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What the ASEAN Markets Means for American Business

Published by Other on 2006-02-20

Executive Summary

President George W. Bush's visit to India in March 2006 will underscore the economic opportunities and political possibilities for America in the world's biggest democracy, and its largest middle class - some 450 million people out of a population of 1.2 billion. Mr. Bush, who has invited dozens of top American CEO's to travel with him to help strengthen the economic corridor between the two countries, will be surely heartened by the fact that India's appetite for American goods, technology and investment in manufacturing and securities, and for political cooperation, is ravenous. But the president will also hear concerns from the Indians about their unresolved territorial and diplomatic disputes with neighboring Pakistan, particularly over the mountainous Kashmir province that both countries claim. He will hear, too, about other key issues such as the transfer of American nuclear technology to meet the energy needs of a rapidly industrializing, but still poor, nation.

However inviting its economic prospects - Deutschebank predicts that India's economy will be behind only the US and China in another 25 years - India is still a developing country. Its gross domestic product is barely $700 billion, well short of the $2 trillion that is generally considered the benchmark for a country to be considered an economic giant. Some of India's Asian neighbors have far outstripped its economic record, which was adversely affected by long years of Fabian-style socialism and the concomitant dominance of a corrupt bureaucracy that required licenses for virtually every economic activity.

Although the president is not scheduled to venture beyond the Subcontinent on this trip, he would be well advised to also address the concerns of India's neighbors, an economically powerful grouping of 10 countries known as the Association of Southeast Asian Nations, or ASEAN. The ASEAN region has a population of more than 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product $737 billion, and a total trade of $720 billion. US trade with ASEAN countries totaled more than $150 billion last year, and, taken together, ASEAN countries are the fifth largest market for US exports. In addition, American investors have an $88 billion stake in the region.

The ASEAN countries are also of strategic interest to the United States. Malaysia and Indonesia sit astride the Malacca Strait, through which as much as one quarter of the world's commerce and half the world's oil pass through each year. Thailand and the Philippines are treaty allies, and America has important security cooperation with several other ASEAN governments. Indonesia is the third-largest democracy in the world, and a model of religious and cultural tolerance. Malaysia, meanwhile, is demonstrating the critical link between democracy and economic growth. And all of these factors we increasingly see in ASEAN - democratization, tolerance and economic growth - are essential in the war against terror.

The United States shares with ASEAN a common interest in promoting democracy, prosperity, and stability. American cooperation is aimed at advancing these interests and at tackling transnational problems like terrorism, infectious disease, trafficking in persons, narcotics and other crime.

Nevertheless, the ASEAN countries are generally disappointed at the slackening pace of American investment in the region; they contend that the US is missing out on timely commercial and manufacturing possibilities in an area that has long been hospitable to US interests. While they laud Mr. Bush's overtures toward India - which are likely to have some spin-off benefits for India's ASEAN trade partners - they also feel that American economic policymaking needs to be advanced by a fresh and hard-headed assessment of reality on the ground in Asia, particularly Southeast Asia.

ASEAN leaders say that they have helped defuse Islamic militancy in their region, and thwarted many terrorist plans aimed against America. They also point to the fact that their countries have long been adherents to the Bush Administration's twined messages of democracy and the free market. But they say that Washington hasn't sufficiently acknowledged this, and that the American business community hasn't rewarded ASEAN with the kind of foreign direct investment merited by ASEAN's economic performance and yields on capital.

The Bush Administration and American business in general, need to evaluate ASEAN's contention with some urgency. It isn't simply that many of the ASEAN countries - Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia - by themselves have humongous economic clout. That clout is amplified by their close trading partners, China, Japan, and Korea. The ASEAN countries, plus China, Japan, Korea, and Taiwan, hold more than $3 trillion in US Treasury securities. This represents the highest accumulation of US dollar holdings in history.

These holdings underwrite America's current-account deficit of $725.8 billion. And while the Asians do not plan to park their money elsewhere at the moment, they aren't increasing their holdings significantly either. There's an estimated $3 trillion in cash reserves sitting in the vaults of ASEAN central banks. That's because of their concern about the dollar's strength. While the decline of the dollar against non-Asian currencies finally began to slow the growth rate of US imports, export growth also slowed because the dollar has not fallen sufficiently. Much more depreciation will be needed to substantially reduce or eliminate the deficit.

The loss of US export markets during the prolonged overvaluation of the dollar over the past decade has made it more difficult for US firms to increase exports. The dollar simply has not fallen far or fast enough to stimulate adequate export growth. The dollar has only fallen 11.6% since 2002, much less than in the mid-1980s, yet the trade deficit is twice as large as it was in 1987. Hence, the trade deficit has continued to expand.

Viewed one way, the determination of Asian governments to prop up the dollar to promote their export-led growth strategies is the largest barrier to needed dollar adjustments. Of course, the arrangement suits them fine: this is a form of vendor financing, where Asian central banks are loaning America vast sums so that the US could buy their goods. (The US must borrow abroad to finance its trade deficits. The recent decline in the dollar indicates that private foreign lenders are less willing to supply new credit. Foreign governments stepped into the gap and financed a growing share of US international debt in recent years. A rapid, uncontrolled decline in the dollar could destabilize US financial markets and sharply increase interest rates and inflation. Foreign governments, primarily in Asia, have provided a substantial share of the net capital inflows in recent years.)

The economic clout of the ASEAN countries is likely to grow as they organize themselves into a regional common market, along the lines of the European Union. That will be a market of 600 million by next year, and 1 billion by 2020. Dr. Mahathir Mohamad, a former prime minister of Malaysia, floated this idea of an East Asian economic grouping back in 1990; he called it "East Asian Economic Caucus." Since the US was left out of this proposed grouping, the US undermined this proposal, and the Asia Pacific Economic Grouping (APEC) came into being with a major role for US and its allies in the East. Dr. Mahathir expressed his displeasure by not attending the first meeting of the APEC in Seattle in 1993.

The central bankers of ASEAN countries are a savvy lot, and they have managed monetary policy well. ASEAN governments are far from profligate, and finance ministers typically tend to be conservative. Southeast Asian economies have largely recovered from the financial meltdown following the collapse of Thailand's currency, the baht, in 1997.Although domestic politics may vary from country to country within ASEAN, and there is general agreement that America is a reliable power to do business with. In turn, the Bush Administration acknowledges that ASEAN is the primary agent of economic integration for the region, and is therefore an indispensable partner for US organizations with a stake in ASEAN economic growth and related security matters.

For American business, therefore, the question can be posed as follows:

New business, anyone?


The Background

The Association of Southeast Asian Nations was established on August 8, 1967 in Bangkok by the five original member-countries: Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on January 8, 1984; Vietnam on July 28, 1995; Laos and Myanmar on July 23, 1997; and Cambodia on April 30, 1999.

The original ASEAN Declaration states that the aims and purposes of the grouping are: (i) to accelerate the economic growth, social progress and cultural development in the region through joint endeavors in the spirit of equality and partnership in order to strengthen the foundation for a prosperous and peaceful community of Southeast Asian nations; and (ii) to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter.

The very idea that Southeast Asian countries would band together under some sort of rubric was unusual. The history of the region, dating back to 150 B.C., was one of squabbling among dozens of local kingdoms and princely entities. The dominant powers then, as now, were China and India, which traded with various communities. China and India helped spread Buddhism and Hinduism in the region. Arab traders later brought in Islam. And much later, the Dutch, British, French and Spaniards created settlements that ballooned into imperial colonies. After World War II, Communism spread in Indochina once China was seized by Mao Zedong. A "Bamboo Curtain" marked off Vietnam, Laos and Cambodia - the three main Communist states - from the other Southeast Asian countries that more or less opted for capitalism, however indigenous.

Capitalism didn't necessarily translate into democratic forms of governments; authoritarianism became the dominant political creed in the region. It wasn't until the late 1990's and the early years of this millennium that political systems in much of the ASEAN region showed definitive signs of liberalizing.

The region is now stable, notwithstanding the occurrence of intermittent Islamic agitation. More than any other Westerners, Americans - and their dollars - are very much welcome.
The US and ASEAN established dialogue relations in 1977, and since have cooperated in numerous political, economic and development activities, according to the Department of State. Since 2002, the US has supported the ASEAN Cooperation Plan (ACP) and the Enterprise for ASEAN Initiative (EAI), offering broad support for trade capacity building, regional integration and development, cooperation on transnational issues and support for the ASEAN Secretariat in Jakarta.

In July 2005, Deputy Secretary of State Robert Zoellick and ASEAN Foreign Ministers agreed to raise relations to a new level by developing the ASEAN - US Enhanced Partnership (EP). This agreement was raised to the level of a Presidential initiative by means of Joint Vision Statement on the Enhanced ASEAN-US Partnership (JVS), issued by President Bush and the ASEAN leaders attending the 2005 APEC Summit in Busan. The JVS called on the Secretary of State and ASEAN Foreign Ministers to develop a Plan of Action (POA) to implement the EP.


How ASEAN Views America

President Bush's trip to India comes at a time of mounting concern in ASEAN countries over the economic ambitions of India and its main rival in Asia, the People's Republic of China.

"ASEAN is positioning itself between India and China - as a gateway to those economies," said the chief economist for Asia-Pacific for Credit Suisse, Arjuna Mahendran. "ASEAN leaders know that that the US economy has become even more intertwined with that of East Asia in the last three of four years, and is likely to become even more intertwined."

Mr. Mahendran, a former president of the Sri Lanka Board of Trade, points to the fact that China's foreign-exchange reserves rose last year to nearly $300 billion. The figure is expected to touch $800 billion in three years, and $1 trillion in less than five years. At the same time, China's Communist regime, as of December 2005, held $256.7 billion in US Treasury bills, second only to Japan's holdings of $685 billion.

Moreover, China's trade surplus with the United States increased by 24.5% in 2005, to $202 billion, the United States' largest bilateral deficit.

While many members of the US Congress urge China to devaluate its currency - the remimbi - drastically in order to make American goods more competitive (and, not coincidentally, Chinese imports more expensive), the Chinese are unlikely to oblige.

Last year, they revalued their currency by slightly more than 2% and they have declared that the currency will now be traded and valued against a basket of currencies and not just the US dollar.

A recent blog posting puts the revaluation matter in clear perspective:

"Let us start simple and then build to the more complex and useful. Imagine that we live in a world where only the United States and China trade across borders. Under the previous fixed exchange rate, the US dollar bought 8.28 remimbi. Now the US dollar only buys 8.11 remimbi, so it now takes about $1.02 to purchase 8.28 remimbi. This is important because the manufacturer of the socks that I am wearing right now wants to get paid in remimbi, he does not care what the dollar value of the socks are. His workers get paid in remimbi, his electric bill gets paid in remimbi, and his taxes are paid in remimbi. He wants to sell his socks for remimbi. So now my socks are slightly more expensive to me, the consumer. The change in price will not be the full 2% as that is a matter of negotiating power between the buyer and the seller, but the dollar price will increase.

This type of interaction will go on across the board. The inverse reaction also goes on, as US good exports to China become slightly cheaper - that $50 million Boeing now only costs 406 million remimbi instead of 414 million remimbi to the Chinese. So just playing with Economics 101 logic, when things get cheaper, people and countries consume more, and when things get more expensive, they consume less. Therefore we would predict that the US should export more goods to China and import slightly less. This is the simplest first order prediction."

China's trade surplus with the United States increased by 24.5% in 2005, to $202 billion, the United States' largest bilateral deficit. This bilateral deficit with China increased $40 billion in 2005, more than accounting for the entire increase in the United States' non-oil trade deficit. China has prevented any appreciable increase in the value of its currency, which has caused the bilateral trade deficit to balloon for a number of years. China's intransigence has encouraged other Asian nations to prevent or slow increases in the value of their currencies.

US imports from China are six times the value of US exports to China, making it the United States' most imbalanced trading relationship. US imports from China were $243 billion in 2005 (an increase of 24%), making China the second largest exporter of goods to the United States, behind Canada at $288 billion. At current rates of growth, China will surpass Canada and become the largest supplier of US imports within the next two years.

Leaders in Washington are well aware, of course, that the Chinese - and other Asian holders of American securities - have no place else to invest their trade surpluses. The EU, Japanese and British currencies are nowhere as attractive as the American dollar.

"The Asians are interested in maximizing their profits," said Mr. Mahendran, the Singapore-based Credit Suisse economist. "They are interested in job creation in their own economies."

Such job creation is predicated on more exports to the US. In turn, this assumes that the American market will keep growing. In order to ensure that, the Asians, in effect, finance their own exports by "loaning" their dollars to the US Treasury through the purchase of T-bills and other securities.

(For 2005, exports of $1,271.1 billion and imports of $1,996.9 billion resulted in a goods and services deficit of $725.8 billion, $108.2 billion more than the 2004 deficit of $617.6 billion. For goods, exports were $892.5 billion and imports were $1,674.6 billion, resulting in a goods deficit of $782.1 billion, $116.7 billion more than the 2004 deficit of $665.4 billion. For services, exports were $378.6 billion and imports were $322.2 billion, resulting in a services surplus of $56.3 billion, $8.5 billion more than the 2004 surplus of $47.8 billion. The goods and services deficit in 2005 was $725.8 billion. As a percentage of US gross domestic product, the goods and services deficit increased from 5.3 percent in 2004 to 5.8 percent in 2005.)

(Dramatic increases in the cost of petroleum products and the volume of oil imports were responsible for nearly two-thirds of the increase in the trade deficit in 2005. The average price of crude oil imports increased 39% over 2004. In addition, the volume of petroleum product imports also increased 4% in 2005.

(Total US imports of goods and services reached $2 trillion in 2005 for the first time, 57% more than the $1.3 trillion in exports. To keep the trade deficit from widening further, the growth rate of exports must exceed the growth rate of imports by 57%. Last year, import growth of 13% exceeded export growth of 10%, and imports expanded by $228 billion, almost twice as much as the increase in exports of $120 billion. Net imports as a share of GDP have increased for 10 consecutive years in a row since 1995. If imports continue to grow at a 13% rate, the trade deficit will decline only if exports grow faster than 20%, which would be double their 2005 growth rate. In the absence of a dramatic and sustained slowdown in US growth, exports can grow more than half again as fast as imports only with a substantial reduction in the value of the US dollar.)


ASEAN leaders also say that the production platform in their countries is only rivaled by Japan, South Korea and Taiwan - and that their economies, in effect, offer American manufacturers a more sophisticated base than that of even China.

That is why they watch with considerable dismay as American foreign direct investment (FDI) continues to surge in China, while it appears to be slackening in many ASEAN countries. (In 2005, China received nearly $60 billion in FDI, much of it from US companies. The unofficial figure for the 10 countries of ASEAN was about $20 billion, much of it going to Singapore, Thailand and the Philippines.)

Beyond the economics of deficit financing, there are larger political issues that figure increasingly in ASEAN's relationship with America. A recent poll of foreign and trade ministers of ASEAN countries showed that they want to develop stronger ties with America and Australia.

In particular, they pointed to a mutual convergence of interests in tackling Islamic militancy. American law-enforcement agencies such as the Federal Bureau of Investigation (FBI) have established offices throughout the ASEAN region.

While there isn't quite a groundswell of clamoring for stronger ASEAN-US political ties, Mr. Bush is more popular in the region than in Europe or the Middle East. This is a point that American business could capitalize on.


The Malaysia-India Nexus

President Bush and his entourage are likely to note with considerable interest that India has announced plans to spend more than $500 billion on infrastructure improvements over the next five years. The American CEO's traveling with the president will undoubtedly want their companies to compete for contracts.

But here's something that might surprise them: Malaysia, an ASEAN member, is already pursuing those contracts, as is Singapore. Malaysia, like its Southeast Asian neighbor and longstanding rival, Singapore, wants not just a spoonful of the contracts curry, but a large serving. But Singapore enjoys an advantage over Malaysia in that its companies not only bid for contracts, they also invest in the Indian economy. In fact, Singapore's current investment of $1.3 billion is the biggest from ASEAN, dwarfing the roughly $500 million that Malaysian investors have poured into Indian companies, mostly in the technology sector.

Moreover, Singapore is expected to put an additional $3 billion into the Indian economy in 2006 alone.

Mr. Badawi will soon be visiting India with a large business delegation in tow; his emphasis will be on how Malaysia -- perhaps more than any other Asian country -- is already an integral part of India's effort to accelerate its infrastructure development. Malaysian companies currently have nearly $2 billion worth of deals, mostly to build highways and power grids in remote areas untouched by the economic progress enjoyed by India's urban areas.

Mr. Badawi's trip is being played out against a larger backdrop of a calibration of economic diplomacy in Southeast Asia. This country of 24 million majority Malays, and minority Chinese and Indians is increasingly looking westward to India and the Middle East for both contracts and also for foreign direct investment. On an earlier trip in 2004, Mr. Badawi spent several days in Dubai before flying to India, and many of his meetings focused on the question of more business for Malaysian companies in the dramatic growth of the emirate.

The focus on India is new. It is an acknowledgment of the Subcontinent's emergence as a major economic power, and of the growing spending power of its burgeoning middle class. It is also an acknowledgment that India, with foreign-exchange reserves at a record $135 billion and exports of more than $100 billion annually, has the cash to spend on developing its long neglected infrastructure.

Malaysians talk about India's potential to match Emerging Asia's other economic giant, China as a source of lucrative construction and other infrastructure contracts. Malaysia's annual bilateral trade with China, about $30 billion each year, is seven times that it has with India. But Prime Minister Badawi wants to diversify Malaysia's trade portfolio.

While Malaysia is India's largest trading partner among ASEAN countries and has seen bilateral trade growing steadily -- it is expected to be $4.28 billion this year, mostly palm oil, rubber products and textiles -- it's a far way from the figure with China, $30 billion

"We recognize the emergence of China and India in the global trading environment," Mr. Badawi says. "Southeast Asia needs greater integration with these trading partners and cannot remain competitive merely by strengthening intra-regional co-operation."

Part of the reason why Malaysia is looking increasing west toward India and the oil-rich countries of the Gulf is the desire for a counterbalance to ASEAN's growing dependence on China. While ASEAN's trade annual trade of $13 billion with India accounts for only 2 percent of the grouping's total trade, its figure with China will be $110 billion this year, an increase of a whopping 40 percent over 2003.

But rather than celebrate without restraint, key ASEAN officials actually worry about this situation. The 2003 outbreak of severe acute respiratory syndrome (SARS) that resulted in closing of factories in China and alarming foreign companies that are increasingly relying on their Chinese operations for speedy production of manufactured goods for markets in Europe and the United States.

ASEAN countries -- particularly Malaysia, which has enjoyed a healthy annual growth rate of about 7 percent for the last two or three years -- worry that with China trying to cool its overheated economy in an effort to avoid a hard landing (meaning deceleration of growth rates to below 4 percent annually from China's current 10 percent), their own economic prospects would be adversely affected.

"We in Southeast Asia have no wish to become merely an adjunct to the Chinese economy," George Yeo, Singapore's trade and industry minister, told the Confederation of Indian Industry - an influential lobby group - during a trip to India not long ago. "Hence, our decision to move closer to all economies that want closer links to us."

India certainly wants closer ties with Malaysia and other ASEAN countries. Its companies have started investing in Asian entities, including in Malaysia, where Indian sources have poured $421 million into 122 projects in petrochemicals, textiles and textile products, food manufacturing, chemicals and chemical products, and rubber products.

The "partnership agreement pact" that India, China and Korea signed with ASEAN at the third India-ASEAN summit in Vientiane, Laos, in late 2005 will allow India could increase trade between the two sides from $13 billion at present to $30 billion by 2007. The trading zone that this new grouping creates will have a combined gross domestic product exceeding $2 trillion.

Malaysia sees itself as the gateway to both ASEAN and China. Officials in Kuala Lumpur point out that Malaysia is strategically located within this expanded market.

So what might be a stumbling block in better trade relations between India, Malaysia and the rest of ASEAN? The basis of any good bilateral business isn't simply good economics and sound financial sense.

Perhaps a more fundamental factor is culture. And this is where countries like Malaysia and Singapore need to offer more reassurance to the notoriously prickly Indians that despite Malay hegemony in the former and Chinese in the latter, Indians -- their professional skills, and their business -- are truly welcome.

Conclusion

The prevailing assumption in American business circles, as indeed among European ones as well, is that China and India are likely to be the main competitors in the global market for the industrialized countries.

But the 10 members of ASEAN are also rapidly emerging as a formidable and increasingly integrated economic bloc. Most of these countries are well advanced in technology, telecommunications, financial services, and international trade. Some of them, such as Singapore, have graduated from third-world to first-world status. Relatively cheap labor and sophisticated infrastructure enable the ASEAN countries to sell their goods cheaply and voluminously.

This presents both a threat and an opportunity to the domestic economies of the industrialized countries - i.e. the 31 members of the Organization for Economic Cooperation and Development, the Paris-based think tank that's widely regarded as the rich man's club. Some ASEAN countries - such as Singapore and Thailand - enjoy economic growth rates faster than many of the rich nations. The threat lies in the simple fact that goods from these countries would swamp industrialized-country markets and that cheaper and more efficient sectors in back-office processing and market analysis would entice the rich nations to move more of their operations to these countries.

The emergence of ASEAN also presents a fresh opportunity for American business to develop stronger trade ties. But here, too, there will be stiff competition. The race for winning ASEAN's "heart" will be between the US and Europe on the one side, and China and India on the other side. China and India combined already have the world's biggest consumer market: 2.5 billion, or almost a third of the world's population. Will the two Asian giants buy more from ASEAN countries, with their cheap goods, or will they retain their currently stronger trade links with the United States?

Recognizing that ASEAN is both an exporter and importer of goods and services, China, India and even Australia are fashioning more economically integrated links with ASEAN. And recognizing their own need to present themselves as an integrated regional bloc, the ASEAN countries have launched a "single window" system for trade, customs and levies.

The irony is that while Asian nations - ASEAN, China, and India - are liberalizing their trade regime, the larger global structure of the 148-member World Trade Organization is failing to keep up. Its biennial ministerial meeting, concluded in Hong Kong mid December, couldn't develop sufficient traction to further liberalize world trade and persuade America and Europe to significantly reduce subsidies to their farmers.

While the WTO's actions or inactions may not directly affect most of ASEAN's members, the grouping has other concerns. There's some concern, for example, that Singapore's economy is growing at such breakneck speed that it will "heat up" the region, generating inflation and perhaps leaving the other 9 ASEAN nations behind in their economic development.

And finally, why, beyond the trade aspect, is all this of importance to American businessmen? Because the ASEAN countries hold $1 trillion in US treasuries; they have another $3 trillion parked in their treasuries, and they are deciding what to do with the money. Along with China, ASEAN has financed much of America's trade and budgetary deficits.

The US is going to have to further woo ASEAN by investing more in its economies so as to expedite sustainable development, especially in the poorer members such as Laos, Cambodia, and Myanmar.

A more prosperous ASEAN need not undercut prosperity in America. And regardless of America's pre-eminent position in the global economy, the economic momentum in ASEAN is irreversible. American businesses would be better advised to look at ASEAN's stable markets for investments in consumer manufacturing and securities markets. And they might do well to consider more joint ventures in ASEAN nations.

At a recent conference sponsored by the Bush Administration in Washington, participants spoke encouraging about enhancing economic opportunities for the US private sector in ASEAN countries. A speaker from the private sector called this "one of the most exciting times for those of us doing business [in the region]," describing it as a renaissance of ASEAN countries with the US and citing a series of meetings, deals, and recent liberalizing regulatory activity. Another noted that, after a period of intense self-examination, ASEAN has retained its core functions of protecting small member states from larger nations, and providing a platform for negotiation with the large economies in the region.

In the economic cooperation area, ASEAN and the US do agree to build on the existing "Enterprise Asia Initiative," while working to sustain joint economic growth, support realization of the ASEAN Economic Community, cooperate in trade, finance and other areas, and strengthen the ASEAN investment climate. They further agree to reform international financial institutions in the area of economic surveillance and to promote Asia's influence in them. They commit to special cooperation in the strategic sectors of energy, environmental and natural resource management, and transportation.

The US views ASEAN as an area of both strategic and economic importance, and President Bush held productive, wide-ranging discussions with the ASEAN representatives at the 2005 APEC meeting. FTAs are in negotiation with Singapore and Thailand, and the Malaysian cabinet has agreed to pursue one as well.

By not working closely with ASEAN in the economic realm, the US runs the risk of trade share loss in a growing region that is already a major trading partner, as well as loss of influence, with the potential for discrimination against US businesses in future competition. There is also an associated security risk, as ASEAN countries may become overly dependent on the Chinese economy, with which theirs will inevitably become integrated, compromising their capacity for independent policy and action. Some believe that China has already replaced the US as the most respected and admired country in parts of the ASEAN region. The opportunities facing the US from regional economic cooperation are the obverse of these risks: an expanded, unified regional export market in which US businesses can compete on fair terms; opportunities for investment; better prospects of intra- and interstate political stability.

The key challenges facing both ASEAN and the US are trade and financial integration within ASEAN, combined with implementation of policies to liberalize external trade and improve the business environment. By comparison with the EU, impetus for integration in ASEAN comes much more from the financial sector. ASEAN countries trade with extra-regional countries more than with each other, so trade gains from integration will be relatively small. ASEAN needs international financial credibility, however, in order to free up the assets now locked into currency reserves, for such long-term investment spending as infrastructure development.

ASEAN and the US cooperation to enhance trade and investment already takes place under the Enterprise for ASEAN Initiative (EAI) and ASEAN Cooperation Plan (ACP), according to the State Department. The US Patent and Trademark Office, for example, works regularly and intensively with ASEAN to build capacity and develop policy in such business environment matters as intellectual property rights.

Similarly, under the ACP, a US economic consulting business has been funded to provide technical assistance and training that coordinates closely with ASEAN. With a project office in the ASEAN Secretariat itself, this company harmonizes all of its activity with the ASEAN Vientiane Action Program, developing road maps from present to integrated market scenarios in eleven priority areas. Private sector business organizations are also engaged at their own initiative; one prominent firm provides US-based training for senior ASEAN executives, for example.

As with security matters, in working with ASEAN on economic issues, the US stumbles over its expectations of regional organization operations. Comparing ASEAN with the EU, Americans are often frustrated with ASEAN's scope and pace. Partly in consequence, the US has not participated in ASEAN regional developments to the same degree as other ASEAN dialog partners. It is useful in passing here recall the EU's 20-year head start on ASEAN, the assistance provided by the US in its early years, and the intense economic and security pressures that drove its growth for much of its lifespan. One participant at the Washington conference said that his biggest problem was the dearth of resources to train the best ASEAN students, future regional thinkers and leaders, in the US, especially students from Vietnam and Cambodia. A third difficulty is the need to introduce business environment improvements ahead of or in parallel with integration and liberalization support. Economic returns to the latter may be severely compromised if not anticipated or at least accompanied by the former.


Addendum: Looking Beyond ASEAN's 2005 Summit

The recent ASEAN Summit held in Vientiane, Laos may well have broken new ground in Asian integration and community-building, as China is slated to play an accelerated role in building this future East Asian Community. Optimism was thus high for East Asia following the conclusion of the 10th ASEAN Summit, as well as the series of back-to-back summit meetings between ASEAN and its Asian-Pacific partners, China, Japan, South Korea, India, Australia and New Zealand.

In fact, China took center stage with India at this summit, as ASEAN leaders formalized their intentions to bind themselves more closely to these two regional giants so as to ensure their own prosperity and greater global clout. Of particular significance was the speech to ASEAN business leaders of Malaysian Prime Minister Abdullah Badawi, who called for a greater integration of ASEAN with China and India. This was also the first official acknowledgement of Beijing's and New Delhi's growing importance to ASEAN at summit level.

ASEAN has in fact completed negotiating last month its goods liberalization package and schedule for the future ASEAN-China Free Trade Agreement (FTA). Both partners should be able to meet its complete FTA schedule by 2010. Prime Minister Wen Jiabao played the graceful guest at the Vientiane Summit and pledged greater cooperation with ASEAN, ranging from energy cooperation to financial matters, after having stated at last year's ASEAN Summit in Bali that China is a "gentle and friendly elephant" to its smaller Asian neighbors.

The goodwill generated by Premier Wen, following the cordial relations, and discussions that President Hu Jintao has had with many of the ASEAN leaders at the recent APEC Summit in Chile, paid dividends, as positive feelings toward China amongst ASEAN was prevalent in Vientiane.

But this Vientiane Summit was also significant for Asian integration and regionalism, as ASEAN seems to have taken a new lease on life with six new significant developments, over which China would have key influence in the coming years.

Firstly, ASEAN took a decision to speed up its own economic linkages in setting up an ASEAN Economic Community (AEC). ASEAN leaders signed pacts to push forward economic integration within the grouping, so that the "original" five ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand) and Brunei would abolish trade tariffs in 11 sectors by 2007 - three years ahead of schedule.

These 11 sectors in fact constitute more than half of current intra-ASEAN trade, which is significant. The other four economies (Vietnam, Cambodia, Laos and Myanmar) will join the trade pact by 2015, or five years earlier than scheduled. The AEC received a much-needed boost in Vientiane and should help foster greater economic community-building across Asia, especially if it is increasingly hinged on a successful ASEAN-China FTA and partnership, which had decidedly given ASEAN an impetus to coalesce as investments shifted to China.

Secondly, the four newer ASEAN members held a sub or pre-summit meeting just before the main summit and pledged to work together to narrow their wealth gap with the other six "older" countries; they also pledged to move quickly towards integrating their four economies so as to better attract foreign investments together.

This meeting was significant, as it was the first time that Cambodia, Laos, Myanmar and Vietnam had met at summit level within the greater ASEAN framework. No doubt, China's increasing influence in these four countries of Indochina has provided this sub-regional impetus to integrate further, which in turn could also enhance Beijing's overall standing and influence within the "greater" ASEAN in future.

Thirdly, India was officially inducted into the Asian economic integration process. Not only was its growing clout and role recognized (like China), but India's future place within East Asia appears to have taken a big step forward. In fact, ASEAN is currently negotiating an FTA with India, just as Indian Prime Minister Manmohan Singh declared that two-way trade between India and ASEAN should more than double to $30 billion by 2007. In this regard, China's normalization of relations with India has helped pave India's integration with the region, although China's trade ties with the East Asian region clearly surpass those with India.

Fourthly, ASEAN also decided to begin FTA negotiations with Japan and South Korea next year, in order to speed up the increasing trade flows between ASEAN and Japan/South Korea, thus giving further impetus to the "ASEAN+3" process. Similarly, Chinese, Japanese and South Korean leaders had also met at summit level in Vientiane to strengthen Northeast Asian cooperation, notably in energy security and resolving the North Korea crisis through the six-party talks.

he strengthening of the Northeast Asian pillar in "ASEAN+3" is crucial for the success of any future pan-East Asian regional framework; Beijing's role is considered key by ASEAN, especially when China's decision to negotiate a FTA with ASEAN had sparked interests in Japan-ASEAN and South Korea-ASEAN foreign trade agreements.

Fifthly, ASEAN invited for the first time Australia and New Zealand to the summit, as ASEAN prepares to begin negotiating FTAs with both Canberra and Wellington next year. This was significant, especially after Prime Minister John Howard of Australia refused to sign the ASEAN Treaty of Amity and Cooperation (TAC), unlike the leaders of China, India, Japan, South Korea, who have all inked the TAC either last or this year. Despite some unhappiness within ASEAN, Australia and New Zealand could still hope to belong to an Asian regional political and economic grouping next year, when it is launched. Beijing's support for the inclusion of these two Pacific nations would be crucial, as it is believed that Canberra and Wellington could now be actively lobbying Beijing for its blessings and support to join Asia.

Lastly, the concept of a larger Asian economic bloc got a big boost. Philippine President Gloria Macapagal-Arroyo called for ASEAN to push forward with its efforts to integrate the group by 2020 or earlier, and then "embrace China, Japan, South Korea and India." Such an economic bloc, according to Arroyo, could "hold its own" in future negotiations with the United States, Europe or other emerging economic entities, like in Latin America, the Middle East or Africa.

A crucial decision was taken to organize an East Asian Summit (EAS) in Kuala Lumpur next year, when Malaysia takes over the chairmanship of ASEAN. An ASEAN consensus on this EAS was reached after Indonesia accepted the idea to transform the"ASEAN+3" framework into the EAS, with possible additional countries, like India, Australia and New Zealand, joining in. It is already understood that this inaugural EAS in Malaysia will be followed by a second Summit held in China, thus placing Beijing within the fundamental "core group" of the East Asian integration process, which Japan ardently hopes to co-lead with China, as well as "outsider" India.

For Beijing to host the Second East Asian Summit in 2006 would be a regional bonus for China, as it could then affirm the group's agenda, scope and goals in a more decisive way, after the inaugural 2005 launch in Malaysia.

The Vientiane Summit has thus clearly advanced the fundamental goal of launching an East Asian entity next November in Kuala Lumpur under Malaysian chairmanship. The much-touted East Asian Summit would then formally replace the "ASEAN+3" framework, thus forging a longer-term Asian economic, social, cultural and political community so as to "balance" the United States, Europe and other emerging entities and groupings in the future.

But even more significant for Beijing would be the future role and place of India in East Asian economic integration. The Second High-Level Conference on Asian Economic Integration was held in Tokyo in mid-November 2004, organized by the Research Information System (RIS) of Non-Aligned Countries, based in New Delhi. The RIS-organized and Japan's Sasakawa Peace Foundation-sponsored meeting was the second in a series of high-level conferences on Asian integration, which first began in New Delhi last autumn; a third conference is scheduled in Beijing this year, ahead of the EAS launch.

Beijing could then be in the center of this Indian initiative, which clearly seeks to secure a place within the future East Asian Community.

Significantly, the Chinese partner in this series of Indian-organized conferences is none other than the Development and Research Center of the State Council of China, an important research organ of the Chinese Government.

In fact, this series of conferences is actively pioneered by the RIS of New Delhi to ensure that India is "on the first train of Asian integration." India has pledged its full contribution to Asia's economic cooperation and integration, ranging from energy and financial cooperation to IT and trade, and has insisted on how the tremendous financial assets of Asia (in terms of huge accumulated forex reserves) could be effectively used to enhance Asia's bargaining power on the world stage vis-a-vis other established or emerging entities.

Regionalism is undoubtedly on the rise across the world and East Asia should not be left out of this global trend. India knows that it would have to obtain the tacit approval and support of Japan, and especially China, to join the future East Asian Community, after having successfully wooed ASEAN and South Korea. In Tokyo, India also signaled the birth of a "new India" and its new mentality of openness and regionalism. To illustrate this new thinking, four young parliamentarians from India's four biggest political parties attended the conference to underscore India's new outlook for business, trade, investments and integration.

China's influence is tremendous in this Indian "opening" and integration.

The Indians have insisted that their open economic policy is now irreversible, like China's, as all political parties fully share this goal.

According to them, this should encourage East Asia to embrace India within its future Community, which the Indians have dubbed "JACIK" or Japan, ASEAN, China, India and Korea" grouping. Clearly, in terms of philosophy and economic modeling, the Indians have stressed their close symbiosis with China, as the two Asian giants leaping forward together. This message was again reiterated at the World Economic Forum held in New Delhi in December 2005.

India's wooing of China will relentlessly continue as it hopes to share China's strategic view of reuniting East Asia into a future Community, which could "stand up" against and effectively negotiate with the United States and the European Union as equals.

This idea of "JACIK" appears to have also made some progress officially at ASEAN's Vientiane Summit. Indian Prime Minister Manmohan Singh attended the ASEAN-India Summit and had an invaluable occasion to informally meet his peers from China and Japan. Mr. Singh, well reputed for his liberal stance in economic management, again reiterated the crucial importance of East Asian integration to India and vice versa, and thus pitched India's new thinking to his Asian peers as "an irreversible process," which should also, according to him, help harness East Asian regionalism.

His official visit to Beijing in the coming months would probably be the prime occasion for both Asian giants to pledge their common resolve to build this community, which is what New Delhi seeks in the longer term, as it anchors its own future on consolidated relations with Beijing and an East Asia Community.

But whatever the new geographical and organizational configuration of the future East Asia would be, the EAS framework should remain open and not be exclusive. Pragmatically, it should not be guided by feelings of "Asian nationalism" alone, but instead, seek to better cooperate with the United States and the EU in a global partnership.

The Vientiane Summit has decidedly taken the first step forward toward building a 3 billion-strong East Asian Community of the future, and may thus ultimately be remembered for this "monumental Asian leap forward."

But whatever the outcome, China, India and ASEAN will likely continue to play a key role in molding this East Asian Community, as Japan and South Korea appear to be unfortunately relegated to the second tier of Asian integration.

About the Author

Pranay Gupte writes a daily column for The New York Sun, "Lunch at The Four Seasons With..." It profiles leaders in business, finance, industry, banking, investment, law, education, health, politics, diplomacy, media, the arts, entertainment, academe, government, and other fields. He also writes editorials and opinion articles.

He is a veteran international journalist, editor, and author. A graduate of Brandeis University, he also attended the Columbia University Graduate School of Journalism. Mr. Gupte was a staff reporter and a foreign correspondent at The New York Times for 15 years. He was subsequently a global-affairs columnist at Newsweek International for 18 years, and a contributing editor at Forbes and Asian Finance magazines. He also founded and edited The Earth Times, a newspaper focusing on economic development and the environment.

He has served as Business & Finance Editor of The New York Sun, Business Editor of The Daily Star in Beirut, and Global-Affairs Columnist at The Straits Times, Singapore. He has produced 50 documentaries for public television, and has appeared frequently as a guest commentator on economic and global affairs on CNN, PBS, NBC, ABC, BBC, WCBS, and various radio stations, including National Public Radio.

He has also moderated and appeared in panels at the World Economic Forum's Davos and regional meetings, Columbia University, the Asia Society, and other institutions. Mr. Gupte has written for many major magazines, including The Atlantic, Forbes, People, Reader's Digest, The New York Times Magazine, The New York Times Book Review, and the Harvard International Review.

He is the author of six books, and is now working on a new book.

Mr. Gupte is a life member of the Council on Foreign Relations, and of the Royal Institute of International Affairs (Chatham House, London).

Mr. Gupte's personal Web site is www.pranaygupte.com

He can be contacted by e-mail at pranaygupte@gmail.com.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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