India looks on as the East integrates
By Zorawar Daulet Singh
NEW DELHI - The agreement by the finance ministers of China, Japan, South Korea
and the Association of Southeast Asian Nations (ASEAN+3) last week to create a
US$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 a trend to
integration that has characterized the political economy of the region. India
remains disconnected from this geoeconomic space. For too long, the country's
look-East policy has been based on rhetorical aspirations rather than on
immersing India into the commercial networks that have entwined the nations of
East Asia.
The popular images that animate any discussion on East Asia, such as those
concerning the North Korean nuclear question, the
naval dimension and sea-lane security, and disputes in the South China Sea,
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 in India of a security bias within the
security establishment whereby it tends to project India's 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.
This is not to suggest that nations on China's periphery have somehow lost the
plot and have adopted a benign attitude vis-a-vis China. China's neighbors are
simply executing hedging strategies whereby their security under the American
umbrella and the latter's substantial forward deployments in the Western
Pacific has reassured them to enhance their economic linkages with China.
Ironically, the US has encouraged such engagement, 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 and machinery industries are now characterized
by a vertical division of labor - the slicing up of the manufacturing process
whereby each economy is specializing in a particular stage of the production
sequence of a single product, which is eventually shipped out from Chinese
ports to Western markets.
China has emerged as a central assembly point of imported high-technology
components which are processed there by affiliates of multinational companies
(MNCs), shipped out 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 Philippines. Today,
Japan, Taiwan and South Korea account for around 50% of China's component
imports.
Foreign direct investment into China has played a vital role in restructuring
intra-industry trade in the region. Japan has established 30,000 companies and
joint ventures in China with an investment of US$60 billion. South Korea has
30,000 enterprises there 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% of China's information-technology hardware exports. From 1985 to 2007,
MNCs in China increased their share of total trade from 10% to 60%, and
currently 80% 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 research and development 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% 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 and columnist Paul Krugman has called it, a "T-bills republic"!
Third, the US trade deficit with China is in fact a de facto 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 interdependence and the extensive economic
involvement of the US must be appreciated if India is to craft a sensible
look-east policy. A 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
labor-intensive manufacturing.
Zorawar Daulet Singh is an international relations analyst and co-author
of India China Relations: The Border Issue and Beyond, Viva Books 2009, New
Delhi. zorawar.dauletsingh@gmail.com
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
