Academic journal article
By Laurenceson, James
Journal of Southeast Asian Economies , Vol. 20, No. 2
Economic integration is typically considered in terms of real and financial integration. That is, to what extent are goods and services on the one hand, and financial capital on the other, free to move between countries? The study of China's international economic integration has burgeoned since it began to undertake the final stages of the World Trade Organization (WTO) entry in the late 1990s. From the perspective of ASEAN, China's entry has been of particular interest given that it places many of its members in more direct competition with China in export markets and in terms of attracting foreign investment (Voon 1998). However, despite these concerns, Tongzon (2001) argued using a computable general equilibrium (CGE) model that there were likely to be net benefits for ASEAN members from China's entry, and there has been no clear evidence to the contrary since China became a WTO member in November 2001. Indeed, both China and ASEAN appear to have come to the consensus that their joint development is best served through an even closer degree of integration than that mandated by the WTO. In the same month that China formally joined the WTO, both parties announced the signing of a China-ASEAN Free Trade Area (FTA) agreement due to be completed by 2010. This proposal has already begun to attract research attention, with Chirathivat (2002) presenting evidence based on the same CGE model used by Tongzon (2001) that such an FTA would likely produce net gains for both China and ASEAN.
This paper seeks to shed light on the precursory question of "To what extent are China and ASEAN already integrated?". This is an important question to ask for several reasons. For one, formal tests of China's international economic integration are few, particularly with respect to financial linkages. It has become common practice to refer to the increased volume of trade and investment between China and other countries as evidence of increased international economic integration (Wong 1995). However, this methodology provides only circumstantial evidence of integration and lacks a rigorous theoretical basis that can make interpreting results difficult. For example, during 1997-98, the rate of export growth from China and the ASEAN economies fell significantly, as did foreign direct investments (FDI) flowing into these countries. To interpret such falls as being indicative of increased barriers to trade and investment ignores the far more obvious demand-side impact of the Asian crisis over the same period. Volume-based measures also provide no benchmark of what could be expected if barriers to trade and investment were low. While Japan and the more developed economies of Asia have been included in numerous rigorous studies of economic integration (Hung and Tong 1996; Moosa and Bhatti 1997; de Brouwer 1999; Aggawal, Montanes, and Ponz 2000; Azali, Habibullah, and Baharumshah 2001), China has rarely been included in the sample. In excluding China from his study of financial integration in East Asia, de Brouwer (1999, p. 2) states "China, in particular, presents an interesting and important case in financial development and warrants a separate study". The primary reason for China's exclusion from previous studies has been due to issues relating to data availability. However, as will be described later, this constraint has eased considerably since the mid-1990s. Understanding the extent to which China is already integrated with ASEAN is also fundamental to gauging the implications of China's WTO entry and the proposed China-ASEAN FTA. If it can be shown that China is relatively integrated (or not integrated) with ASEAN, then the impact of future liberalizations mandated by external bodies and agreements are likely to be small (or large). Lardy (2002), for example, argues that the predictions of some models regarding the impact of China's WTO entry almost certainly overstate the actual adjustment process because they do not take into account the liberalization undertaken by China in the years immediately prior to joining WTO. …