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 with caution, but not without hope. Influencing Asia’s largest economy and political player is not going to be easy, especially given the growth and nature of China–US tensions.

Past thinking assumed Asian economic integration could be neatly ordered, as described by the metaphor of ‘flying geese’, with Japan leading newly industrialised economies of Hong Kong, Singapore, South Korea and Taiwan, and then others. But the Asian Financial Crisis shifted new waves of foreign direct investment into China, and some countries in Asia lost a generational opportunity to join global value chains. Present shifts in the global economy and supply chains are much more turbulent.

A second caution is how much influence anyone can have on China. Investors, like the newly industrialised countries on China’s periphery, might once have held some influence, but this has been diluted by China’s massive growth to be the centre of gravity in Asia’s economic integration. Even today, amid talk of relocating supply chains, most trade patterns remain anchored in China. Beijing will primarily manage its economic integration and do so in accordance with its own priorities. This is evidenced by the Belt and Road Initiative and dual circulation theory.

As China–US competition continues with sanctions and the search for non-Chinese production chains, it remains to be seen how China will respond. As sanctions increase on Russia following its invasion of Ukraine, China — having declared a friendship with Moscow without limits — must decide how to deal with ripple effects on its own dealings and will likely explore ways to sanction-proof its own interests. Such decisions will ring across the region, but other Asian countries have little say in shaping China’s policies.

Yet this does not mean that ASEAN and others have no agency. The inclusive character of ASEAN-led initiatives is an important contrast to other regional integration enterprises. In particular, the United States is constructing new multilateral arrangements that pointedly exclude China, such as the strategic and defence initiatives of the Quad and AUKUS, and any new US economic initiative will be similarly coloured. For all its size, China still needs support.

Initiatives that can 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 in economic integration yet represent sharply different approaches in relation to China — Beijing was never invited into the CPTPP but is the largest economy in RCEP and should reap the largest economic benefits.

Moreover, the context for both has changed considerably since they were first mooted and negotiated. For the CPTPP moving forward, China’s request to join poses a big question. While ostensibly open, the Trans-Pacific Partnership was a flagship of the US ‘pivot’ to Asia and wistful hopes remain that the United States might return. For some, the calculation is that if China joins there is zero prospect for the United States to join. This strategic reaction is understandable but undercuts the CPTPP’s explicit undertaking that accession would be open to any economy able to meet the quality of the undertakings, subject to agreement by current members.

Taiwan has also applied to join. In the past, both Taiwan and China joined the WTO and APEC but today some believe cross-Straits tensions 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 prioritise the politics of the CPTPP.

As an agreement that sought to harmonise various ASEAN+1 agreements, RCEP is a very different arrangement. The emphasis on inclusion means the depth and quality of the undertakings (while not without benefits) will be modest — realistic common targets acceptable among very diverse economies — and frame the largest and most dynamic market in the world.

The risks of China’s dominance in RCEP were to be managed and balanced by two factors: the participation of India and ASEAN’s chairmanship. New Delhi’s decision to remain outside RCEP alters this strategic design. While RCEP came into effect at the start of 2022, whether there is real effort to progress it further 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 that process, as with the ASEAN–China FTA, efforts can be made to remind all parties about multilateral commitments and win–win goals. There can also be efforts to engage India in some form, even short of full membership. After all, the door remains open for its entry.

The challenges of engaging China in regional integration remain that of achieving a balance between strategic and security concerns and the economic benefits of integration.

The first step towards reaping the benefits of economic integration is to be open to all. ASEAN strives towards open regionalism to bring its members together while allowing access to non-ASEAN investors and traders. China, which is crucial for member states, offers benefits that no other country can. There are elements within China who believe their country can benefit from entering such agreements and accepting international rules and norms, in tandem with its own economic reform.

Second, bilateral and minilateral cooperation can also be useful, especially in emerging areas. For instance, Singapore has reached out to Chile, Australia and New Zealand to conclude digital economy agreements. China recently expressed interest in these agreements, indicating that engagement can follow from cooperation between smaller states. There are also elements within China who 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 are not able to be resolved through RCEP or any other trade 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 split global value chains in technology and telecommunications. These too are treated as questions of security and political rivalry. Current rules are insufficient to assure economic integration when the international rules-based order is at real risk of being strained and broken by political turmoil.

Efforts to manage China’s regional economic integration will need to be via multiple new avenues. It is a complex and powerful country, on which opinions differ 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 settled and fixed perspective and, with much less power, exclusion and conflict are not real options. Instead, initiatives to engage and generate rules and relationships must remain the priority.

Efforts within Asia to engage China must continue and even be stepped up, despite current controversies and challenges. The purpose and admission of new members into the CPTPP are questions that need to be resolved but this should be done rationally, rather than rushed. Engagement through RCEP and other existing multilateral efforts like the ASEAN–China FTA also needs reinvigoration. Additional dimensions of integration like sustainability and the digital economy must be added in new ways. Paths forward may be explored bilaterally or even through initiatives that initially are among the smaller economies.

There remain the dangers of being dominated by China or dealt with on terms that are one-sided. The difficulties of dealing with bifurcated supply chains is further complicated by sanctions, security and other political concerns. Yet the rewards of integration across the region, including China, are also real and are very much worth the risk.

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

This article appears in the most recent edition of East Asia Forum Quarterly, ‘East Asia’s Economic Agreement’, Vol 14, No 1.

The post Managing China’s regional economic integration first appeared on East Asia Forum.

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