East and South Asia: Managing Difficult Bilateral Relations and Regional Integration Globally

• Date: 01 December 2015
• Published date: 01 December 2015
• Author: Shiro Patrick Armstrong
• DOI: http://doi.org/10.1111/asej.12076

East and South Asia: Managing Difficult

Bilateral Relations and Regional Integration

Globally*

Shiro Patrick Armstrong

Received 28 April 2013; accepted 13 July 2015

This paper analyzes the economic integration of the East and South Asian econo-

mies in the global economy. East Asian economies are shown to be achieving much

more of their potential trade than South Asian economies, both in terms of intra-

regional trade and in trade with the rest of the world. Examination of the China–

Japan, India–Pakistan and Taiwan–mainland China bilateral relationships shows

that integration of these economies into the global economy has allowed economic

relations to dominate and constrain difficult bilateral political relations in East Asia

while in South Asia adverse political relations have hampered development of

bilateral economic relationships.

Keywords: Japan–China relations, cross-Strait relations, India–Pakistan relations,

measuring trade potential, regional economic integration.

JEL classification codes: F13, F15, F50.

doi: 10.1111/asej.12076

I. Background

Economic integration can encompass many different dimensions of opening up

and increasing economic activity and interdependence across borders. It essen-

tially involves the removal of barriers at and behind the border with the aim of

increasing welfare from increased trade, investment and economic activity that

comes from the ability to specialize, develop the economy and take advantage of

mutually beneficial exchange with other countries. This paper focuses on trade,

the most obvious measure and indicator of economic integration.

Integration of East Asian and South Asian economies into the global economy

show very stark differences in how entire regions approach and achieve open-

ness. Countries in East Asia1have pursued policy strategies of openness to trade

and investment that have led to their having high trade shares with other East

Asian economies as well as globally. East Asia is one of the most economically

* Crawford School of Public Policy, Australian National University, J.G. Crawford Building,

#132, Lennox Crossing, The Australian National University, Canberra ACT 0200, Australia Email:

shiro.armstrong@anu.edu.au.

1 East Asia is defined in this study as ‘integrating’ East Asia, as defined by the ADB (2008), which

is most of the economies encompassing geographic East Asia except North Korea, Burma/Myanmar

and the Pacific Island economies.

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integrated regions in the world, with low barriers to trade and investment within

the region but also with the rest of the world (Armstrong and Drysdale, 2011).

South Asia,2in contrast, is one of the least economically integrated regions in

the world (ADB, 2008) and, if measured in terms of intraregional trade as a

share of total trade, is the region with the lowest integration globally (Sally,

2011). Intraregional trade in South Asian was 3.5 percent of total trade in 2009,3

up from a low of 2 percent in 1967 but significantly lower than the 19 percent

in 1948 (Kumar and Singh, 2009).

High intraregional trade is not an end goal in itself and trading partnerships in

open economies should be determined by comparative advantage and market

forces, but the advantages of proximity are important (Linnemann, 1966; Frankel

et al., 1997; Disdier and Head, 2008). South Asian economies had an average

trade to GDP ratio of 42.7 percent in 2008, showing that they are still relatively

less open than East Asian economies, which had an average trade to GDP ratio of

63.2 percent in 2008.4Including services trade, the estimates rise to 51 and 67.3

percent for South Asia and East Asia, respectively. South Asian economies have

low trade both within the region and globally, despite growth over time. Due to

data availability, the rest of the paper focuses on merchandise trade and not

services trade, despite its importance in South Asian trade.5

A region that has low economic integration can face problems beyond losing

out on benefits to trade from economic proximity. Political interactions tend to

occur at a much higher frequency between neighbours, and higher economic

interdependence can ameliorate and dampen adverse effects of political tensions

(Mansfield and Pollins, 2003). Political tensions can act as a large barrier to

economic integration and lack of economic integration and interdependence can

act as a constraint on the improvement of political relations. Such an equilibrium

might be thought to characterize the India–Pakistan relationship, for example.

The East Asian case is very different, with pairs of countries that have unresolved

historical issues and political mistrust enjoying high levels of trade and economic

integration between them. Some of these relationships, such as those between

Japan and China and, across the Taiwan Straits, between China and Taiwan, show

trends of improving political relations over time as economic relations deepen.

However, just how integrated are individual economies in South Asia and

East Asia, within their region and with the global economy, and how much trade

can we expect within and beyond these regions? Are the low intraregional trade

shares in South Asia expected given the economic structures of South Asia

2 For the purposes of this study South Asia follows the World Bank’s definition and is comprised

of SAARC members less Afghanistan: Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and

Sri Lanka.

3 2009 and 2010 data are not complete for South Asian intraregional flows in the United Nations

Comtrade database or the World Bank’s World Development Indicators.

4 Source: World Bank’s World Development Indicators online. East Asia is ‘East Asia and the

Pacific’, as defined by the World Bank.

5 Services trade will have to be included in the analysis in a different manner as different modes of

services are affected by distance to varying degrees.

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