Endnotes

¹The multilateral trade liberalization process has been governed by the World Trade Organization (WTO)—or its predecessor, the General Agreement on Tariffs and Trade (GATT)—and the unilateral trade and investment liberalization, based on “open regionalism,” has been pursued within the APEC framework.

²Here, East Asia includes fifteen economies—four Asian newly industrialized economies (Hong Kong, China; Korea; Singapore; and Taipei,China), ten ASEAN countries (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam), PRC, and Japan. Note that Singapore is an Asian NIE as well as an ASEAN member

³The original EU-15 comprises Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and United Kingdom.

⁴Petri (2006) has found a rising regional trade bias in East Asia since the 1980s after the secular decline in the post-WWII period.

⁵See Kawai and Urata (1998), Fukao, Ishido, and Ito (2003), Kawai (2005b), and Athukorala (2005).

⁶In the late 1980s, the PRC was not considered as an attractive production base for many global MNCs, including Japanese corporations, due to the country’s tight restrictions over foreign firms’ activities. Hence, the Asian NIEs and middle-income ASEAN countries were chosen as natural options for relocating Japanese MNCs’ production activities abroad. With growing attractiveness of the PRC as an FDI host in the 1990s, however, global MNCs—including those from Japan—began to expand their investment and business activities in the PRC.

⁷This part is drawn from ADB, Asia Bond Monitor, November 2005.

⁸The beta coefficient takes the value of unity for full co-movements of interest rates.

⁹The only exception is Korea, where correlation appears to be falling somewhat after 1998.

¹⁰See Bayoumi and Eichengreen (1994) for evidence up to the early 1990s.

¹¹More precisely, the Japan-Singapore agreement is called the “Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership (JSEPA)” and goes beyond a conventional free trade agreement.

¹²These were the Bangkok Treaty (1976), now known as the Asia-Pacific Trade Agreement (APTA), the Laos- Thailand Preferential Trading Arrangement (1991) and the ASEAN FTA (1992).

¹³As of June 2007, there were 198 FTAs in Asia as a whole. Of these, 90 were concluded, 61 were under negotiation, and 47 were proposed.

¹⁴More complete explanations can be found in Kawai (2005a).

¹⁵There exist other definitions of bilateral and plurilateral FTAs, that is, a bilateral agreement is one reached by two negotiating parties where one of them may be a trading bloc itself (e.g., Thailand-EU FTA) while a plurilateral agreement refers to an FTA in which the number of negotiating parties exceeds two.

¹⁶The APTA, AFTA, the Preferential Trade Agreement-Group of Eight Developing Countries, Trans-Pacific Strategic Economic Partnership Agreement, ASEAN+PRC FTA, ASEAN+Korea FTA, Korea & EFTA FTA, Singapore & EFTA, and the Taipei,China-El Salvador-Honduras FTA.

¹⁷As of November 2007, there were 40 concluded FTAs in East Asia. However, the texts for the Taipei,China and Nicaragua FTA and several recent FTAs were not available.

¹⁸While this forum is considered the most influential for regional central banks, it has its own weaknesses, such as irregularity of meeting schedules and lack of continuity. Eichengreen (2001) noted that each meeting had a different theme, and the themes ranged widely from social safety nets to capital flows.

¹⁹The ASA, established in August 1977 by the central banks of the original five ASEAN countries, with a total facility of US$100 million, was augmented to a total of US$200 million in 1978. Under the CMI, ASA membership was extended to include all ASEAN members, and its facility was further augmented to US$1 billion. It was agreed in April 2005 to further augment ASA to US$2 billion. Note the ASA is a multilateral swap arrangement. The amount US$83 billion for CMI BSAs excludes Japan’s commitment made for Malaysia under the New Miyazawa Initiative (NMI). In June and August of 1999, the Japanese Ministry of Finance committed to providing up to US$5 billion liquidity to the Bank of Korea and up to US$2.5 billion liquidity to Bank Negara Malaysia if and when necessary, through swap transactions between the US dollar and the respective local currencies. The NMI commitment to Korea was later included in a CMI BSA between Japan and Korea.

²⁰Some ASEAN+3 members, such as Malaysia, believe that the CMI should not be linked to IMF programs.

²¹“Original sin,” as hypothesized by Eichengreen and Hausmann (1999), is a situation where emerging economy residents cannot borrow abroad in domestic currency nor borrow long term, even domestically. Hence domestic banks and corporations tend to face a currency or maturity mismatch or both, thus facing balance sheet vulnerabilities to sharp changes in exchange rates and/or interest rates.

²²The so-called “Friends of Thailand” were economies which extended financial assistance to Thailand in 1997 and included Australia; Brunei Darussalam; PRC; Hong Kong, China; Indonesia; Japan; Korea; Malaysia; and Singapore.

²³The Bangkok Declaration in 1967 stated that ASEAN aimed to accelerate economic growth, social progress, and cultural development in the region and promote regional peace and stability.

²⁴See Hew and Soesastro (2003) and Hew (2007) for a number of ideas on deepening ASEAN economic integration.

²⁵The ASEAN economic ministers’ meeting in September 2003 agreed to accelerate integration of 11 priority sectors: electronics, e-ASEAN, health care, wood-based products, automotives, rubber-based products, textiles and apparels, agro-based products, fisheries, air travel, and tourism. These were officially endorsed by the ASEAN leaders in November 2004.

²⁶The ASEAN Charter establishes the group as a rules-based legal personality, creating permanent representation for members at its secretariat in Jakarta and committing leaders to meetings twice a year. The Charter reaffirms as its basic principle consultation and consensus for its decision-making, but where consensus cannot be reached, the ASEAN Summit may decide on how a specific decision can be made. The Charter permits flexible participation in the implementation of economic commitments in ASEAN, including the ASEAN minus x” formula.

²⁷Following the ASEAN+3 leaders’ decision in 2003 and based on the PRC’s proposal, ASEAN+3 economic ministers set up an expert group to conduct a feasibility study on an EAFTA in 2004. The ministers were briefed in 2006 by the Chairman of the Joint Expert Group (JEG) for Feasibility Study on East Asia Free Trade Area on study outcomes. ASEAN+3 leaders in January 2007 welcomed the EAFTA as a fruitful avenue of integration, but at the same time they noted that they should examine other possible configurations such as an FTA for EAS countries. Leaders also welcomed Korea’s proposal to conduct the Phase II study involving the in-depth sector-by-sector analysis of the EAFTA within ASEAN+3. At the same time, reflecting Japan’s position, EAS leaders in January 2007 agreed to launch a track-2 study on a Comprehensive Economic Partnership in East Asia (CEPEA) among EAS participants.

²⁸The East Asia Vision Group was established in 1999 under the leadership of Korean President Kim Dae Jung, and the Group recommended: (a) economic cooperation, b) financial cooperation, (c) political and security cooperation, (d) environmental cooperation, (e) social and cultural cooperation, and (f) institutional cooperation.

²⁹The ASEAN+1 process includes ASEAN+PRC, ASEAN+Japan, ASEAN+Korea, ASEAN+India, and ASEAN+CER mainly in the form of FTAs or comprehensive economic partnership agreements (CEPAs).

³⁰First, ASEAN does not seem to want to see a dominant Japan or the PRC and, second, no close coordination has been developed among PRC, Japan, and Korea yet. Japan and the PRC seem happy having ASEAN assume a leadership role in East Asian community building.

³¹In response to the proliferation of various FTAs in the Asia-Pacific region, APEC agreed to encourage its members to pursue a best-practice model of an FTA.

³²See Bergsten (2007) for a proposed FTAAP.

³³The TAC, signed in 1976, specifically and legally binds all its signatories to peaceful coexistence and respect for the principles of sovereignty, territorial integrity, non-interference in internal affairs, and non-use of force. In addition to all ten ASEAN members, 10 countries have signed the TAC: PRC (October 2003); India (October 2003); Japan (July 2004); Pakistan (July 2004); Korea (November 2004); Russia (November 2004); New Zealand (July 2005); Australia (December 2005); France (January 2007); and Timor-Leste (January 2007).

³⁴The ACU could also be developed for invoicing trade-related transactions and serving as a denomination for local currency bond issues. See Kawai (2007b).

³⁵Interesting remarks have been made by Adams (2006), Under Secretary for International Affairs of the US Treasury at the time. He states: “With respect to an Asian Currency Unit (ACU), there has been some confusion about the US position on this topic. … We do not see the ACU as a competitor to the dollar. … We believe that greater exchange rate flexibility is desirable for the region, but are open-minded as to whether that involves currency cooperation within the region.” On broader regional financial cooperation, while he wants to see more “clarity on the CMI” with regard to the amounts available absent IMF programs and the conditions imposed by CMI creditors, he states “we … support regional cooperation that is consistent with multilateral frameworks.”

³⁶Under the ERM of the European Monetary System, the deutschemark emerged as a de facto anchor currency despite the system having been designed as a symmetric exchange rate stabilization scheme. In Asia, it is also possible for the yen, the yuan, or another currency to play such an asymmetric, monetary anchor role, but the choice will be left to the natural evolution of non-inflationary policymaking and credibility of the region’s central banks.

³⁷The appeal of the “parallel currency” approach is dictated more by economic forces (i.e., market forces) than by politics. This is consistent with the greater emphasis placed by East Asian countries on market-led rather than policy-led integration. It also accommodates the fact that the East Asian political context is very different compared with that of Europe. An underlying commitment to political solidarity drove the transition to a monetary union in Europe. Europe also considered the parallel currency approach, but it was abandoned in favor of the Maastricht process because of the strong political commitment that existed at the time.

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