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 economic growth in the West, particularly in the U.S. 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 Association of Southeast Asian Nations (ASEAN) Economic Community Blueprint for 2015, with plans to continue attracting foreign direct investment, capitalize on the growth of its neighbors (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.
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In fact, Asia has reason for optimism about the capacity of regional trade to compensate for weak markets in the U.S. and the EU and to reduce vulnerability to external shocks. In 2012, opinion leaders in Southeast Asia said that they were most positive about the ASEAN Economic Community 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 formalizing its region as a single market and production base through ASEAN. Intra-regional trade and trade with China now accounts for more than 37 percent of ASEAN’s total trade, up from around 26 percent in 2000. At the same time, trade with the U.S. has fallen from 20 percent in 2000 to 10 percent in 2011, and trade with the EU from 15 percent to 11 percent in the same period.
On the other hand, progress on SAARC’s goal of a South Asian Economic Union by 2020 remains relatively slow. Though intra-regional trade in South Asia recently surpassed $2 billion following the full implementation of the South Asia Free Trade Agreement, it represents only 5 percent of the region’s total trade volume, compared to ASEAN’s 22 percent and the EU’s 55 percent. However, South Asia has made strides integrating with the rest of Asia. For example, while only 1.3 percent of South Asia’s parts and components are traded within the sub-region, 56.3 percent 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 global economic shocks. Prior to the last-minute resolution that saved the U.S. from falling off the “fiscal cliff,” the UN Social Commission on Asia and the Pacific warned that if the U.S. were to fall, it would have dire consequences for Asia, decreasing growth by as much as 2.2 percent 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.