Intra-Asian trade will define the region's future
Over the last several decades, Asia has become increasingly integrated with the rest of the world, its rapid development driven largely by exports to the United States and European Union (EU). Yet, as the world's main economic arteries shift eastward, intra-regional integration within Asia still lags behind. The recent global financial crisis and economic fall-out is quickly changing that dynamic, however. Indeed, as strong, stable growth in the West, particularly in the US and EU, remains elusive, regional markets are becoming more attractive among Asian countries, highlighting the importance for enhanced integration. Despite challenges, this trend toward regional integration should continue in 2013.Currently, over half of world trade takes place between members of regional trade agreements, and Asia is no exception. However, in Asia, as in other parts of the world, regional integration is uneven. While Southeast Asia is shoring up its economic integration efforts through the Asean Economic Community (AEC) for 2015, with plans to continue attracting foreign direct investment, capitalise on the growth of its neighbours (mainly China and India), and accelerate the pace of its trade facilitation measures through a single-market strategy, South Asia remains weakly integrated through the South Asian Association for Regional Cooperation (SAARC) both economically and politically.
In fact, Asia has reason for optimism about the capacity of regional trade to compensate for weak markets in the US and EU and to reduce vulnerability to external shocks. In 2012, opinion leaders in Southeast Asia said that they were most positive about the AEC compared to all other regional trade agreements in Asia. Indeed, while East Asian economic cooperation has mostly been driven by market forces, Southeast Asia has taken significant strides in formalising its region as a single market and production base through Asean. Intra-regional trade and trade with China now accounts for more than 37 per cent of Asean's total trade, up from around 26 per cent in 2000. At the same time, trade with the US has fallen from 20 per cent in 2000 to 10 per cent in 2011, and trade with the EU from 15 to 11 per cent in the same period.
On the other hand, progress on SAARC's goal of a South Asian Economic Union by 2020 remains slow. Though intra-regional trade in South Asia recently surpassed US$2 billion following the full implementation of the South Asia Free Trade Agreement, it represents only 5 per cent of the region's total trade volume, compared to Asean's 22 per cent and the EU's 55 per cent. However, South Asia has made strides integrating with the rest of Asia. For example, while only 1.3 per cent of South Asia's parts and components are traded within the sub-region, 56.3 per cent go to East Asia. This represents the enormous potential that exists for South Asia's future trade among its own region.
Such economic integration in the region is becoming increasingly important to help stave off and overcome economic shocks. Prior to the last-minute resolution that saved the US from falling off the "fiscal cliff", the UN Social Commission on Asia and the Pacific warned that if the US were to fall, it would have dire consequences for Asia, decreasing growth by as much as 2.2 per cent in some countries. To reduce their dependency on developed countries' economies, Asian countries need to diversify their export markets and take advantage of the efficiencies and growing demand that regional trade offers.
While trade is an important part of regional economic integration, it remains only one piece of the puzzle. To avoid the dreaded "middle-income trap" (where countries attain a certain level of income but remain stuck there), Asian nations must prioritise other aspects of regional integration, including:
Investment in infrastructure: Infrastructure development is essential to Asia's economic and political development. In order to address this, Asean has set up the Asean Infrastructure Fund, financed by member nations as well as the Asian Development Bank (ADB) and private equity, to mobilise resources for critical infrastructure development.
Increased cooperation in education and skill development: A recent publication by the ADB stated that "a deeper level of economic integration, which is required for sustainable development, calls for regional cooperation in skills development". Such cooperation could take the form of regional and sub-regional "technical and vocational education and training" (TVET) strategies, such as creating regional and national qualifying frameworks and encouraging national commitments to invest in critical areas like high-skilled manufacturing.
Cooperation in technological innovation and research: Asean members have taken steps toward such cooperation through the Krabi Initiative, which encourages collaboration across the region on a host of science and technology issues, from green technology and food security, to exploiting digital media and social networking for development and innovation.
Regional cooperation in Asia should not be considered solely as a means to accelerate economic growth, but also an effective way to address broader socio-economic and environmental issues facing the region. It will, for instance, play a key role in women's economic empowerment in the region. Women business owners and managers in Asia often do not have the same access to opportunities as men. However, through groups such as the Asean Committee on Women and the South Asia Women's Entrepreneurship Symposium (SAWES), they are able to form regional networks that provide a platform for them to access information and contacts essential to running a business, and advocate for change in areas that stifle their potential.
Regional cooperation will also be integral to managing the impact of environmental issues, such as water scarcity, energy production and distribution, urbanisation, climate change, and disaster recovery and management. Establishing and implementing fair and practical water-sharing and conservation arrangements is critical, with river systems like the Mekong, Indus and Ganges all crossing national borders and essential to local livelihoods. Over the last couple of years, the Asia-Pacific has experienced 70 per cent of the world's natural disasters. This has led to a stronger push toward regional forums and programmes to prepare for and manage disasters through information-sharing, as well as collaborative disaster-management planning efforts. Data management and sharing and the use of innovative ICT tools to provide more timely and accurate predictions, communications and responses are also being explored regionally to minimise the impact of such disasters.
While greater intra-regional trade and investment represent a logical "next door" opportunity for Asian economies, this shift doesn't come without challenges. To lessen reliance on US and EU markets, Asia will need to modify the structure of its regional trade from a focus on raw materials or semi-finished products to those higher up the value chain. Another challenge will be to ensure that smaller, poorer Asian countries also benefit from increased regional interaction. Finally, intra-regionalism can only be successful if the regional entities nurture links and cooperation with other regions.
But, the most important challenge of all remains making regional cooperation work for the people of Asia. The political will and institutional commitments to regional integration relies on the capacity and interest of individuals, civil society and businesses to take the lead and give life to the concept.
Veronique Salze-Lozac'h is the Asia Foundation's director for economic development programmes based in Bangkok, Nina Merchant-Vega is assistant director, Katherine Loh is a senior programme officer, and Sarah Alexander is a programme fellow for the economic development programmes.