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India looks on as East Asia integrates

May 19, 2010  by: Vikram  Points: 40   Category: Social  Earning $0.90   Views: 1732

India looks on as East Asia integrates. THE recent agreement arrived at by the Finance Ministers of China, Japan, South Korea and ASEAN


THE recent agreement arrived at by the Finance Ministers of China, Japan, South Korea and ASEAN (ASEAN+3) to create a $120 billion regional reserve pool "to address short-term liquidity difficulties in the region and to supplement the existing international financial arrangements" must surely be another milestone in East Asian geoeconomics.

This, however, is not an unsurprising development but part of integration that has characterized the political economy of the region. India, on the other hand, remains disconnected from this geoeconomic space. In fact, for too long, India's look-east policy has been based on rhetorical aspirations rather than immersing India into the commercial networks that has entwined the nations of East Asia.

To begin with, there is a default template to much of the discourse on the international relations of East Asia. The popular images that animate any discussion on East Asia such as the North Korean nuclear question, the naval dimension and sea-lanes security, disputes in the South China Sea etc. tend to emphasize the latent, potential and ongoing conflicts in the region while crowding out any meaningful conversation on the question of economic interdependence.

This is partly a result of a security bias within the Indian security establishment whereby we tend to project our perspectives on China onto other actors in the region. For the major part, however, this is because India's own economic linkages with the East are relatively perfunctory.

It is worth highlighting the underlying dynamic that enables interdependence to operate. While some analysts have opined that the economic impulse in the region has a life of its own and security considerations have been subordinated by geoeconomics, such a perspective does not address the reality that East Asian actors have made a conscious political choice to stimulate commerce.

And the extraordinary climb in Sino-US relations has only reinforced the impulse of China's neighbors to engage her. Thus, the situation of a muted security dilemma has paved the way for extensive interactions in the economic sphere.

The interdependence of East Asia cannot be understood without an appraisal of manufacturing supply chains and China's role as a "conduit" in this process.

Over the past decade, production sharing has become more pronounced in the region. A number of electronic industries are now characterized by a vertical division of labour - the slicing up of the manufacturing process where each economy is specializing in a particular stage of the production sequence of a single product that is eventually shipped out from Chinese ports to western markets.

China operates as a central assembly point where high-technology components once produced are exported to China where they are processed by affiliates of multinational companies (MNCs), only to be shipped back again for further processing and sent back to China as organized components for final assembly.

This is reflected in the data. Over the past decade, the proportion of components in exports to China has increased by five times for Indonesia, 15 times for Thailand, 19 times for Malaysia and 60 times for the Philippines. Today Japan, Taiwan and South Korea account for around 50 percent of China's component imports.

FDI into China has played a vital role in restructuring intra-industry trade in the region. Japan has established 30,000 companies and joint ventures with an investment of $60 billion. South Korea has 30,000 enterprises with an investment of $35 billion. Singapore has invested $31 billion in 16,000 projects.

Taiwanese firms are estimated to have invested $100 billion on the mainland. Taiwanese firms alone are responsible for 60 percent of China's IT hardware exports. From 1985 to 2007, MNCs in China increased their share of total trade from 10 to 60 percent, and currently 80 percent of the value of their exports is imported.

Clearly, what we view as "Chinese" exports is in reality part of a complex trade and investment web that spans across East Asia. This has three important implications:

First, China's manufacturing edifice must not be exaggerated since it is primarily the point of final assembly and shipment to western markets. A lot of the sophisticated R&D and high-tech components that go into China's electronic exports continue to be manufactured in Japan, South Korea or Taiwan.

To be sure, there has been a gradual relocation of some mid-value manufacturing to the mainland as China's advanced neighbors have moved up the value chain. But even here, MNCs (Japanese, South Korean, American) have led the way and continue to control major elements of the supply chain.

Second, for the most part (with the exception of a few labor-intensive economies) the regional division of labor has largely been a positive sum game. Thus, the popular notion of the Chinese hegemon overwhelming the Asian economic scene is empirically unjustified.

Even more ironically, it may be noted that the US has been an important beneficiary in this division of labor. It is estimated that 60 percent of all imports into the US emanate from US subsidiaries or subcontracted firms operating in China.

Thus, not only are US MNCs in East Asia playing a vital role in what is exported back home, the surpluses that China accumulates have been recycled into US government debt making China into, as economist Paul Krugman has calls it, a "T-bills republic"!

Third, the US trade deficit with China is in fact a defacto trade deficit with East Asia that bilateral statistics do not and cannot capture. Such a complex multilateral chain complicates attempts to impose economic costs on China, since protectionism against Chinese exports will inevitably penalize other East Asian producers, including US corporations themselves.

Clearly, the nuances in East Asian inter-dependence and the extensive economic involvement of the US must be appreciated if India is to craft a sensible look-East policy. The reliance on a stereotypical image of China and her neighbors has precluded India from economically immersing itself in the region.

Instead of overstating China's economic story, New Delhi should become better acquainted with the integration dynamic in East Asia, one that is already transforming political choices in the region. And the prerequisite for India's participation in regional supply networks will begin by constructing an ecosystem at home that encourages the allocation of resources toward labour-intensive manufacturing.


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