Paper No. 23-2005
There is tremendous momentum for economic and financial integration in East Asia today. Partly inspired by the formation of the European Union and partly as a response to the 1997/98 Asia financial crisis, many East Asian countries are showing greater commitment to regional economic cooperation. A number of bilateral free trade agreements (FTAs) have either been concluded or are being negotiated.1 At a less formal level, the ASEAN+3 grouping has brought the whole region together in regular consultations over trade, investment, as well as monetary and exchange rate policy matters. Few countries in East Asia harbor any illusion of realizing a region-wide economic union any time soon, although there were clear attempts by some of them in this direction.2 A crucial ingredient in any successful East Asia-wide economic integration effort is the role of China. China could be a major catalyst to the integration process if it chooses to. But it would do so only if such a move is in line with the overall objectives of its foreign economic policy. More importantly, it must be consistent with Chinas domestic economic agenda. In this paper, we examine trends and developments in the regional pattern of trade and production and link it to the evolving structure of Chinas economy. We argue that there is scope for China to play a more active role and provide stronger leadership in East Asian economic integration. In our view, the developmental pattern in Chinas domestic economy and the likely changes in Chinas production and trade structures will justify such a policy approach. Doing so will also help improve Chinas economic and political relationship with the region.