Economic integration

Managing China’s Regional Economic Integration

Author: Simon Tay, Singapore Institute of International Affairs

Anyone seeking to manage China’s regional economic integration must proceed cautiously, but not hopelessly. Influencing Asia’s biggest economic and political player is not going to be easy, especially given the growth and nature of Sino-US tensions.

Past thinking assumed that Asian economic integration could be perfectly orderly, as described by the “flying geese” metaphor, with Japan leading the newly industrialized economies of Hong Kong, Singapore, South Korea and Taiwan, then others. But the Asian financial crisis has shifted new waves of foreign direct investment into China, and some Asian countries have lost a generational opportunity to join global value chains. Current changes in the global economy and supply chains are much more turbulent.

A second caveat concerns the influence that anyone can have on China. Investors, such as newly industrializing countries on China’s periphery, may have had some leverage already, but this has been diluted by China’s massive growth to become the center of gravity for economic integration. from Asia. Even today, amid talk of relocating supply chains, most business models remain rooted in China. Beijing will mainly manage its economic integration and do so according to its own priorities. This is demonstrated by the Belt and Road initiative and the dual circulation theory.

As Sino-US competition continues with sanctions and the search for non-Chinese production chains, it remains to be seen how China will react. As sanctions increase against Russia following its invasion of Ukraine, China – having declared an unbounded friendship with Moscow – must decide how to handle the ripple effects on its own relations and will likely explore ways to pursue their own interests. Such decisions will reverberate throughout the region, but other Asian countries have little influence on Chinese policy-making.

However, this does not mean that ASEAN and others do not have an agency. The inclusiveness of ASEAN-led initiatives contrasts sharply with other regional integration ventures. In particular, the United States is building new multilateral arrangements that ostensibly exclude China, such as the Quad and AUKUS strategic and defense initiatives, and any new US economic initiative will be of the same color. Despite its size, China still needs support.

Initiatives likely to influence China’s engagement are already in place: the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Both represent considerable markers of economic integration, but represent very different approaches compared to China – Beijing has never been invited into the CPTPP but is the largest economy in the RCEP and stands to gain the greatest benefits economic.

Moreover, the context of the two has changed considerably since they were first discussed and negotiated. For the future of the CPTPP, China’s application for membership poses a big question. Although seemingly open, the Trans-Pacific Partnership was a flagship of America’s “pivot” to Asia and there remain nostalgic hopes that the United States might return. For some, the calculation is that if China joins, there is no prospect of membership for the United States. This strategic reaction is understandable but undermines the CPTPP’s explicit commitment that membership would be open to any economy able to meet the quality of commitments, subject to the agreement of current members.

Taiwan has also applied to join. In the past, Taiwan and China have joined the WTO and APEC, but today some believe the tensions across the strait are too high, and support from Japan and the United States has clearly swung. Yet an immediate and outright exclusion of China will close an opportunity to influence its reform and integration, and prioritize CPTPP policy.

As an agreement to harmonize various ASEAN+1 agreements, RCEP is a very different arrangement. The focus on inclusiveness means that the depth and quality of businesses (although not without benefits) will be modest – realistic common goals acceptable among widely diverse economies – and frame the broadest market and the most dynamic in the world.

The risks of China’s dominance in the RCEP had to be managed and balanced by two factors: India’s participation and the ASEAN presidency. New Delhi’s decision to stay out of RCEP changes this strategic design. While RCEP came into effect in early 2022, whether there is a real effort to move it forward is therefore an open question.

China has every reason to work with partners and build on RCEP commitments where it can be a key player. In this process, as in the case of the ASEAN-China FTA, efforts can be made to remind all parties of multilateral commitments and win-win objectives. There may also be efforts to engage India in some form, even short of full membership. After all, the door remains open for his entry.

The challenge for China’s engagement in regional integration remains that of balancing strategic and security concerns with the economic benefits of integration.

The first step towards reaping the benefits of economic integration is to be inclusive. ASEAN strives to achieve open regionalism to bring its members together while allowing access to non-ASEAN investors and traders. China, which is crucial for member states, offers advantages that no other country can offer. Some elements in China believe that their country can benefit from entering into such agreements and accepting international rules and standards, alongside its own economic reform.

Second, bilateral and minilateral cooperation can also be helpful, especially in emerging areas. For example, Singapore has reached out to Chile, Australia and New Zealand to strike deals on the digital economy. China has recently expressed interest in such agreements, indicating that engagement can come from cooperation between small states. There are also elements in China that argue that China should contribute to new rules and initiatives in these emerging areas.

There are difficulties. Consider China’s actions in its trade with Australia. These cannot be resolved by RCEP or any other commercial body. But the multilateral trading system has meant Australian exporters have found other markets and blunted the effectiveness of Chinese actions. Conversely, consider efforts to exclude China and divide global value chains in technology and telecommunications. These too are treated as matters of security and political rivalry. Current rules are insufficient to ensure economic integration when the rules-based international order is in real danger of being strained and shattered by political unrest.

Efforts to manage China’s regional economic integration will have to take many new paths. It is a complex and powerful country, on which opinions diverge considerably between and within other countries. The United States seems to have chosen a path of intense competition and perhaps conflict. But many in Asia have a less established and fixed perspective, and with much less power, exclusion and conflict are not real options. Instead, initiatives to engage and generate rules and relationships should remain the priority.

Efforts in Asia to engage China must continue and even intensify, despite current controversies and challenges. The purpose and admission of new members into the CPTPP are issues that need to be resolved, but this should be done rationally, rather than rushed. Engagement through the RCEP and other existing multilateral efforts like the ASEAN-China FTA also needs to be reinvigorated. Additional dimensions of integration such as sustainability and the digital economy need to be added in new ways. Ways forward can be explored bilaterally or even through initiatives that initially concern small economies.

There remains the danger of being dominated by China or being treated one-sidedly. The challenges of managing bifurcated supply chains are further complicated by sanctions, security, and other political concerns. Yet the benefits of integration across the region, including China, are also real and well worth the risk.

Simon Tay is President of the Singapore Institute of International Affairs.

This article appeared in the latest edition of East Asia Quarterly Forum“East Asia Economic Agreement”, vol 14, n° 1.