Regional FTA Initiatives

(1) Proliferation of FTAs in East Asia

Despite its being a latecomer in the move towards FTAs compared to the Americas and Europe, East Asia has seen an unprecedented increase in bilateral and plurilateral FTA activities since the late 1990s. Multilateralism and most favored nations (MFN) principles through the General Agreement on Tariffs and Trade (GATT)/WTO framework and open regionalism and unilateral liberalization centered on APEC formed the bedrock of the region’s approach to international trade for several decades. While the ASEAN Free Trade Area (AFTA) has been in effect since the early 1990s, many more governments in East Asia have recently embarked on preferential trade arrangements. In this sense, East Asia as a whole has changed its long-standing policy of pursuing trade liberalization only in a multilateral framework based on the WTO and APEC. The region has shifted its trade policy to a three-track approach based on global (WTO-based) cum trans-regional (APEC-based), regional (ASEAN+3 or ASEAN+6), and bilateral liberalization.

Japan implemented a bilateral EPA with Singapore,¹¹ Mexico, Malaysia and Chile, signed EPAs with Thailand, the Philippines, Indonesia, and Brunei, agreed on a Comprehensive EPA in principle with ASEAN, and is negotiating on agreements with Korea, Viet Nam, Australia and India among others. The PRC implemented a FTA on goods with ASEAN and is now negotiating on a services and investment agreement. Korea has also implemented an FTA with Chile and a goods agreement with ASEAN, signed an FTA with the US and a services agreement with ASEAN, and is negotiating an FTA with the EU. ASEAN is more aggressive in pursuing FTAs. While enacting FTAs with the PRC and Korea, ASEAN is (or is considering) negotiating FTAs with India, Australia-New Zealand, and the EU. Some ASEAN members, like Singapore and Thailand, are actively pursuing bilateral FTAs. In this sense, there have been some bandwagon effects among Japan, PRC, and Korea in their drive for plurilateral FTAs/EPAs with ASEAN, which is acting as a regional hub for FTA moves. Recently, India, Australia, and New Zealand have joined this wave.

Table 4 [ PDF 53.5KB | 1 pages ] summarizes 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; and (iii) proposed FTAs (where parties issued joint statements with intention to negotiate an FTA, or established a joint study group or conducted a joint feasibility study to determine the desirability of establishing an FTA). Prior to 2000, only 3 FTAs had been concluded,¹² 1 was under negotiation, and another 3 had been proposed. Within seven years, there was a tenfold 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 more than half of Asia’s total FTA initiatives).¹³ This trend seems set to increase in the future as East Asia makes up threequarters of FTAs under negotiation in Asia.

(2) Driving factors behind FTA initiatives

Three factors have led to the emergence of recent FTA moves in East Asia: (i) the deepening of market-driven economic integration; (ii) the success of European and North American economic integration initiatives; and (iii) the Asian financial crisis.¹⁴

First, the most fundamental factor is the progress of market-driven regional economic linkages and interdependence. De facto economic integration requires policy measures to further deepen integration—i.e., coordination and harmonization of trade and FDI activities. Policymakers in East Asia are increasingly of the view that FTAs can support trade and FDI expansion through further elimination of cross-border impediments, facilitation of trade and FDI, and harmonization of various rules, standards, procedures, and regulations. 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 and, more recently, regional MNCs.

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 unless they coordinate their own trade policies at the regional level, they will be disadvantaged in global competition and multilateral negotiations. Out of the concern that the two giant blocs, the EU and the US, might dominate the rule-setting in the global trading system while marginalizing the role and weight of East Asia, the region’s policymakers have come to believe that they must step up their own process of integration and increase the region’s voice in, and for, global trade issues. In addition, facing the slow progress of the WTO/Doha round and the perceived loss of steam of the APEC process, FTAs are considered as an insurance policy against the periodic difficulties with multilateral trade liberalization.

Third, the Asian financial crisis of 1997–98 has taught the important lesson that East Asia needs to strengthen regional economic cooperation in order to sustain dynamic 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 1997–98 Asian financial crisis nurtured the sense of a “region” with a common set of challenges.

(3) Salient features of East Asian FTAs/EPAs

Many East Asian FTAs/EPAs are relatively new and, hence, summarizing their salient features is not an easy task, given the limited number of implemented FTAs/EPAs in place. Using the Asian Development Bank’s Asian Regional Integration Center (ARIC) FTA Database, Kawai and Wignaraja (2007) have identified several key features of East Asian FTAs, focusing on configuration (bilateral vs. plurilateral), inward vs. outward orientation, scope (in terms of “WTO plus” elements), and rules of origin.

Bilateral vs. plurilateral FTAs. The configuration of FTAs in East Asia can be divided into bilateral and plurilateral. Bilateral refers to agreements between two countries, while plurilateral refers to agreements among three or more countries. Plurilateral FTAs take several forms—agreements involving more than two countries, between one (or more than one) country and a trading bloc (like ASEAN), or between two trading blocs (e.g., ASEAN- EU).¹⁵ On the whole, countries are opting for simple bilateral FTA configurations rather than the more complex plurilateral ones as the bilateral agreements may be easier to negotiate. There were 31 bilateral FTAs among the 40 concluded FTAs as of November 2007 (i.e., 78% of total concluded FTAs), and there were 28 bilateral FTAs among the 38 FTAs under negotiation (making up 74%).

There are 9 plurilateral agreements among the concluded FTAs, and an additional 10 plurilaterals under negotiation.¹⁶ Among these, AFTA stands out in its economic importance in the region and as a natural hub for future FTA consolidation in East Asia. ASEAN has also become a focal point for the emergence of a new category of bloc-to-trading bloc agreements (e.g., an ASEAN+EU FTA under consideration for negotiation). The other concluded plurilateral agreements connect various East Asian countries with others outside the region.

Outward orientation of FTAs. Looking at East Asian FTAs, the high degree of outward orientation is striking. Out of all (40) concluded FTAs, 26 are with countries or groups outside East Asia as of November 2007 (65% of total). The outward orientation of East Asian FTAs under negotiation is even higher at 89%.

Having commenced negotiations with Australia, India, and New Zealand, ASEAN as a group is considering negotiations with the European Union. Singapore has concluded 8 extraregional agreements with a wide geographical spread from North and Latin America to the Middle East. PRC, Japan, Korea, and Thailand have concluded FTAs with some Latin American countries. The PRC has concluded an FTA with Pakistan and is negotiating FTAs with the Gulf Cooperation Council and Iceland. Thus, East Asian economies have a strong tendency to maintain open trading relations with the rest of the world rather than becoming inward-looking (Kawai, 2005a).

“WTO-plus” coverage. The WTO regulatory framework typically covers trade in goods, services, and a few other trade-related issues, while FTAs may cover issues beyond the WTO framework. So it is useful to examine the extent to which the recent East Asian agreements go beyond the WTO regulatory framework—by looking at provisions on a host of issues such as trade facilitation, investment, government procurement, competition policy, intellectual property rights, contingency protection, environmental protection, labor mobility, and dispute settlements. Agreements containing such provisions are sometimes referred to as “WTO-plus” elements.

It is useful to break down concluded FTAs in East Asia into four types according to increasing scope: (i) goods only; (ii) goods and services; (iii) goods, services, and Singapore issues; and (iv) goods, services, Singapore issues, and cooperation enhancement measures. “Singapore issues” refers to trade facilitation, investment, government procurement, and competition policy. These were conditionally included in the work program for the Doha Round in November 2001 but were subsequently dropped at the WTO Ministerial Conference in Cancun in 2004. Cooperation enhancement measures refer to additional WTO-plus provisions—such as labor standards, small- and medium-sized enterprises (SMEs), and the environment—which are included in some agreements along with the Singapore issues. It is noteworthy that two thirds of concluded East Asian FTAs in 2007—a total of 23 (or 68%) out of 34 concluded FTAs for which data were available¹⁷—had “WTO-plus” provisions in addition to goods and services provisions. Of these, 9 had the Singapore issues only while another 14 were more comprehensive in scope with both the Singapore issues and cooperation enhancement provisions. This indicates that East Asian economies typically favor “WTO-plus” agreements rather than agreements in trade in goods and services.

Multiple rules of origin. Rules of origin (ROOs) exist to determine which goods will enjoy preferential bilateral tariffs and thus prevent trade deflection among FTA members. For manufactured goods, ROOs may have three types: (i) a change in tariff classification (CTC) rule defined at a detailed Harmonized System (HS) level; (ii) a local or regional value content (or value added, VA) rule requiring a product to satisfy a minimum local or regional value added in the exporting country or region of an FTA; and (iii) a specific process (SP) rule requiring a specific production process for an item.

Out of the 30 concluded FTAs in East Asia—for which data were available—strikingly, the majority (20) have adopted a combination of the three different ROO types rather than applying a single rule. Of the remaining FTAs, 3 use the VA rule only, another 3 use VA and/or CTC rule, and another 4 use VA and/or SP rules. The simplest ROO can be found in AFTA and the ASEAN+PRC FTA, both of which specify a 40 percent regional value content (VA) across all tariffs. Many agreements involving Japan, Korea, and Singapore tend to use a combination of rules. This suggests that room exists for coordination on ROOs across different, overlapping FTAs.

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