Introduction to regional economic integration and regionalism

The conceptual definitions

Regionalism, regionalization, regional economic integration, regional economic cooperation, regional trade agreements, free trade agreements …, terms like these appear frequently in newspapers, academic articles and official documents when international trade, investment or finance is concerned. In essence, they all refer to one phenomenon: the cross-border preferential economic initiatives undertaken by national governments or private sectors at regional or bilateral level, as opposed to multilateral initiatives which are conducted on non-discrimination basis under the auspice of the World Trade Organization (WTO).

Although these terms can be understood loosely and used interchangeably, it is important and useful to distinguish one term from another conceptually. Winters, when discussing the regionalism v. multilateralism debate, defines regionalism ‘loosely as any policy designed to reduce trade barriers between a subset of countries regardless of whether those countries are actually contiguous or even close to each other’. According to Lamberte, regionalism shall refer to ‘formal economic cooperation and economic arrangements of a group of countries aimed at facilitating or enhancing regional integration’. Regionalism is to be distinguished from regionalization, which is ‘market-driven integration, spurred by unilateral reforms in individual economies within a particular region’.

Introduction

The rise of China and India, two economic superpowers (if not quite yet military superpowers), almost simultaneously is perhaps unprecedented in history and this presents both opportunities and challenges. While the likelihood of actual military conflict has been somewhat limited by norms against the use of force since the Second World War, proxies for actual military conflict are often found as the trade skirmishes fought between the US, Japan and the EU have illustrated.

However, China and India have ostensibly chosen to pursue development strategies based on cooperation rather than competition. China has assured the Asian region that it will stay on the path of peaceful development and it is actively engaging other nations to work towards win-win partnerships. In particular, China has, along with Japan and South Korea, been working with ASEAN in the ASEAN+3 process. India has also embraced a policy that encourages regional cooperation. At the first East Asia Summit (EAS) held in Kuala Lumpur on 14 December 2005, the Indian Prime Minister, Manmohan Singh, outlined his vision of an emerging Asian Economic Community (AEC) as including ASEAN, India and China. He also envisioned a Pan Asian Free Trade Agreement which, together with many other free trade agreements (FTAs) being negotiated in the region, would form the building blocks of the eventual AEC. ASEAN is already in the process of negotiating FTAs with both China and India and has already concluded Framework Agreements (FAs) for these FTAs.

Introduction

China and India are the two largest developing countries by population and Gross Domestic Product (GDP). Together they account for one third of the world's population and approximately one sixth of the world's GDP. Together, they account for half of the world's poor. They have experienced remarkable growth over the past decade. How does the (WTO) World Trade Organization figure in the further growth of China and India?

Both China and India were original members of the General Agreement on Tariffs and Trade 1947 (GATT). The government of Taiwan purported to withdraw China from the GATT after the 1949 revolution, and China famously acceded to the WTO at the end of 2001. China and India are individually and collectively an important force at the WTO. Their presence is even more critical because of their role as developing countries. However, these two countries demonstrate well that the group of developing countries is diverse, and is not always united in its interests. While China, India and a handful of other large developing countries can be expected to lead the developing country bloc, this bloc includes a good deal of diversity of interest.

Introduction

International economic order means the comparatively steady pattern, structure or model of international economic relations gradually formed in a specific history era. The establishment and evolution of the international economic order depends on the comparative economic, political and military power among categories of members in international society. International economic order is closely related to international economic law. International economic law is a fundamental tool to strengthen existing international economic order, and at the same time, an important means to promote and change the old international economic order and establish the new international economic order.

The development process of international economy and international economic law witnesses the continuous struggles between strong countries who are trying to maintain and enlarge their vested interests and to defend the old international economic order, and the weak countries who are striving to ensure a status of economic equality and to establish a new international economic order. These struggles are generally resolved with compromise and cooperation between the two parties. However, after a period of compromise and cooperation, new struggles arise from new interest contradictions and conflicts. This is a recurring cycle, with each recurrence raising the existing international economic order and related international economic norms to a new level or new phase.

The announcement of open door policies in Asia have largely applied to foreign investment as they preceded liberalization in the area of trade. China announced its open door policy in 1979 and India set in train less stringent foreign investment controls in 1992. Both events occurred well before the establishment of the World Trade Organization in 1995. To this extent, the developments as to liberalization in the area of foreign investment preceded those in international trade. The move towards free markets showed an ascendancy with the emergence of Thatcherism and Reagonomics and the fall of the Soviet Union, which removed a powerful competing model from the scene. Many factors at the time favoured liberalization of the foreign investment regime. The loans crisis arising from the circulation of petro-dollars had led to the drying up of private funds. Aid had become non existent. The states of Eastern Europe, released from Soviet hold and adopting free market economics, increased competition for the only means of private capital, the investments of multinational corporations. The situation was ripe for liberalization on a global scale. But, though individual countries did show fervour for the adoption of the liberalization model in their foreign investment policies, at the global level, the trend towards globalization has not resulted in global rules on foreign investment. With economic crises in Asia, Russia and Argentina, there has been some rethinking on the value of liberalization of foreign investment regimes.

Introduction

This chapter discusses the efforts being made in East Asia towards financial integration, and the prospects for it becoming generally accepted as a consensus goal of national policies. At present, financial integration in East Asia is largely a discussion topic for national officials in regional gatherings, both formal and bilateral and the subject of research, rather than a planned objective or even a limited agreed direction of policy. At the same time, several separate motives and common external forces have caused an increase in discussion of prospects for financial cooperation and integration in East Asia, and greater cooperation among national interests that traditionally compete in economic, financial and trade objectives. This has made the possibility of an agreement on financial integration as a deliberate objective more tangible than before.

This chapter begins with a discussion of the reasons underlying discussions relating to East Asian financial cooperation and integration (section II). It then reviews progress to date in a number of areas, of which the most significant are initiatives involving regional economic cooperation and Asian bond market development (section III). In looking to possible future developments, it is useful to compare the experience to date of the most successful regional financial integration initiative, that of the European Union (EU) (section IV).

In recent years, China and India have often been mentioned together in the context of their phenomenal economic growth and their combined potential to shift the centre of world influence to Asia. Both countries also come to mind as leading suppliers of outsourced services to developed countries such as the USA, a trend which has generated international attention and controversy amongst policy makers, scholars and analysts.

This chapter will focus on the legal aspects of outsourcing under the General Agreement for Trade in Services (GATS). After an introduction to outsourcing and the role of China and India in the outsourcing of services, the chapter will examine to what extent the provisions of GATS are conducive to promoting and regulating the global outsourcing of services, and the implications of these findings for China and India. Matters that will be considered include the existing level of liberalisation of trade in outsourced services; protectionist measures to curb offshore outsourcing; the importance of rules of origin particularly in free trade agreements (FTAs); and options for liberalisation of trade in offshored services in the future.

Outsourcing

What is outsourcing?

Much international attention has been focused on the outsourcing phenomena, but it must be noted that various writers and speakers might not necessarily be referring to the same thing when they refer to ‘outsourcing’.

Introduction

China and India, two prominent Great Power aspirants (sometimes referred to as ‘a class of two’), declared jointly in 2003, and later re-affirmed repeatedly, their mutual desire in developing wider and closer cooperation in regional and international affairs and, in the context of the World Trade Organization (WTO), in enhancing their cooperation in support of the developing countries.

While not under-estimating their potential for closer cooperation in broad international arenas, the realisation of such collaboration in international affairs will be hampered in the near future at least, as it has been in the last fifty years or so, by the existence of various triangle relationships, such as China–India–USA, China–India–Russia, and China–India–Pakistan, the unresolved issues (e.g. Tibet, national borders and regional ambitions), and the lack of mutual trust between the two countries resulted from its twisted history of bilateral relations. This complex and complicated relationship between the two Asian giants has now produced much discussion and debate on potential threat of growing powers, conflict of ambitions, rivalry for domination, competition for influence, partnership for multipolarity, and cooperation for international peace and security. Much of this literature is produced by scholars in international relations, political science, general Asian studies and economics; and much of the literature on Sino-Indian relations has left more questions than it has provided answers.

It has never been so timely to examine the impact of the rise of China and India on the international economic order in the wake of the ongoing global economic crisis. The rapid integration of China and India into the world economy is not only lifting the living standards of over two billion people, but also shifting the global balance of power toward the East. However, the implications of this rise on the international economic and legal system have not been fully explored and many questions remain unanswered. For example, what is China's or India's attitude toward the existing international economic norms including the trading system and its dispute resolution system? What is the role of China and India in regional economic integration which may however be highly politically oriented? Further, although China and India are both on the road to economic globalisation, they seem to have adopted different domestic approaches which might have profound impact on their international behaviors.

This volume, having its origins in a highly successful international symposium of the same title organised by the Faculty of Law of the National University of Singapore in June 2006, is an attempt to address these questions. It brought together a group of distinguished scholars on international law, world trade law and law and development to conduct a unique examination of the roles of China and India in the new world economy from the perspectives of international economic law and comparative law.

Introduction

India's population is approximately 1.1 billion while that of China is approximately 1.3 billion. Together, they comprise more than a third of the world's population and a formidable economic pair in the developing world.

China and India share several characteristics. Both have great ancient civilizations of rich and long-standing cultures. Parts of their populations share common religious traditions. In the international arena, China and India together forged the Five Principles of Peaceful Coexistence in the 1950s, which still strongly influence developing state relations today. However, the two also diverge in many ways.

Unlike India, China is emerging from its chrysalis of a centrally planned economy and transforming into a ‘socialist market economy’. As part of this transformation, its legal system, belonging to the civil law tradition, has been undergoing massive changes in recent years – many of which are a result of its entering the World Trade Organization (WTO). In terms of rule of law, China has a greater challenge in overcoming perceptions about the strength and soundness of its legal system and adherence to the rule of law. Enormous changes have been made to China's legal system in the wake of WTO membership. Some of these changes are of watershed significance, for they spell departures from prior tradition and practice.

Introduction

The establishment of the World Trade Organization (WTO) has transformed a mostly power-oriented world trading system under the General Agreement on Tariffs and Trade (GATT) into a mostly rule-oriented one. In this rule-oriented system, law, as opposed to power and diplomacy, serves as the anchor of international trade relations. The WTO claims broad jurisdiction over trade in goods, trade in services, and trade-related intellectual property rights, and its rules penetrate into the traditionally domestic regulatory space of sovereign nations more than those of any other international organization ever did. Furthermore, the WTO is equipped with a dispute settlement mechanism that features compulsory adjudication and binding decisions upon its 150-plus members. Since its inception, the WTO dispute settlement system has generated a growing body of jurisprudence that has become an important part of international law.

This article seeks to assess and compare the respective contributions of China and India to the development of WTO law. It does so by examining the practices of the two countries in the WTO rulemaking and adjudicatory processes. Although the two countries have very different backgrounds in their association with the world trading system – India has been inside the system since 1948, first as an original contracting party to the GATT and then an original member of the WTO, whereas China only acceded to the WTO in late 2001 – a comparison between the two can nevertheless be meaningful because of their many similarities.

At first glance, China and India seem to contradict the basic premise of the law and development movement that law plays a key causal role in economic growth. According to the standard view, China has enjoyed high growth rates despite weak legal institutions and the lack of rule of law, while India's growth rates have lagged far behind China's despite a reputation for rule of law and stronger legal institutions. Closer examination however reveals that the experiences of China and India are not as inconsistent with the prevailing wisdom regarding the relationship between law and development as is often suggested.

General law and development lessons

At the risk of reiterating the obvious, let us begin with some general lessons of the new law and development movement. First, “rule of law” and a functional legal system are necessary but not sufficient for sustained growth. The empirical evidence is surprisingly consistent about this general relationship.

Second, the relationship between rule of law and economic growth is non-linear. Legal institutions are costly. There is less need for formal legal institutions in predominantly rural economies where contracting parties are bound together in tight social networks and there are informal mechanisms for enforcing contracts.

Third, informal mechanisms may provide a useful supplement, but they are not adequate substitutes for functional formal institutions in a reasonably developed economy. Informal mechanisms operate against a background of formal institutions, and often could not function without the possibility of ultimately turning to the courts should other means for resolving the dispute fail.

The potential political role of private entrepreneurs in China has been a salient issue in recent scholarship on China. Some see private entrepreneurs as potential agents of political change; others see them as apolitical and even supporters of the current political system. Although the political implications of China’s rapid economic development have not yet been fully realized, many scholars, politicians, and journalists anticipate not only that economic development is leading toward democratization in China but also that private entrepreneurs are likely to be key players in that process. They point to China’s growing numbers of entrepreneurs and “middle class” as potential supporters or even advocates of democratization (Parris, 1993; White, Howell, and Shang, 1996; Zheng, 2004). Others see private entrepreneurs as the leading edge of an emerging civil society that will eventually transform China’s political system (Gold, 1998; He, 1997; Pei, 1998). These views were most prominent in the 1990s, when economic privatization began in earnest. In contrast, empirically based studies of the political interests and behavior of China’s capitalists reveal most of them to be politically tied to the state or apolitical: very few exhibit strong democratic beliefs, and few of them engage in political activities designed to promote political reform (Chen, 2004; Chen and Dickson, 2010; Dickson, 2008; K. Tsai, 2007). These studies see China’s capitalists not as agents of democratization but as key beneficiaries and supporters of the status quo.

Although much of the speculation about the potential role of privatization in general and private entrepreneurs in particular in fostering democratization in China is based on modernization theory, the comparative literature on the role of capitalists shows that they are very ambivalent about political change. They are rarely the leading edge of opposition to the authoritarian state, but their support can tip the balance between whether the state can withstand the challenge from democratic challengers or whether it will succumb to pressure for regime change (Rueschemeyer, Stephens, and Stephens, 1992). In Eva Bellin’s apt phrase, they are “contingent democrats”: to the extent that their economic interests are dependent on the survival of the regime, they remain supportive of the status quo (Bellin, 2000: 175–205).

The current volume highlights the range and vibrancy of current studies of China by political scientists in the United States. This is a field that has become relatively mature in terms of the number and types of institutions that produce good China-related research, the array of generations of scholars engaged in that research, the variety of sources available to understand developments in China, and the methodological richness of the field overall. All of this represents a situation very different from and much better than that in the 1960s. But the changes over the past four decades have also introduced problems that require the ongoing attention of the field.

The Evolution of the Field

The world of the 1960s differed fundamentally from that of 2010 in terms of how China is studied. China studies in the earlier period were just reviving in the wake of the devastation wrought by the anti-Communist efforts most memorably associated with Senator Joseph McCarthy, who, in February 1950, asserted that he had a list of 205 Communists being protected in the State Department. The senator – along with others asking “Who lost China?” – decimated the ranks of China specialists in the State Department and questioned the loyalty of scholars such as John K. Fairbank and Owen Lattimore, arguing that they were at least Communist dupes and in some cases active secret members of the Communist Party (Fairbank, 1982). The results were such that Fairbank, generally regarded as the dean of the China field, addressed a conference of China scholars in the early 1970s and advised the younger participants to be sure to always keep a daily diary. He explained that this would prove important when they are investigated by a congressional committee and must explain what they were doing and thinking at any particular point in their past.