Introduction: Key Issues

East Asian economies have grown rapidly over the last four decades, driven by the expansion of international trade and foreign direct investment (FDI). Production networks and supply chains—formed initially by global multinational corporations (MNCs) and later by emerging East Asian business firms—are the basis for trade and FDI expansion. More recently, East Asian governments have embarked on policy initiatives for formal economic integration through bilateral and plurilateral free trade agreements (FTAs). The Association of Southeast Asian Nations (ASEAN) is emerging as the integration hub for FTA activity in East Asia, while the People's Republic of China (PRC), Japan, and Korea are also making formal economic ties with ASEAN. More recently, India and Australia are joining in this bandwagon move towards FTAs with East Asia.

There is a view, however, that FTAs—particularly the proliferation of multiple, overlapping ones—carry the risks of going against the World Trade Organization (WTO) Doha round and creating negative "noodle bowl" effects. If such risks are significant, many questions arise: What should be done to minimize such risks? How can East Asia ensure that the region's FTAs can become a stepping stone toward global integration? If the benefits of consolidating Asian "noodle bowls" into a single East Asian FTA are large, how should this be achieved? Should East Asia aim for a single FTA based on ASEAN+3 (comprising the ten ASEAN members plus PRC, Japan, and Korea) or ASEAN+6 (or the East Asia Summit group comprising ASEAN+3, Australia, New Zealand, and India)? What about East Asia's relationship with North America and Europe?

This paper attempts to answer some of these questions. Section 2 highlights the progress of market-driven regional economic integration of East Asian economies through trade and FDI and the recent emergence of policy-driven FTA initiatives. Section 3 summarizes some salient characteristics of East Asian FTAs including geographical orientation, WTO-plus provisions, rules of origin, and other standards. Section 4 examines the economic impact of forming various types of FTAs in East Asia (among such groups as ASEAN+1's, ASEAN+3, and ASEAN+6) using a computable general equilibrium (CGE) model. Section 5 tackles policy issues for helping to make East Asian FTAs a stepping stone, rather than a stumbling block, to global economic integration. Section 6 concludes by focusing on how East Asia should strengthen trade and FDI ties with North America and Europe.

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