Let the tiger roar in Europe

David Vines argues that the EU needs to learn lessons from Asia's trade bloc

Europe now faces a twin crisis - an economic one of jobs and a political one of faltering purpose. Solutions require growth-oriented policies. For these Europe should not look inward to the European market and to monetary union, but rather outward, towards eastern Europe and north Africa and to the world. In doing this Europe could learn some valuable lessons from Asia.

The Asian region encompasses Japan and the original four "Asian Tigers" (Korea, Taiwan, Singapore and Hong Kong), the second-wave developers in the Association of South East Asian Nations - Asean - (Malaysia, Thailand, Indonesia, Brunei and the Philippines), the third generation developing countries like Vietnam, and, finally, China. This is the most rapidly growing region in the world, with two decades of double digit growth rates behind it. That growth has been based on industrialisation for the world market.

Asian countries are characterised by strong nation states, strong governments and the pursuit of economic prosperity by means of export friendly policies. These policies have three aspects. First, barriers to global international trade are being dismantled. Second, there are high savings and high investment in industries that produce to export for the global market. Third, exchange rates are competitive, to make investment-for-export profitable.

There are also strong regional policies in Asia for the promotion of strength and peace in the region. Peace is pursued in Asia by means of shared economic growth, and that is promoted by increasingly free international trade. To promote their objectives, Asian governments set up the Asia Pacific Economic Co-operation (Apec) process at a meeting in Korea in 1989. At a summit at Bogor, Indonesia, in 1994, Apec established the revolutionary objective of complete free trade within the region by 2020.

The strategy of the Apec countries is called "open regionalism". The objective is not a trade bloc like that in Europe, with free trade inside a common market and barriers around it. Rather the objective is free trade with everybody. Such open regionalism is radical because in order to avoid the diversion of trade away from low-cost world suppliers towards high-cost producers within the region, these practitioners stand ready to dismantle all trade borders, even against trade partners outside the region who are not dismantling such barriers.

This "open regionalism" is also enormously clever.

q It is a club in which each country belongs to a community of like- acting nations: each knows that as it opens its own markets, markets are being simultaneously opened in partner countries. This helps dismantle political resistance to liberalisation: business leaders, and workers, can focus not on the loss of home markets, but on the growing access to foreign ones.

q There is no need to negotiate legally binding complex treaties of the kind that we have come to dread in Europe. Within the club individual countries have the freedom to pick and choose which sectors to liberalise, and to do this at their own speed. Nevertheless there is strong peer pressure of an Asian kind. The most recent example of this was the liberalisation announced last November by the Philippines: all tariffs are to be reduced to 5 per cent by 2004.

q Because the club is non-discriminatory, with all liberalised markets open to all comers, it helps Asia-Pacific countries prepare for freer global trade. These countries have already begun to push for a new round of global trade talks in Geneva.

q Open regionalism is clever because it is an open club. Other peripheral non-players are free to join in the process by liberalising too. As a result, a cumulative process of industrial relocation through foreign investment is taking place throughout Asia: as wages have risen in the most advanced counties, factories have been relocating from Japan and the original four Asian Tigers, to the second, third and fourth generation of liberalising economies. This has been called the "flying geese" pattern of regional industrialisation and growth. In this regional system there are no institutional impediments to ever-widening concentric circles of economic growth and development.

The contrast between the Asia Pacific region and Europe could not be stronger. Europe's relations with its near neighbours are rotten to the core. We are nervous about letting the 12 countries of eastern Europe into the EU and, as European budget projections just released show, we cannot afford to let them in. Agriculture is excluded from trade agreements precisely because several of these states have rural economies. Successful exporters face anti-dumping lawsuits, and "voluntary" export restraints. And "rules of origin" prevent the re-export to Europe of goods assembled out of low-cost components from the rest of the world. Europe's relations with north Africa are even worse. This is definitely not the recipe for the dynamic growth of Europe's periphery. Europe's flying geese have broken wings. There are three clear lessons from this.

q Europe must adopt policies for prosperity and growth that look more like Asian policies. This will require the European Central Bank to lower European interest rates. It will also require higher savings and even lower budget deficits than those in the Maastricht criteria for EMU.

q Europe must encourage its periphery in eastern Europe and north Africa to cut tariffs and embrace free trade with the whole world. It must also move towards accepting all exports from these regions without restriction. And these countries should demand an end to the shackles Europe has imposed.

q Europe must embrace exporting to the world market, including rapidly growing markets in Asia. With this must go faster liberalisation of access to the European market. Europe should back Sir Leon Brittan, the Vice- President of the European Commission, who has championed Apec's push for a new round of global trade talks. And Europe should seek to join Asian countries in the strategy of open regionalism, by liberalising Europe's trade with the world, with no strings attached. The first steps should be taken at the forthcoming Europe-Asia summit, in London next April.

q David Vines is a Fellow and Tutor in Economics at Balliol College, Oxford and Director of the Global Economic Institutions Research Programme of the Economic and Social Research Council. He is also a Research Fellow in CEPR's International Macroeconomics and lnternational Trade programmes and an Adjunct Professor of Economics at the Australian National University.