as domestic consumers are worse off by the tariffs and trade is diverted. However, a sole increase in trade volume might, in the long-term, be less beneficial for the economy than the development of a domestic industrial base.

This example does not intend to argue that protectionism should be the policy of choice for developing countries, but it serves as an indication that unconditional trade liberalization might not, in each and every case, be the best choice for developing countries. Nonetheless, the so-called “Washington Consensus on Development”, which influences the agenda on development of Bretton Woods Institutions as well as regional development banks, has institutionally linked economic development to trade liberalization policies (Araghi 2009: 133). Nowadays, institutions like the World Bank or the International Monetary Fund persuade developing countries to reduce barriers to trade (Edwards 1993: 1359) even though certain trade barriers, if embedded in a comprehensive trade strategy, can benefit developing countries (Dornbusch 1992: 80). As Grossman and Helpman (1990: 34) concluded with their two-country model on trade, tariffs might support long-term growth if imposed by the country with a comparative disadvantage in research and development, or on high value-adding industries.

Although free trade may not be an optimal policy option, it still remains a rule of thumb for trade negotiations (Krugman 1987: 142). Krugman rightly argues that a less straightforward policy preference and deviation from a common standard might result in retaliatory policies and trade wars. An emphasis on free trade, nevertheless, bears dangers of power asymmetry. Milewicz et al. (2016: 10) argue that the vast majority of preferential trade agreements signed in the past decades have included clauses on nontrade issues, such as environmental or institutional standards, as well as references to human rights. This extended scope is sometimes criticized as an imposition of standards beyond national borders for self-interested purposes (Bhagwati 2003: 51). Economically stronger states can often then dictate terms in bilateral agreements (Milewicz et al. 2016: 20).

Not only then does the impact of economic integration on trade patterns require consideration, but also the impact on the prospects of development for states involved. Notably, higher trade volumes do not necessarily translate into economic development. Nevertheless, strict rules on trade rules themselves bear an intrinsic value in international trade as any deviation from might result in zero-sum games. In this context, regional economic areas might serve as a good compromise so that countries can retain a relatively high level of control over policies, as well as the capacity to make adjustments according to their economic needs, while still establishing a formal agreement and clear economic rules. The following section discusses whether regional economic integration might provide a viable alternative to serve these purposes in the case of ASEAN.

The Continuing Integration of ASEAN

ASEAN reached a formal new dimension of integration among its members in January 2016 with the introduction of the ASEAN Economic Community (AEC) to replace the ASEAN Free Trade Area (AFTA). AFTA had been in effect since 1993 and covered almost all intra-ASEAN tariffs (Daquila 2007: 141).

Traditionally, ASEAN has followed a problem-oriented approach to regional issues. The member countries strive for consensus and adhere strictly to the principle of non-interference in national affairs, therefore holding absolute respect for member sovereignty. This model, in opposition to the European experience of supranationalism (the delegation of tasks to joint authorities above the level of intergovernmental cooperation), has been described as the ASEAN way (Goh 2003: 114). Only the onset of the Asian financial crisis in 1997/98 prompted member states to conduct meetings semi-annually, where prior they had been infrequent and occurring years apart. Largely, ASEAN, in both its emergence and establishment, has been conceived as a loose intergovernmental forum. However, member governments have started to increasingly call for greater integration. In its vision for 2025, ASEAN proposed:

[…] advancing a single market agenda through enhanced commitments in trade in goods, and through an effective resolution of non-tariff barriers; deeper integration in trade in services; and a more seamless movement of investment, skilled labor, business persons, and capital.
— (ASEAN 2015: 15).  [Emphasis added]

Notably, ASEAN considers a single market to encompass the same four freedoms as entitled in the Treaty on European Union (European Union 1992: 14): goods, services, capital, and labor (Fox 1997: 5).

However, a single market requires major political reforms and amendments, especially concerning the free flow of labor. Toward this end, the ASEAN way could actually prove harmful to realizing the goal of deeper integration, as political concessions and institutionalization might become hard to avoid. Already, the Singaporean Ministry of Trade and Industry has clarified that the AEC does not even include a customs union with common external tariffs or a coordinated economic policy (Ministry of Trade and Industry Singapore, 2015). This statement highlights the difficulty of ASEAN achieving a true single market as the establishment of a customs union is a key prerequisite to this end. Absent progression toward a customs union (as stands currently), ASEAN, de facto still a free trade area, remains far from realizing deep integration. Hence, rhetoric does not match reality.

While some studies have suggested measures to develop an ASEAN single market (Lloyd 2005: 263), the states involved may not actually feel incentivized to support such a development. Indeed, it seems a looser agreement of ASEAN plus three (China, Japan, and Republic of Korea) will be more acceptable and preferable for its members than continuing ASEAN integration (Low 2003: 83).

ASEAN’s Contemporary Economic Structure

Assessing the prospects of further ASEAN integration requires an analysis of the starting point. This section relays the current economic structure of the organization to reveal the economic relations among member states. First, as Table 1 indicates, the economies of ASEAN member states diverge quite greatly as some, like Cambodia and Myanmar, still heavily rely on agriculture while others have already industrialized and developed service-based economies (e.g. Singapore). This spread in level of economic development is quite high, especially when considering the relatively small number of member states (10). Consequently, as Figure 1 shows, trade accounts for differing shares of ASEAN economies. In Singapore, trade volume amounts to three times Gross Domestic Product (GDP). It remains significantly lower for the Philippines and Indonesia, and therefore plays a subordinated role in those countries’ economic policies. Figure 2, displaying Foreign Direct Investment (FDI) flows originating from and directed to ASEAN nations, further reinforces the heterogeneity of economies in the region. As shown, the vast majority of FDI is targeted at Singapore with Singaporeans receiving roughly 200 times more FDI per capita than Filipinos. Thus, it can be seen that Singapore economically dominates the region in terms of foreign capital attraction and trade volume.

Figure 1: ASEAN member states’ trade in terms of GDP. Data for Myanmar are incomplete. Inconsistency in data for Cambodia originates from World Bank’s data.

Figure 1: ASEAN member states’ trade in terms of GDP. Data for Myanmar are incomplete. Inconsistency in data for Cambodia originates from World Bank’s data.

As has been discussed above, even if the heterogeneous economic structure would not divert trade with outsiders in the context of ASEAN, it remains uncertain whether further integration would be desirable for ASEAN members in the long-term. This immense level of heterogeneity and diverging economic policy priorities raise questions about the depth of potential integration. Further, the vastly differing strategic policy interests that result from current economic and trade structures also complicate prospects for deeper integration.

Figure 2: FDI Inflow and Outflows of ASEAN in 2014.  

Figure 2: FDI Inflow and Outflows of ASEAN in 2014.

 

This claim can be substantiated by employing Figure 3, which visualizes trade in goods among ASEAN’s member states in 2014. Strikingly, from this figure, it immediately becomes evident that every ASEAN nation is more engaged in trade with outsiders than with fellow ASEAN members. In fact, trade with outsiders exceeds 70 percent of total trade for almost all ASEAN members. Considering unweighted averages, only 23 percent of an ASEAN state’s exports flow to other ASEAN states and 39 percent of imports originate from other ASEAN members, with numbers being as low as 12 percent of Vietnamese exports being directed to ASEAN. In particular Singapore is far more oriented toward outsiders than toward fellow ASEAN member states. Again, the chart shows that Singapore also has a dominant position in intra-ASEAN trade only. Excluding Singapore, trade volumes remain insignificant among ASEAN member states.

Figure 3: Bilateral trade flows in goods over 2014 with involvement of at least one ASEAN member state. Thickness of the streams indicates the value of the trades in current US dollars. [Data have generally been retrieved from UN Comtrade. However, data for Myanmar and Lao PR origin from UNCTADstat and are estimated as no official data are available.]

Figure 3: Bilateral trade flows in goods over 2014 with involvement of at least one ASEAN member state. Thickness of the streams indicates the value of the trades in current US dollars. [Data have generally been retrieved from UN Comtrade. However, data for Myanmar and Lao PR origin from UNCTADstat and are estimated as no official data are available.]

While these data do not indicate whether integration might in the long-term benefit the development of ASEAN member states or the potential of an intra-ASEAN division of labor, they indicate a quite low level of interdependence among ASEAN nations. Generally, the benefits of integration would be higher if insiders strongly engaged in mutual trade. However, in the case of ASEAN integration is likely to be rather associated with trade diversion than trade creation. Moreover, different policy priorities, for instance regarding trade barriers, are likely to hinder the adoption of joint policies, which would be indispensable for the creation of a single market. Therefore, while the high degree of economic heterogeneity and trade reliance on outsiders does not inevitably pose an obstacle to economic integration for ASEAN, it does complicate the emergence of a customs union with common external tariffs.

Does the “ASEAN way” lead to a Customs Union?

As Singapore remains the most crucial actor within ASEAN, its traditionally low tariffs challenge potential harmonization of external duties or even the adoption of common external tariffs because other countries in the region often prefer protectionist measures to grow their infant industries. However, tariff averages do not truly reveal a state’s stance toward protectionism. Even though, for instance, Myanmar has an average tariff rate of 3.2 percent, it does not automatically follow that it has a relative liberal trade policy within ASEAN because tariff peaks skew the average. ASEAN nations have historically enacted most-favored-nation ad-valorem duties for steel and iron, and electrical machinery and equipment. Hence, while the average values of tariffs on these goods do not strongly correlate with the level of economic development of ASEAN members, there remains a clear pattern of protectionism if looking at the peaks. For these goods subject to tariff peaks, a reduction would require significant changes in trade policy, which would mean a massive decrease (likely in opposition to political interests) or exclusion from a common tariff regime (thus preventing the establishment of a fully fledged customs union). In all likelihood, states will not abolish duties on such sensitive goods.

Subsequently, given that common tariffs would certainly be higher than Singapore’s individual tariffs, such an action would thus divert its trade with outsiders and potentially hurt an essential pillar of Singapore’s economy. Anticipating this effect and taking into account Singapore’s massive primacy and dependence on its economic links to non-ASEAN states, Singapore will almost certainly not abandon its policy stance. Hence, harmonization would most likely require Singapore to reduce its trade openness. If one also considers the political rhetoric of Singaporean politicians and their advocacy for liberalization (Lee 2006: 186), which is reflected in Singapore’s continuing commitment to 20 bilateral or multilateral free trade agreements, the country will likely reject common tariffs that exceed its own rates.

On the other hand, it could be argued that more protectionist states should lower their tariffs to approach Singapore’s tariff levels and enhance their rather underdeveloped involvement in world trade. However, as discussed, liberalization policies directed at non-ASEAN economies as a result of harmonization could negatively affect development prospects for certain ASEAN states. Thus, by advocating for integration these states could potentially harm themselves. To put it in the words of List, overhasty integration and harmonization could lead to states “kicking away the ladder” (List 1856: 440).

Whether the motivation for those high tariffs is justified does not necessarily matter, as simply the perception of a negative or positive effect resulting from the rate of external tariffs leads policymakers to make judgments. Upholding high tariffs, nonetheless, seems to be the majority position among ASEAN nations. Therefore, assuming that ASEAN states are rational actors, the organization now faces two viable options for achieving deeper integration: 1) political commitment to further integration that outweighs potential economic disadvantage and 2) changed attitudes toward free trade. Given the preferences of member states, despite outward advocacy and rhetoric of enhanced economic cooperation, ASEAN progression toward a fully-fledged customs union would require a paradigm shift that will take time to materialize.

Considering the current heterogeneous tariff structures among its members, their strong ties to outsiders, and the organization’s traditional focus on economic benefits, this advancement of regional integration in Southeast Asia seems highly unlikely. Given that a customs union is an economic necessity to establish a single market, ASEAN’s rhetoric of advancing a single market agenda seems mismatched to real prospects.

The European Community Model

Since the European Union is often referred to as a role model for ASEAN, it is worthwhile to examine its structure in 1992 (back then as the European Community (EC)), before the establishment of its common market. As Table 1 indicates, EC member states were quite homogenous with their service sector contributing at least 60 percent to GDP; further, they exhibited broadly similar patterns in the size of their agriculture and the industrial sector. Thus, the EU nations did not have as pronounced heterogeneity among national economic structures at the time of the EC compared to ASEAN member countries today. Figure 4 visualizes trade relations in goods with involvement of at least one EC state in 1992. As the figure points out, the share of trade with outsiders among EC states did not exceed 50 percent of total trade volume for a single state, while more than 60 percent of all imports and exports in these member countries occurred within the EC itself. This pattern highlights the interest of EC members and their priorities in evolving economic relations within the EC framework.

Figure 4: Bilateral trade flows in goods 1992 with involvement of at least one European Community member state. Thickness of the streams indicates the value of trade in current US dollars. [Data retrieved from UN Comtrade.]

Figure 4: Bilateral trade flows in goods 1992 with involvement of at least one European Community member state. Thickness of the streams indicates the value of trade in current US dollars. [Data retrieved from UN Comtrade.]

Further, European integration rests heavily on the idea that economic interdependence guarantees peace, and therefore member states at times forsake their own national interests understanding that doing so guards them against potentially disastrous consequences of political conflict, e.g. a full-scale war. Initially, economic considerations and benefits were secondary to political considerations (Dinan 1999: 2). In consequence, economic decisions have partly been made for political reasons, for which reason the process of integration itself has been highly valued by the EC’s members. The process of political bargaining and consensus decision-making thus remain deeply rooted in the organization’s intentions and its history of operations.  

The resulting economic integration among EC states seems to have had an impact on intra-EU trade at present. For instance, the share of intra-EU trade is much higher for the states of Eastern European that have gone through most of their industrialization in the context of EU institutions and economic policies. This finding indicates that development, which takes place embedded in the context of a common market, does increase relative dependency on this market, while possibly hampering the development of external trade relations.

However, even the achievement of a single market in Europe, regardless the formal level of integration, seems to fall short of a stable economic entity. European integration has been imperfect and incomplete. The European sovereign debt crisis, enhanced by the global financial crisis, revealed that policymakers lacked appropriate and effective instruments to address the economic challenges triggered in a European context. Indeed, the unrealistic expectation of a self-initiating process of fiscal disciplining because of a common currency, as predicted by German economists in particular, turned out to be a fatal misperception. In fact, after Greece experienced significant shocks to its public finance, leaving its economy in a devastating state, EU assistance relied on deflationary policy and fiscal austerity, which rendered major social costs for the country and leaving it in crisis even after almost a decade. Although EU member states surrendered authority over monetary policy instruments by joining the currency union, the Eurozone lacks policies around adjustment transfers and transnational efforts to compensate for Europeanized policies or failing market mechanisms. Only in the course of the crisis have policymakers recognized this missing element of the currency union and have created the permanent European Stability Mechanism (ESM) (Scharpf 2011: 26).

Other means of deeper integration have been discussed to correct for institutional shortcomings. These measures, however, mostly require even deeper political integration and further surrender of sovereignty, making political integration indispensable for further economic integration. This prerequisite can result in political backlash and resistance, as evidenced by the successful referendum in the United Kingdom to leave the EU and the recent emergence and strengthening of anti-European parties in France, Germany, and Greece. This is partly in response to continuing, imperfect integration. A different expression of this sentiment can be found in the German condition for accepting Greece’s bailout. Given public pressure, policymakers in Germany have insisted on repayment of those loans, which renders any attempt to create a pan-European redistributive fiscal policy unfeasible. Once more, the European Fiscal Compact that came into force in 2013 might prove incomplete as it lacks powerful instruments to stimulate tumbling economies.

Political constraints and the organization’s antecedent economic architecture restrict the range of effective approaches to solve the crisis. Nowadays, again, political considerations might impede a proper economic solution of the European sovereign debt crisis, which was in part caused by imperfections in the prior integration process, even though current economic preconditions have been quite favorable for economic integration. The European experience has impressively proven that at a certain point economic integration becomes inevitably linked to complementing political integration in terms of supportive transnational policy instruments. The lesson to be learned for ASEAN, then, is that long-term stability is one of the most salient features of economic integration. If political barriers impede stable economic integration in terms of certain policies, it might indeed be worthwhile to reconsider these policies.

Conclusion

This paper seeks not to identify a gold standard in terms of trade liberalization or an optimal level of economic integration. Much more, the argument at heart has been that an ideal standard of trade and economic integration should not be considered ends in themselves but policy options to increase the welfare of nations and their citizens. Furthermore, economic development has become even more dependent on the global context, namely the international division of labor, the need to compete with global firms from abroad, and involvement in preferential trade agreements. While trade liberalization can significantly contribute to economic development, it might in certain cases be a second best only or rule of thumb, as Krugman stated, for want of practically viable alternatives. Especially in times when multilateral agents such as the WTO fail to provide agreements on common trade rules and the diverging ideas regarding trade liberalization among developing and developed countries, plurilateral entities might serve as a compromise between retaining a high level of political control and reaping the benefits of limited liberalization. Specifically, the assessment of contemporary ASEAN leads to four conclusions.  

The argument at heart has been that an ideal standard of trade and economic integration should not be considered ends in themselves but policy options to increase the welfare of nations and their citizens.

First, ASEAN members have highly heterogeneous economic structures and face different levels of industrial development, as evidenced by Singapore’s primacy in trade and attraction of foreign capital. No uncontested theory of trade and market integration states that ASEAN’s heterogeneous composition would directly constrain its ability for integration. Nevertheless, this circumstance indirectly affects the prospects for integration as ongoing integration is likely to require a reduction in trade with outsiders, which means countries would need to reconcile diverging policy preferences on this front. As shown, outward trade has been more pronounced with ASEAN member countries compared to the levels among EU countries as such interactions have been more salient than trade with insiders for every ASEAN member state.

Second, this heterogeneity among ASEAN economies might be beneficial if properly exploited. Integration and liberalization among ASEAN might allow less-developed states to grasp benefits of access to a broader market and economies of scale without having to face global competition, thus to a certain extent fostering a regional division of labor rather than more immediate liberalization toward the global division of labor. This scenario is in particular true when considering ASEAN’s selective approach toward integration and the high respect for national preferences.

Thirdly, heterogeneity and a cautious approach toward integration might possibly impede policy harmonization and deeper integration of ASEAN. As relayed in this paper, even though ASEAN is labeled a single market, the establishment of a fully-fledged customs union with common external tariffs is highly unlikely considering the economic reality. Hence, ASEAN most likely will remain a free trade area in the intermediate term.

ASEAN will not move toward resembling the EU but rather continue down its own path, thereby possibly disrupting predominant conceptions of regional integration to perhaps offer an alternative model for future regional blocs.

Lastly, as both the case of the a theoretical customs union in Southeast Asia and the European experience have shown, a certain level of integration and economic harmonization will require political integration, which tends to become increasingly important over the course of deepening integration. In the same vein, political backlashes can potentially halt integration processes, as currently observed in Europe. In addition, the political rationale of the process of European integration has also shown that the EU is a unique case and shouldn’t be employed as benchmark. Moreover, the ASEAN way could well end before the achievement of deeper integration. This is not to say, however, that ASEAN integration failed or that it will collapse in the future, but much more, this paper’s findings indicate that further integration can and most likely will continue to deepen international cooperation rather than intra-region policy harmonization. ASEAN can best serve its member’s interests by continuing selective and fragmented integration, which addresses all issues policymakers consider worthy of beneficial cooperation for the states involved. Thus, ASEAN will not move toward resembling the EU but rather continue down its own path, thereby possibly disrupting predominant conceptions of regional integration to perhaps offer an alternative model for future regional blocs.

 

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Kenneth Thomas Stiller, 23, from Bremen, Germany, is about to graduate in Political Science and Economics at the University of Mannheim. His main areas of interest concern the international political economy, in particular economic and political integration, and the economics of foreign aid. He gained professional experience at the United Nations Economic Commission for Europe, the German Federal Foreign Office as well as PricewaterhouseCoopers. Furthermore, he was student assistant at the University of Mannheim’s chair of comparative politics. The paper at hand is the result of an academic exchange with the National University of Singapore.

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