Implications to the Asian Economic Community

The first East Asian summit of regional leaders of ASEAN countries–Australia, India, Japan, South Korea, and New Zealand–was held in Kuala Lumpur on 14 December 2005. In this summit, the above countries discussed the broad contours of a larger Asian Economic Community that will have a significant future impact in forming a larger trade block. On the occasion of the historic First East Asia Summit, the heads of state/government of the member countries of the ASEAN, Australia, and PRC, Republic of India, Japan, Republic of Korea, and New Zealand signed the Kuala Lumpur Declaration. The declaration highlights the importance of strengthening bilateral and multilateral interaction and cooperation among participating countries of the summit and the world on issues of common interest to enhance peace and economic prosperity.

The declaration aims to: (i) foster strategic dialogue and promote cooperation in political and security issues to ensure that our countries can live in peace with one another and with the world in a just, democratic and harmonious environment; (ii) promote development, financial stability, energy security, economic integration and growth, eradicate poverty and narrow the development gap in East Asia, through technology transfer and infrastructure development, capacity building, good governance and humanitarian assistance, promoting financial links, trade and investment expansion and liberalization; and (iii) promote deeper cultural understanding, people-to-people contact and enhanced cooperation in uplifting the lives and well-being of our people to foster mutual trust and solidarity as well as promoting fields such as environmental protection, prevention of infectious diseases, and natural disaster mitigation. ¹⁰

A larger open trade block is emerging in Asia with the PRC and India as the main drivers. These two countries would act as catalysts of a larger trade bloc intermesh together. The process has already started with both the PRC and India separately hooking into the ASEAN and jointly forming a bilateral FTA. An FTA between ASEAN and the PRC, Japan, South Korea, New Zealand, Australia, and India (East Asia FTA) is possible in the next 10 years. Australia and New Zealand have signed or are negotiating bilateral agreements with many ASEAN+4 countries (see Table 1).

Bilateral FTAs lay the foundation for open economies and contribute to the speeding up of the participating nations' FTA talks with other trade partners, subregional groupings, and multilateral trade talks. Asian countries recognize that bilateral and subregional trade agreements can contribute toward accelerating regional and global liberalization and can act as building blocks within the framework of multilateral trading system.

According to the WTO Secretariat (1995), "RTCAs can strengthen multilateralism by moving generally at a faster pace than the multilateral system, and sharing its goals represent a way of strengthening the latter. There had been a definite trend toward broader and faster market access liberalization of nontariff measures in RTCAs, in parallel to developments in the Multilateral Trading System. The positive effects of RTCAs on the integration of developing countries in the world economy are also noted". According to Ornelas (2005), RTCA's achieve more-or-less the same outcome as multilateral trading arrangements.

The India-PRC FTA will contribute to regional economic integration by injecting additional momentum into the establishment of the East Asian Free Trade Area. Since the PRC and India are two major emerging powers in the world, they should form an FTA to forge economic cooperation which will foster free, fair and rules-based market economies. India has a comparatively strong reservation against the openness of several sectors of the domestic economy. Similarly, the PRC has reservations in opening a few sectors. But under the proposed FTA, they have to open their market to each other, making them more open to participating countries of the proposed Asian community and also to multilateral trading framework. This FTA will induce domestic structural reforms and create open, competitive market environments in both countries, particularly for India. Other Asian countries will follow this example. With the fastest economic growth in the world, this partnership is bound to be successful. Encouraged by the success of an FTA between the PRC and India, other Asian countries may come forward. ASEAN countries are already negotiating FTAs with these two countries. There may be a rush to sign FTAs among the Asian countries. At this moment, ASEAN is driving the integration process in the Asian region, but with the emergence of the PRC and India as major economic powerhouses and relative stagnation faced by the most populous ASEAN country Indonesia, the ability of the ASEAN to serve as the engine of Asian integration has substantially diminished. In such a situation, the PRC and India can act as cohesive partners of an FTA that may be the engine of Asian growth.

An India-PRC FTA may act as a catalyst to strengthen multilateralism under the WTO and to the formation of an Asian community. This cooperation will build bridges and linkages between East and South Asia. It would also help remove barriers which have been delaying countries like Japan and India from signing FTAs with ASEAN. ASEAN is now engaged in five separate FTAs with Australia-New Zealand, India, Japan, Korea, and PRC.

The India-PRC partnership is "trade only" because of its focus on trade integration rather than on non-trade issues like labor standards, environmental standards, intellectual properties, and even restrictions on the use of capital controls, which are the integral parts of US FTA template, which US may eventually want to turn into a WTO forum. Under such multilateral environment, the Asian bloc will be stronger for its approach on "trade only" rather than other peripheral issues in which the US is very interested. This will give a strong bargaining position for the Asian bloc to counter the US template in the WTO negotiations, when they will bring new issues to the negotiating table.

As a part of the look-east policy, India has consciously integrated its economy with East Asia (ASEAN+PRC, Japan and South Korea) since the early 1990s. As a result, the share of East Asia in India's trade is increasing rapidly making it a more important trade partner compared to the EU or the US. India has also been very active in negotiating bilateral trade agreements, primarily with developing countries. It belongs to SAARC and Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), and Kunming Cooperation. India has signed limited FTAs with Sri Lanka (1998) and Thailand (2003). In addition, it signed a number of preferential trade/tariff agreements (tariff concession schemes) with countries/blocs such as Afghanistan, Chile, and MERCOSUR (consisting of Argentina, Brazil, Paraguay, and Uruguay). By the end of June 2005, India signed a CECA with Singapore, which is India's first "comprehensive" FTA. India expects to upgrade its pact with Sri Lanka to a CECA in 2006. Currently, bilateral negotiations are going on with Thailand, ASEAN, Gulf Cooperation Council, Bangladesh (revised and stronger trade agreement), and Mauritius. The government is in various stages of considering talks with the PRC, Egypt, Indonesia, Japan, Korea, Malaysia, and SACU. Under the India-ASEAN frame, the idea is to come up with an overall regional trade and investment agreement, including an FTA on goods, services and investment. After some debate—especially over rules of origin and the impact of ASEAN agricultural imports on Indian farmers—the India-ASEAN FTA is now set to be enforced on 1 January 2007. India is also part of the India-Brazil-South Africa (IBSA) triangle considering a trilateral FTA. ¹¹

The PRC has taken several bold steps in forming an Asian Economic Community. It has benefited immensely from the economic globalization since it became a member of the WTO on 10 December 2001. To extract more benefits from globalization, it has deepened domestic economic reforms and opened its economy further to the world. The PRC already signed deals with ASEAN, Pakistan, and Thailand (restricted to agriculture), and is talking to Chile, New Zealand, South Africa, and the countries of the Gulf Cooperation Council in the Middle East, which provide more than 40% of PRC's oil. The PRC has strong commitment to participate in the Asian economic unification. On 8 October 2003, the PRC formally signed the ASEAN Treaty of Amity and Cooperation (TAC) and became the first member nation outside Southeast Asia to sign said treaty. The PRC has played a leading role in all FTAs in the Asian region. It is the lead member of ASEAN+1, ASEAN+3, and ASEAN+3+India groupings. The country has been the main instrument in forming economic groupings with ASEAN, India, Japan and Korea. Through different summit level dialogues, ASEAN and four dialogue partners–the PRC, India, Japan, and Korea (ASEAN+4)–are all actively engaged in evolving the FTAs between their pairs. Through the complex web of FTA negotiations, the ASEAN+4 is expected to be a reality. The PRC-India PTA/FTA will facilitate the liberalization process. But Track II dialogue of the formation of ASEAN+4 is at the advance stage due to the cohesive nature of these economies in the Asian region.

In addition, the PRC and India are members of the Asia-Pacific Trade Agreement (APTA) under the Bangkok Agreement together with Bangladesh, India, Republic of Korea, Lao People's Democratic Republic, and Sri Lanka. The PRC ratified the Bangkok Agreement in January 2001 and continued to be a member since then. Thailand and the Philippines originally signed the agreement, but did not ratify it because of their commitment to the ASEAN. The PRC's presence in the Bangkok Agreement as the sixth member makes the group more vibrant. Intra-regional trade among countries of the Bangkok Agreement increased from 3.7% in 1990 to 5.2% in 2004. The Expert Group on the Bangkok Agreement met in 2001, where members suggested expanding their membership to developed countries of Asia, such as Australia, Japan, and New Zealand, to strengthen the Bangkok Agreement in view of their considerable share of world trade.¹²

The Asian Economic Community is getting into shape due to the integration of 14 of the largest and fastest-growing economies of Asia with vast complementarities. A potential trade bloc of ASEAN, Japan, PRC, India, and Korea (JACIK) is emerging as the third pole of the world economy, with a combined GNP of $13 trillion, which is 30% of the world's total, much larger than the NAFTA or EU. The JACIK's exports will add up to $1.37 trillion compared to $1.2 trillion of NAFTA. The combined official reserves of the JACIK economies at $1.3 trillion in 2002 are much larger than those of the US and the EU combined. Foreign exchange reserve of JACIK countries is more than $2.5 trillion at present, which is obviously much more robust compared to the EU or NAFTA.

Welfare gains of the JACIK countries from the economic integration are enormous. Welfare gains in totality can be measured not only by liberalization of trade but also adopting measures to make capital freely mobile within the community, harmonizing customs procedures and product standards, and mechanisms to ensure an equitable distribution of gains. The study based on the computable general equilibrium model shows that trade liberalization among the JACIK countries in the framework of a regional trade agreement could generate efficiency gains worth $147 billion. If a regional trade agreement is combined with investment liberalization and mobility of skilled manpower, the gains from integration will add up to $210 billion representing more than 3% of GDP of the JACIK countries. What is more important in this scenario is that under a similar type of integration, welfare gains of the rest of the world would also improve by $109 billion, suggesting that Asian economic integration is Pareto optimal. ¹³ In addition, certain portion of total available regional saving of $2 trillion can be used to invest in regional infrastructure such as transport infrastructure, gas and oil pipelines, satellites and broadband cables, which can generate huge potential welfare gains that could add up to hundreds of billions of dollars because of the unutilized capacities existing in Japan, Korea, and other Asian countries in the areas of engineering, construction, and other infrastructure-related industries and service sectors.

Bhattacharyay (2006) discussed the future shape of RTCAs in Asia. The future shape of trade blocs will be based on consolidation and expansion of subregional groupings into a more cohesive arrangement, along with the establishment of common principles for a regional economic partnership to include broader areas of economic cooperation. Under the banner of the Asian Summit, it is expected that Australia, and New Zealand will join the ASEAN+4 group to make the ASEAN+6 group. Given that these 16 countries have trade links with each other, it makes sense to liberalize trade and the investment sectors further under the East Asian FTA.

In view of the high growth rates and large market sizes of some South Asian countries, countries such as Bangladesh, Pakistan, and Sri Lanka are also expected to join the trading block. Pakistan signed the Instrument of Accession to the Treaty of Amity and Cooperation in Southeast Asia, Jakarta, on 2 July 2004. Pakistan is negotiating RTCAs with the PRC, Malaysia, and Singapore. The next entrant to the trade block will be Pakistan. Sri Lanka has already signed RTCAs and proposed one with Singapore. Subsequently, other Asian countries will join in stages when they are ready. This will lead to a giant free trade area modeled on the NAFTA without a monetary union in the form of a single currency.

Japan is proposing an $80 million to $100 million fund over a 10-year period to establish a Comprehensive Economic Partnership in East Asia spanning 16 countries under the Nikai Initiative, which will foster closer economic linkages among the 10-member ASEAN, and PRC, Japan, and South Korea + India, Australia, and New Zealand. Japan's Ministry of Economy Trade and Industry formulated the Nikai Initiative, following the 11th ASEAN Summit in Kuala Lumpur last December (South Information Gateway, 2006).¹⁴ A more formal East Asian Summit is expected to supersede the ASEAN+3 framework and underscore the region's seriousness in pursuing its goals to achieve an EU-style single Asian market and community by 2020. The proposed free trade area of Asian community would create a combined population (or a consumer base) of 3.1 billion people and combined GDP of almost $10 trillion, or almost half of the world's population and a quarter of its GDP.

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Comment(s)

There are [2] comment(s) for this entry. Post a comment.

1. S.N.Singh
   (posted 17 May 2007 / 06:34:01 PM)
   
   I reviewed the paper thoroughly and based on the hypothetical model, we cannot access the actual scenario of trade among countries. Several hidden and more effective factors should also be brought into consideration.
   
   Thanks
   Singh S.N
2. Geethanjali Nataraj
   (posted 23 February 2007 / 05:38:04 PM)
   
   I have gone through the article. I think the data on India's trade with China can be easily updated by another year to 2005-06. The ministry of commerce, government of India has posted data up to 2005-06 in its data base. Secondly, the source of most of the tables is also mentioned as CMIE. I am not sure whether it is a good idea to use CMIE database. It is generally considered to be unreliable . To depict trade between two countries, it would be advisable to use international trade sources say for instance COMTRADE.
   Thanks
   geethanjali.