Global Economy
China’s Economic Ties with Its Neighbors Grow

Jahyeong Koo and Dong Fu

The Asian financial crisis of 1997, Japan’s decade-long economic slump and China’s accession to the World Trade Organization (WTO) have begun to change East Asia’s economic landscape.

In dollar terms, China’s economy is about 10 percent of the United States' economy, 20 percent of Japan’s and a little more than 90 percent of Italy’s. However, after adjusting for differences in cost of living (so-called purchasing power parity adjustments), China’s economy is more than half as large as the United States’, making it the second largest economy in the world. Moreover, China’s rapid growth means that its economic influence is expanding rapidly.

On Dec. 11, 2001, China became a member of the World Trade Organization. Accession to the organization implies an opening up of trade, although China has not indicated that it would be nearly as open to trade as the United States. As part of its agreement in joining the WTO, China lowered its average tariff from 16.7 percent in 2000 to 12 percent in 2002. China will also reduce the number of items under import license or quota—from about 300 items today to zero in three to five years. China is also liberalizing foreign investment in banking, insurance, wholesale and retail trade, telecommunications, asset management, financial services, accounting, construction and tourism.

China’s accession to the WTO means less Chinese trade protectionism—and therefore bigger markets for China’s neighbors. The lower production costs resulting from this opening, however, may mean that China will attract foreign investment that other Asian countries would otherwise have received.

Association of Southeast Asian Nations (ASEAN) The Association of Southeast Asian Nations includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Some particularly important aspects of these transformations involve the Association of Southeast Asian Nations (ASEAN). While Japan’s difficulties have lowered its direct investment in ASEAN countries, China has opened its markets to this group and routinely runs trade deficits with them. The increased economic integration of China with its southern neighbors has sensitized all parties to the possibility of more. Last November regional leaders declared that a free trade agreement between China and the ASEAN countries is likely within 10 years.

Taiwan and mainland China are also integrating economically. Despite the slow pace in lifting political hurdles, Taiwan's direct investment in mainland China is increasing rapidly. Taiwanese industry, traditionally heavily dependent on Japanese industry, has recently suffered badly as a result of Japanese stagnation and the global high-tech slowdown. Taiwanese entrepreneurs will be looking for more capital outlets, production bases and export markets in mainland China than ever before.

China’s more open markets will allow South Korea to increase its sales there. However, some analysts argue that China’s emergent economic power may also prompt a reactive free trade agreement between Korea and Japan, neither of which is a member of ASEAN. Even if Korea tries to strike a balance in its economic and political relations between China, Japan and the United States, China’s influence on Korea’s economy may grow as China’s economy expands. The pressure on Korea to maintain its technological advantage over China will likely increase as China advances technologically.

Japan's role as a primary investor in and exporter of capital goods to East Asia—especially ASEAN countries—has been ebbing over the past decade. So far the Japanese government’s initiatives in reaching free trade agreements with other countries are not finding a great deal of political support in the ruling Liberal Democratic Party. The Japanese yen’s recent large devaluation has triggered concern and resentment among neighboring countries.

What we have referred to so far as economic integration may also be viewed as the construction of a regional economic bloc. So far, however, free trade areas have been rare and only recent phenomena in East Asia. Up to now only ASEAN countries have formed a free trade area.[1] No one knows for sure whether a Chinese–ASEAN free trade area will materialize or if Korea and Japan will form their own in response. However, observers argue that these likely blocs will have to first develop before there can be any attempt for one involving China, Japan and Korea.

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