The Ambiguous Architecture of Economic Integration in East Asia

Abstract

The Ambiguous Architecture of Economic Integration in East Asia Natasha Hamilton-Hart (bio) Regional economic integration in East Asia has been built on an architecture of ambiguity and informality. A foundational informal architecture of cross-border business ties and business-government relationships has facilitated regional commerce for many decades. Ambiguity has contributed to building formal integration through intergovernmental cooperation because commitments are often only possible due to the flexibility ambiguity provides. In the current moment of heightened tension between the United States and China, the United States is aiming to eliminate areas of ambiguity and flexibility in its growing array of export controls and other policies intended to hamper the acquisition of advanced technology by Chinese entities and "de-risk" exposure to China. This essay examines how informality and ambiguity have facilitated the development of East Asian economic regionalization and what this looks like in an environment of U.S.-China rivalry. The De Facto Economic Regional Architecture East Asia has emerged as a robust economic region over the past three decades, as evidenced by the growth of cross-border investment flows and the rise of intraregional trade. Regional trade and investment flows have been organized to reflect the logic of global value chains, sometimes referred to as global production networks, by which the production of goods is dispersed across national boundaries in an effort to realize efficiencies of scale and specialization.1 The rise in trade of intermediate products created a distinctive condition of complex interdependence: firms and national economies are enmeshed in multiple, crosscutting relationships of mutual [End Page 31] dependence that span not only critical inputs and final markets but also technology, logistics, distribution, digital services, and information flows.2 Early analyses of the emerging structure of regional integration in East Asia noted that the de facto regionalization occurring there, even by the 1990s, was different from the European experience in which integration was essentially a product of formal regionalism.3 Formal regionalism meant cooperative commitments by governments to liberalize trade and investment, harmonize standards, and remove other restrictions on the free flow of commerce and people. Regionalization, in contrast, appeared to occur in advance of formal intergovernmental agreements in East Asia and was, in this sense, informal and market-based rather than state-led. In fact, as was clear by the end of the twentieth century, the new structure of integration via global value chains was fundamentally different from that predicted by traditional trade and investment models based on the full production of finished goods, such as washing machines and automobiles.4 Instead, very specific production functions were disbursed geographically, while transactions along the value chain were governed in diverse ways rather than consisting of a series of arms-length, price-based exchanges.5 The governance of different value chains varies according to the specific attributes of what is being traded and where, but the essential point is that global value chains provide for a degree of informal coordination among participants. The relationships and close coordination among individual market players make possible exchanges and interdependencies that would otherwise be unlikely to clear the market due to information asymmetries, lack of trust, or other market imperfections. Early analyses tended to view these interfirm relationships that smoothed problems of trust through the lens of ethnically distinctive business group structures and networks.6 [End Page 32] The ethnic dimension to these networks, however, does not derive from any kind of culturalist essence but rather through the economics of transaction costs. In the East Asian context, for example, ethnic Chinese business networks in Taiwan and many Southeast Asian economies provide functional substitutes for formal institutions in terms of contract enforcement and other market infrastructure. Similarly, Japanese keiretsu (business groups) and Korean chaebol (sprawling conglomerates) can be seen as coordinating institutions that underpin the willingness of market players to share technology, extend credit, or enter extended contracts that might otherwise be too risky to pursue. Such informal coordinating structures have carried much of the burden of East Asia's de facto regionalization, which would not otherwise have been predicted in the face of government policies that were often restrictive or inhospitable to cross-border commerce. Crucially, informal interfirm networks also included...