Economic Integration and FTA Initiatives in East Asia

2-1 Market-Driven Economic Integration in East Asia

Economic integration through trade and FDI. East Asia has long enjoyed a market-driven expansion of trade and FDI. Over the past two decades, the region's trade and FDI have expanded rapidly. East Asia's exports rose from 14% of world total exports in 1980 to 27% in 2006, while its imports expanded from 15% to 24% during 1980-2006.¹ FDI inflows into East Asia (including Japan) more than tripled from 5% of world total FDI inflows in 1980 to 16% in 2005, while East Asian FDI outflows increased from 5% to 11% of world total outflows over the same period. East Asia's global expansion of trade and FDI has been accompanied by rising intra-regional concentration of trade and FDI activities.

Table 1 [ PDF 13.4KB | 1 pages ] summarizes changes in the share of intra-regional trade for various groupings in the world over the period 1980 to 2006. The table demonstrates that intra-regional trade as a share of East Asia's total trade has risen from 37% in 1980 to 55% in 2006 (including Japan) or from 23% to 46% over the same period (excluding Japan). Now 55% of East Asia's trade is with itself. The recent share of intra-regional trade within East Asia is still lower than that in the old European Union-15 (which peaked at 66% in 1990), but exceeds that of the North American Free Trade Area (which peaked at 49% in 2001).

FDI inflows into emerging East Asia have contributed to regional economic integration. Table 2 [ PDF 13.4KB | 1 pages ] indicates summarizes the source regions/countries of emerging East Asian economies' FDI inflows (cumulative figures) for the period 1995-2005. It shows that firms from the major industrialized countries as well as those from within emerging East Asia, are the main investors in emerging East Asia. Indeed multinational corporations from the European Union (EU), the United States (US) and Japan account for 15%, 14% and 11%, respectively, of emerging East Asia's cumulative FDI inflows over the period 1995-2005. More specifically, the largest investors in the Asian newly industrializing economies (NIEs), particularly in Singapore and Taipei,China, come from the US. In contrast, the EU is the largest developed country investor in ASEAN-9 (which excludes Singapore), particularly in Indonesia and Viet Nam, though Japan is the largest developed country investor in Thailand. However, in Thailand and Viet Nam, the Asian NIEs' firms are the most dominant investors. In the case of the PRC, Hong Kong is by far the largest investor and no major industrialized country dominates FDI.² Notable is the rising importance of FDI by the Asian NIEs' firms, which account for 29% of total FDI inflows to ASEAN9 and 54%of total inflows to the PRC. More recently firms from the middle-income ASEAN countries, such as Malaysia and Thailand, have also begun to invest in other ASEAN countries and in the PRC. All in all, emerging East Asia, the EU, the US, and Japan are important foreign direct investors in emerging East Asia.³

Factors behind trade and FDI integration. There are several factors behind the expansion of trade and FDI and the resulting economic integration of East Asian economies. First, East Asian economies have pursued trade and investment liberalization as part of their outward-oriented trade and FDI policies within the multilateral framework under the General Agreement on Tariffs and Trade (GATT)/World Trade Organization (WTO) and open regionalism through Asia-Pacific Economic Cooperation (APEC). Several GATT liberalization rounds have reduced tariffs and non-tariff barriers to trade on a sustained basis. A key feature is that the region has avoided discriminatory trade practices. The APEC process was successful in encouraging the PRC—as well as Taipei,China—to pursue trade and FDI liberalization outside of the WTO framework. To support these liberalization measures and to cope with the competitive pressure coming from abroad, the economies have adopted complementary domestic reforms.

Second, through FDI, global MNCs and later other East Asian firms have formed production networks and supply chains throughout East Asia. They have divided their production processes into multiple sub-processes and located these sub-processes in different countries based on comparative advantage—i.e., relative factor proportions and technological capabilities. This has promoted dynamic evolution of intra-regional division of labor and led to the rise of vertical intra- industry trade in parts, components, and semi-finished and finished manufactured products.⁴ An important implication of this evolution is that large inflows of FDI to emerging East Asia have stimulated the region's engagement with trade in a way that reflects the individual economies' stages of industrial development. Asian NIEs were the first to be part of such networks, followed by middle-income ASEAN countries, and then by the PRC and Viet Nam.

Third, improved physical and digital connectivity and development of logistics support services—due to infrastructure investment (in transport, telecommunications, etc.) and ICT technical progress—have reduced trade costs of conducting cross-border business and thus encouraged trade and investment activities. This has helped the emergence of spatially concentrated clusters of manufacturing firms and supplier networks within East Asia.

Fourth, rapid growth of a very large emerging market economy, the PRC, has also been contributing to closer economic linkages among the East Asian economies. The PRC now plays a major role in these production networks and supply chains as its expanding export requires imports of industrial materials, parts, components, and other intermediate products from the neighboring economies. The PRC has thus become a manufacturing assembly for the East Asian economies, particularly for Japan and the Asian NIEs. More recently, the rise of India is expected to further strengthen regional economic linkages.

All of these factors have led to East Asia's greater economic openness and globalization, which in turn has created natural (de facto) regional concentration of trade and FDI activities in East Asia. North America and Europe remain important markets for East Asia's finished manufactured products but, with the growth of regional markets, the relative importance of these outside markets has been declining over time.

2-2. FTA Initiatives in East Asia

Proliferation of FTAs in East Asia. East Asia is a latecomer in the move towards FTAs compared to the Americas, Europe, and Africa but has seen an unprecedented increase in total FTA activity since the 1990s. Multilateralism through the WTO framework and open regionalism centered on APEC were the bedrock of the region's approach to international trade for several decades. Recently, many governments in East Asia have embarked on bilateral and plurilateral trade arrangements. Notably, Japan implemented bilateral economic partnership agreements (EPAs) with Singapore, Mexico, and Malaysia; signed EPAs with Chile, the Philippines, Thailand, Brunei, and Indonesia; has reached an agreement in principle with ASEAN; and is negotiating on agreements with Korea, Viet Nam, India and Australia.⁵ The PRC implemented an FTA on goods trade with ASEAN and is now negotiating on agreements on services trade and investment. Korea has also implemented an FTA with Chile and an FTA on goods trade with ASEAN and has reached an agreement on an FTA with the US. ASEAN is even more aggressive in pursuing FTAs. While enacting FTAs with the PRC and Korea, ASEAN is negotiating FTAs with Australia-New Zealand and India, and considering to negotiate with the EU. Some ASEAN members like Singapore and Thailand are actively pursuing bilateral FTAs. In this sense, there have been bandwagon effects among the East Asian economies in their drive for FTAs/EPAs. Recently, Australia, New Zealand, and India have joined this wave. The time frame of liberalization schedules of East Asian economies indicates that most of the liberalization measures will have been fully implemented by 2020 (Table 3 [ PDF 32.2KB | 1 pages ]).

The PRC has proposed a Northeast Asian FTA among the three nations in Northeast Asia (PRC, Japan, and Korea),⁶ as well as an East Asia-wide FTA for ASEAN+3 countries (the ten ASEAN members, PRC, Japan, and Korea). Japan has also proposed an even bigger regional EPA for ASEAN+6 countries (the thirteen ASEAN+3 countries, Australia, New Zealand, and India). However, no time frame has been proposed for negotiations of such wider FTAs/EPAs.

Japan's conclusion of a bilateral EPA with Singapore—called the Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership (JSEPA)—symbolized a change in its long-standing policy of pursuing trade liberalization only in a multilateral framework based on the WTO and APEC. Japan decided to shift its trade policy to a three-track approach based on global (WTO-based) cum trans-regional (APEC-based), regional (ASEAN+6), and bilateral liberalization. For Japan, regional and bilateral liberalization is an attempt to achieve deeper integration with its trading partners on a formal basis, going beyond reductions in border restrictions—pursuing investment liberalization, promoting greater competition in the domestic market, and harmonizing standards and procedures. Its challenge is to maintain an appropriate balance between the regional and bilateral approach and the WTO liberalization framework, which remains an important element of Japanese trade policy.

Table 4 [ PDF 32.2KB | 1 pages ] identifies three types of FTA activity in East Asia by status, during 1976–2007: (i) concluded FTAs (those signed or under implementation); (ii) FTAs under negotiation (those being officially negotiated with or without a framework agreement being signed); and (iii) proposed FTAs (where parties issued joint statements with intention to negotiate an FTA, established a joint study group, or conducted a joint feasibility study to determine the desirability of establishing an FTA). As of 2000, only three FTAs had been concluded, one was under negotiation, and another three had been proposed.⁷ Within seven years, there was a ten-fold increase in FTAs concluded in East Asia and a larger increase in those under negotiation. By the end of June 2007, there were 36 FTAs concluded, 41 under negotiation, and 25 proposed. Today East Asia is at the forefront of FTA activity in Asia, with a total of 102 FTA initiatives at various stages—equivalent to about half of Asia's total FTA initiatives.⁸ East Asia makes up twothirds of FTAs under negotiation in Asia.

Factors underlying FTA initiatives. There are basically three factors behind recent FTA initiatives in East Asia: (i) the deepening of market-driven economic integration; (ii) the progress of European and North American economic integration; and (iii) the Asian financial crisis.⁹

First, the most fundamental factor behind the emergence of recent initiatives for FTAs is the progress of regional economic linkages and interdependence. Market-driven economic integration eventually requires policy measures to support and further it—i.e., harmonization of policies, rules, and standards governing trade and FDI. Policymakers in East Asia are increasingly of the view that FTAs, if designed widely in terms of scope, can support expanding trade and FDI activities through further elimination of cross-border impediments, facilitation of trade and FDI, and harmonization of various rules, standards, and procedures. In this way, FTAs can be regarded as part of a supporting policy framework for the deepening production networks and supply chains formed by global MNCs and emerging East Asian firms.

Second, economic regionalism in Europe and North America—including the successful launch of an economic and monetary union by the euro area countries and the expansion of the EU to the east, as well as the success of NAFTA and its incipient move to the Free Trade Area of the Americas (FTAA) in North, Central, and South America—has motivated the East Asian economies to pursue regional trade arrangements. Governments in East Asia fear that the two giant blocs—the European Union and the United States—might dominate the rule-setting in the global trading system while marginalizing the role and weight of Asia in global competition and multilateral negotiations. They have increasingly realized the importance of stepping up their own process of integration and uniting themselves to strengthen bargaining power in the global arena, and raise the region's voice in, and for, global trade issues. In addition, facing the slow progress of the WTO/Doha negotiation process and the perceived loss of steam in the APEC process, FTAs can be considered as an insurance policy against the periodic difficulties with multilateral trade liberalization.

Third, the Asian financial crisis of 1997–1998 has taught the important lesson that East Asia needs to strengthen economic cooperation in order to sustain economic growth and stability. The global initiative to strengthen the international economic system in this regard has been unsatisfactory, while the national efforts to strengthen individual economic fundamentals take time to bear fruit. Hence, the general sentiment in Asia has been that the region must establish its own "self-help" mechanism for economic management. The 1997–1998 Asian financial crisis nurtured the sense of a "region" with a common set of challenges.

2-3. Evolving Economic Architecture in East Asia

East Asia has seen the development of several key groupings over the last fifteen years, including ASEAN, ASEAN+3, East Asia Summit (ASEAN+6), APEC, and Asia-Europe Meeting (ASEM).

ASEAN. Until recently, the Association of South East Asian Nations (ASEAN), established in August 1967, had been the only formal organization that pursued regional economic integration in East Asia. The ASEAN Declaration stated that it aimed to accelerate economic growth, social progress, and cultural development in the region and promote regional peace and stability. The association has embarked on several economic integration initiatives, including the ASEAN Free Trade Agreement (AFTA), the ASEAN Framework Agreement on Services (AFAS), and the ASEAN Investment Area (AIA). In December 1997, the ASEAN leaders adopted the ASEAN Vision 2020, which envisioned ASEAN as outward looking, living in peace, stability, and prosperity, bonded together in partnership in dynamic development and in a community of caring societies. In October 2003, the ASEAN leaders adopted the Declaration of ASEAN Concord II (Bali Concord II), whereby they agreed on the establishment by 2020 of an ASEAN Community comprising three pillars, namely, ASEAN Security Community, ASEAN Economic Community, and ASEAN Socio-Cultural Community.

The lynchpin of the ASEAN economic integration initiative is AFTA, introduced in January 1992, which aims to establish an ASEAN Free Trade Area within 15 years. The Common Effective Preferential Tariff (CEPT) Scheme was introduced as the main mechanism for lowering intra- ASEAN tariffs to the 0–5% range.¹⁰ Despite the slow pace of trade liberalization, AFTA has been in effect among the first six signatories—Brunei, Indonesia, Malaysia, Singapore, Thailand and the Philippines—since January 2002 by reducing tariffs on almost all products in the Inclusion List to the 0–5% range. Implementations have been delayed for newer members—for Viet Nam in 2006, Lao People's Democratic Republic (Lao PDR) and Myanmar in 2008, and Cambodia in 2010. The six original signatories are expected to eliminate tariffs altogether by 2010 and the four latecomers by 2015. By then ASEAN as a whole will become a tariff-free FTA.

The AFAS, signed in December 1995, aims to substantially eliminate restrictions to trade in services among ASEAN members—by progressively improving market access and ensuring equal national treatment—and improve the efficiency and competitiveness of ASEAN services suppliers. The AFAS was amended in September 2003 to allow for the application of "ASEAN minus x" formula in the implementation of services commitments. Under this formula, member countries that are ready to liberalize a certain service sector may proceed to do so without having to extend the concessions to non-participating countries. The AIA, adopted in October 1998, aims to make ASEAN a competitive, conducive and freer investment area through liberalizing investment rules and policies in protected sectors and promote greater flows of capital, skilled labor, professional expertise and technology within the region. The AIA agreement has expanded to cover manufacturing, agriculture, mining, forestry and fishery sectors, and services incidental to these sectors.

The ASEAN Economic Community (AEC), one of the three pillars of the ASEAN Community, is considered as the realization of the end-goal of economic integration as outlined in the ASEAN Vision 2020. ASEAN is expected to become a single market and production base by 2020, with a free flow of goods, services, investment, a freer flow of capital, equitable economic development, and reduced poverty and socio-economic disparities.¹¹ In moving in this direction, new mechanisms and measures are expected to be introduced to: strengthen the implementation of its existing economic initiatives including the AFTA, AFAS and AIA; accelerate regional integration in the priority sectors; facilitate movement of business persons, skilled labor and talents; and improve the existing ASEAN Dispute Settlement Mechanism. In the Cebu Summit in January 2007, ASEAN Leaders decided to advance the time frame of the ASEAN Community, including AEC, forward to 2015.

ASEAN+3. The leaders of Japan, China and Korea were invited to the informal ASEAN Leaders' Meeting in December 1997, in the midst of the Asian financial crisis, which de facto initiated the ASEAN+3 process. There are many ministerial processes within the ASEAN+3 framework, for foreign affairs, economy and trade, macroeconomic and finance, environment, energy, health, labor, science and technology and social welfare among others. In additional to economic ministers, finance ministers have been particularly active for regional financial cooperation, including the launch of the regional liquidity support arrangement (Chiang Mai Initiative), the regional economic surveillance process and Asian bond market development. The PRC regards ASEAN+3 as a natural grouping for East Asia's trade and investment cooperation.

The ASEAN+3 Leaders in November 2004 agreed that the establishment of an "East Asian Community" is a long-term objective and affirmed the role of ASEAN+3 as the main vehicle for this eventual establishment. The idea of creating an "East Asian Community" had been proposed by the East Asia Vision Group (2001).¹² Its principal aims, relating to economic, trade and investment integration, can be summarized as:

• Establishment of an East Asian Free Trade Area (EAFTA) and liberalization of trade well ahead of the APEC Bogor Goal;
• Expansion of the Framework Agreement on an ASEAN Investment Area (AIA) to all of East Asia;
• Promotion of development and technological cooperation among regional countries, to provide assistance to less developed countries; and
• Realization of a knowledge-based economy and establishment of a future-oriented economic structure.

The Group had envisioned the progressive integration of the East Asian economies, ultimately leading to an "East Asian economic community." Once a region-wide FTA is formed, covering both trade and investment, and institutions for other types of regional cooperation are established, the basic foundation for an East Asian economic community will have been prepared. The ASEAN+3 leaders in 2002 received the final report of the East Asia Study Group (EASG), which was essentially government officials' responses to the Vision Group's recommendations, and identified 17 concrete short-term measures and 9 medium- to long-term measures to move East Asian cooperation forward. The Leaders endorsed in 2003 the implementation strategy of the short-term measures—to be implemented by 2007—and in 2004 encouraged a speedy implementation of the short and long-term measures of the EASG.

East Asia Summit (ASEAN+6). One recent, significant development is the November 2004 agreement by ASEAN leaders in Vientiane to convene an East Asian Summit (EAS). Creation of this new forum had been suggested by the East Asia Vision Group, but without a clear view of which countries should be its members. The first EAS meeting was held in Kuala Lumpur in December 2005 and the second one in Cebu in January 2007, with the participation of ten ASEAN members as well as six countries including PRC, Japan, Korea, India, Australia, and New Zealand. This wider group focuses on issues common to the wider participants, such as energy and environmental issues. Japan regards ASEAN+6 as an appropriate group for East Asia's trade and investment cooperation.

Future economic cooperation in East Asia, leading to an East Asian economic community, is likely to evolve around the multiple agreements under the ASEAN, ASEAN+1, ASEAN+3 and East Asia Summit (EAS, or ASEAN+6) processes.¹³ It is likely that the "ASEAN Economic Community," to be created by 2015, will be the center of East Asian economic cooperation. It is now understood that the core of East Asian cooperation lies in ASEAN as the "driving force," with ASEAN+3 as the "main vehicle" for the realization of an eventual East Asian economic community, with the EAS as "an integral part of the overall evolving regional architecture."

APEC and ASEM as trans-regional forums. APEC, established in 1989, has played a useful role in encouraging trade and investment liberalization on a voluntary and unilateral fashion within an Asia-Pacific context, including the United States, Canada, and Australia as members. Australia played a major role in promoting APEC as a trans-regional forum with the basic principle of "open regionalism." One of its most important achievements was to induce unilateral, voluntary trade liberalization of non-WTO members such as PRC and Taipei,China. In addition, the Bogor Declaration of 1994 set the goal of zero tariffs by 2010 for developed countries and by 2020 for developing countries. The modality of achieving the Bogor goals was clarified in the so-called Osaka Action Agenda. Nonetheless, APEC's prominence appears to have declined since the Asian financial crisis because of its inability to effectively respond to the crisis and the recent proliferation of bilateral and sub-regional FTAs pursued by the member economies. But the basic principle of "open regionalism," set out by APEC, may remain important if APEC members take APEC—and WTO—principles as a liberalization infrastructure for their FTAs and attempt to go beyond such basic principles.¹⁴

The Asia-Europe Meeting (ASEM) was created in 1996 as a forum for Asia-European Union economic cooperation. Its membership covered initially five original ASEAN members, PRC, Japan, Korea and EU members, but was later expanded to include all ASEAN members, and more recently key South Asian countries, like India and Pakistan. ASEM has not been active as a forum for trade and investment liberalization as in the case of APEC.

Download this Discussion Paper [ PDF 404KB| 52 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.