ECFA and its Relevancy in North East Asian
Economic Integration
Hsin Chang Lu1
Section I. Introduction
The current international business environment has changed very much since the end
of the Cold War era.
Due to the decreasing probability of conflict among major
powers, economic engagement and social exchanges become the norm for gaining
international cooperation, mutual trust in peaceful resolution as well as for future
prosperity.
As a result, one sees increasing trade volume and investment flow across
national borders and the setup of new organizations to collaborate with joint effort
during the past four decades.
To date, global security issues have gone beyond border safety, refugees and the
environmental changes.
It now includes infectious diseases, internet accessibility
and e-business opportunities, and even fertility in the developed world.
Since the
financial tsunami occurred in the year of 2009, the direction of joint effort to save the
world from a great depression has been shifted to a new round of struggle for world
leadership as found recently in the game of agenda setting by G20 countries.
1
Associate Professor of Business Economics, Department of International Business, National Taiwan
University.
I have to thank Prof. Iichiro Uesugi at Hitotsubashi Univ. for exchange on Japanese trade
and industrial policy and to Senior Fellow MoonJoong Tcha, Ph.D at Korea Development Institute for
sharing the Korean experience in FTAs.
They are not responsible for any errors or views in this paper
and in interpretation of trade policy and FTA affairs in Japan and Korea.
Regional conflicts of all sorts and potential threats from terrorism seem to be on the
rise. What occurred between North and South Korea’s during the past year and the
lasting conflict in currency value between China and the USA have intensified to run
into a blame game.
Considering of traditional threats as well as non-traditional
threats, Japan, Korea and China have each proposed a multi-faceted security policy to
address her own interest and exercise influence in separate fields of interest.
For instance, it is considered necessary for Japan to reinforce the Japan-U.S. Security
Arrangements to ensure prosperity and development2.
Japan also actively advances
diplomatic efforts towards fostering peace and stability in the international
community, which is considered essential for promoting Japan's national interests.
Korea also follows similar line of thinking and goes even further to invite EC to play
a role in resolving nuclear proliferation and risk of a nuclear war on the Peninsular.
On the way to foster diplomatic relationship for peace making, we also observe the
conclusion of Korea-EC free trade agreement reached in 2010.
In fact, East Asia has
become the center of the world in terms of trade and investment arrangements.
For
policymakers on this side of the Pacific Ocean, the debate is no longer between
effectiveness of regionalism against to the guiding principle of multilateralism.
Dozens of free-trade agreements (FTAs) are signed since 1989 and turned East Asian
into the "spaghetti bowl" type with intertwined free trade areas (Baldwin 2007).
2
The Ministry of Foreign Affairs (MOFA) of Japan released the Diplomatic Bluebook 2011 on April 1.
In presenting the annual report, Minister Takeaki Matsumoto noted Japan is now facing its greatest
national crisis since the Second World War. Japan has endeavored to deepen its alliance with the United
States as the cornerstone to promote relations with neighboring countries.
Regionalism has been widely accepted ever since and become the building blocks to
paralleling a multilateral trading system.
Whether FTAs promote trade depends on
contribution to momentum towards global trade liberalization (Krueger, 1999).
Therefore it is interesting in accounting for the rapidly evolving landscape of
economic cooperation and assessing its importance into the near future, especially in
ways to implement and consolidate between existing FTAs within East Asia.
The
question to assess the effect of spaghetti bowl is addressed in Frankel and Wei (1997).
Were global free trade realized, the significance of FTAs will wither away.
Arguments for or against have been advanced in both directions. Frankel, Stein and
Wei (1995) summarize as to how the development of regional free trade arrangements
might undermine movement toward multilateral liberalization as follows: Firstly, the
negotiation process provides opportunities for manipulation by special interests;
Secondly, the negotiation process draws on scarce negotiator resources and political
energy, which may delay the multilateral process of the support it requires.
On the other hand, it may as well help the movement toward further liberalization out
of development of regional free trade areas.
As also summarized in Frankel and Wei,
favorable arguments include the following points: Firstly, FTAs tend to “built-in”
unilateral liberalization that member governments cannot achieve otherwise, say by
creating export-oriented constituencies; Secondly, the formation of FTAs can increase
the efficiency and imagination of multilateral negotiations.
It has been suggested that the main arena for trade liberalization in the next instance
may well be through the FTA process – via the broadening of NAFTA into a Free
Trade Area of the Americas (FTAA), the further broadening of the EU enlargement,
continued deepening in the Asia-Pacific through APEC, and through linkages
between these regional groupings something like Asia-Europe Meeting (ASEM).
The difference in opinions can be best illustrated by the following remarks. The US
Office of Trade Representatives insists that all WTO Members should engage in
across-the-board negotiations to finalize the Doha Development Agenda
3
.
Representative Michael Punke was quoted as saying that “….The gaps we must
address result from problems of substance, not process, so as Members weigh ideas,
the focus needs to be on how we deal with these substantive issues – not the shape of
the negotiating table….” To the contrary, senior officials from the 21 member
economies of the Asia-Pacific Economic Cooperation (APEC) Forum concluded in
Washington meeting this March with the aim to build a “seamless regional economy.”
Their focus will be on finding ways to strengthen regional economic integration,
promote green growth, and advance regulatory cooperation.
The organization of this paper is as the following: we start to examine the history of
North East Asian Summits through examining documentation, news releases, various
declarations of action plans, agreement and proposals made over the years in Section
II.
After examining the trend of FTAs during the past 50 years, we try to derive
some causal reasoning behind successful completion of FTA deals.
We contrast this
effort by the three country sub-regional formation with wider ring organizations such
as APEC, Tran Pacific Partnership (TPP) and Asia Pacific Trade Agreement (APTA)
in Section III.
In Section IV, we would like to see the relevancy of ECFA for the
development of economic integration in North East Asia during this transition period.
Conclusion is followed in Section V.
3
See the statement in Trade Negotiations Committee by U.S. Ambassador to the World Trade
Organization , Deputy U.S. Trade Representative Michael Punke at Geneva, Switzerland on March 29,
2011.
Section II
Efforts for Free Trade Area in Northeast Asia
Based on the perspective of global activism, the Japanese government engaged in
various topics such as peace building, disarmament and non-proliferation of
international terrorism and international organized crime (Japan Blue Book 2011).
In return, Japan was elected as a non-permanent member of the United Nations
Security Council in October of 2008 and participated in United Nations peacekeeping
operations, including dispatching officers of the Japan Self-Defense Forces to the
United Nations Mission in Sudan and assisting transportation activities in Iraq.
Apparently, the making of FTA comes with the pursuit of many purposes other than
consideration of economic growth and material well-beings.
The influence
exercised in the regional economy as well as significant role in WTO is also taken
implicitly as important factors by some provokers.
The deepening of economic
interdependence may give rise to a sense of political trust among countries, which will
expand Japan's global diplomatic influence and interests.
Japan will continue in
reforming Security Council and pursuing Japan's permanent membership in the
Council.
As many studies argue forcefully that FTAs may serve as an important supplement to
the establishment of a multilateral trading system.
Over the past decade, Korea
comes out successfully in signing EU and the USA as economic partnership while
Japan seems less aggressive and tends to meet with higher resistance from her trading
partners.
The Chinese Government also deems Free Trade Agreements as an
effective approach to integrate and strengthen cooperation with other economies.
Contrary to other developed countries with an aim to integrate with LDC’s and to
harmonize existing trade-related regulations and industrial standards, Japan takes
FTAs as one way to avoid turning economic frictions into political conflicts.
Other
than observing increasing trade as well as investment in Northeast Asia, we also
notice the urging call for a possible FTA among China, Japan and Korea4.
Below we will update the progress made so far among these three countries and make
comparison about the urgency behind each proposal.
2.1 China-ROK Free Trade Area
In November 2004, Chinese President Hu Jintao and former ROK President
Roh-Moo-Hyun declared to launch of an unofficial feasibility study on China-ROK
Free Trade Area during the APEC Summit Meeting held in Chile.
The Development
Research Center of the State Council of China and the Korea Institute for
International Economic Policy conducted a joint “Feasibility Study for the
China-Korea FTA” from 2005 to 2006.
This report drew a solid conclusion that the
FTA would be mutually beneficial for both countries.
China and ROK then decided to upgrade the unofficial study to a study jointly made
by government, business and academia in November, 2006.
joint study was held in Beijing in March 2007.
The first meeting of this
The second meeting of Joint
Research was held in Seoul from July 3 to 4 2007.
The third meeting of this
research was held in China from October 23 to 25 2007.
These meetings touched
upon a number of key issues in respect of China-South Korea FTA, including
4
The relevant declaration and joint statements can be found on government web pages in China, Japan
and Korea.
comparisons on the competitiveness of certain industries, the impact of establishing
FTA, the principle for country of origin, and measures of trade remedy.
During recent visit to South Korea, Chinese Premier Wen Jiabao and President of
South Korea Lee Myung-bak announced to wrap up China and ROK joint study in
June 2010.
This study covered issues such as trade in goods, trade in service and
investment through five joint research meetings.
Policy recommendations, including
suggested principles for negotiating were also included in the report. They finally
reached a consensus regarding certain chapters in the joint research report.
The joint study along with five meetings to exchange ideas has broadened mutual
understanding and set up a good foundation for promoting China-ROK FTA.
MOU
between Korea and China for Free Trade Area was then signed by bilateral
representatives, economic and trade ministers from both parties in June 2010.
Currently, the two sides are still working on a few remaining issues to be agreed on to
go forward. Both parties agreed to create conditions for launching talks soon5.
2.2 China-Japan-Korea FTA
Dated back in 2002, the leaders of China, Japan and Korea all agreed to carry out the
non-governmental academic research on China-Japan-Korea FTA. From 2003 to
2009, the research institutes of the three nations made a comprehensive and in-depth
analysis about the feasibility.
The report comes at no surprise that FTA could
expand regional market and advance economic amalgamation of the three nations.
5
Korean Prime Minister Kim Hwang-sik, currently in Beijing on an official visit, told reporters
on April 14, 2011 that Wen Jiabao had requested to officially start negotiations on a
Korea-China free trade agreement. But Kim said that an in-depth study on sensitive topics
such as farm products should be done before the actual meetings.
On the second meeting of leaders from China-Japan-ROK in October of 2009, a
consensus was reached to initiate a joint research by Government, Enterprises, and
Universities on China-Japan-Korea FTA.
A joint statement was then announced at
the Sixth China-Japan-ROK Trade Ministers’ Conference to conduct this joint
research in the first half of 2010.
No doubt that China-Japan-ROK FTA is perceived as beneficial for expanding
regional trade, promoting mutual benefits and boosting the economic integration
process of Northeast Asia and East Asia.
The Preparatory Conference for the joint
research was held in Seoul, Korea, on January 26th 2010.
The three parties
exchanged views on tariff, non-tariff measures, rules of origin, trade remedy and
economic cooperation accordingly.
Participants discussed relevant issues such as terms of reference, and field research,
and decided to hold the first session of joint research conference in Seoul, Korea, in
April 2010.
The 2nd Session of China-Japan-ROK Joint Research on FTA was held
from September 1 to 3, 2010 in Tokyo, Japan.
The 3rd Session with a focus on
issues of trade in services and investment was held in Weihai, Shandong Province of
China from December 1 to 3, 2010.
The process of joint research and schedule of
several meetings along the past decade is summarized as in figure 1.
2.3 Korea and Japan FTA
The negotiation on a bilateral economic partnership agreement (EPA) between Japan
and Korea was launched in December 2003 for a total of six round meetings under a
joint study. Yet the negotiation was stopped at the completion of the joint study
from November 2004 to May 2008.
Then it was resumed again in June 2008 and
started another 4 rounds of working level negotiation.
Finally both parties met again and got into 1st round Director-General-Level
Consultation on the operation of possible Korea-Japan FTA.
However, there seems
to be no plan for another round of meeting or negotiation till now.
In February 2011,
the foreign ministers of both countries agreed to resume the negotiation in April this
year6. At current, it’s a difficult time for Japan and will certainly slow down many
things in this regard.
2.4 Summary
From the above discussion, it seems more positive between Korea and China to
complete the joint study at half of the length of time relative to other FTA proposals.
In fact, trade growth between Korea and China is twice as fast to that between China
and Japan.
Recent report in Beijing also confirmed the intention for both sides to
kick into formal negotiation.
However, the response made by Korea is not warm as
they are pending more on the past of Korea-US FTA in no time.
The deal making between Japan and Korea is also not clear. Japan seems interested
more in a multilateral setting with vital partnership outside of Asia.
Besides, the
tension between Japan and China, and Korea and Japan respectively is still hard to be
overcome, be it related to the context of history books or territory disputes.
Historical tensions out of war memory, competing implicitly to lead in East Asia, and
clashes over island territory and oil reserves all restrict the range for strengthening
cooperative relations.
6
See the report at http://english.kyodonews.jp/news/2011/02/72333.html
The future actually looks a bit gloomy as Sino-Japanese relationship may turn into an
illusion after the shock by recent earth quake in Japan.
As Japan needs assistance
from Washington more now than ever, Japan may choose to stay passively along the
development of Sino-Japanese economic partnership relation.
Thus it’s quite
interesting to examine if the end of fiscal expansion since the financial tsunami in
2009 will induce ever conservative response and more protectionism, or keep the
current heat toward more trade liberalization in Asia.
Section III Other Arrangements for Free Trade in Asia
New and creative ways to increase trade and jobs are not just expected but proposed
explicitly in the context of FTAs to facilitate market accessibility, eliminate trade
barriers and so to reduce transaction costs,. As such, regulatory cooperation becomes
a top priority under most negotiation. For instance, mutual recognition agreements
(MRA’s) can establish procedures for accepting test results from laboratories or
testing facilities in other countries. This type of cooperative effort will address the
unnecessary regulatory difference, often perceived as extra loading to businesses and
consumers. By MRAs dealing, a manufacturer will be allowed to test
once and will see the same test results to be accepted elsewhere.
product just
Although less discussed openly among the Asian economies, the commitment to
conclude WTO Doha Development Agenda is still urged forcefully by the US. WTO
members are encouraged by the US side to demonstrate renewed energy and to
engage with each other more seriously in across-the-board negotiations. To make the
Doha Development Agenda into action, a lasting debate has taken place over the
impact of FTAs on East Asian business during the past two decades.
Some see the development of FTAs as harmful and label this trend as Asian
"spaghetti bowl" where overlapping regional trade agreements will ultimately lead to
too high administrative cost and too much bureaucracy, while others don’t see it that
way. Some scholars emphasize on the net beneficial effects resulted from deeper
regional integration and address the possibility of a building block to the end of
multilateral liberalization globally. This contradictory view is partially solved after
Asian financial crisis in 1997. Since then, assurance in trade opportunity and support
for sustaining development need cooperation and mutual trust in any type. Japan
began to sign its first FTA with Singapore in 2002 and Korea even set up a worldwide
roadmap for FTA deals in 2003.
Whether the multiple overlapping FTAs in East Asia is harmful to business activity or
not, particularly for that of small- and medium-sized enterprises (SMEs), has been
examined and criticized by Baldwin (1997). According to a survey collected by
Asian Development Bank (ADB), the exemption of tariff within Asia through FTAs
is used less likely. It suggests that the effect of Asian spaghetti bowl does not seem
heavy and harmful to finally deter business activity. Nonetheless, as more FTAs take
effect in the near future, the impact to business transaction is likely to be intensified
in many ways.
3.1 APEC
The core agenda of APEC is to strengthen regional economic integration by removing
barriers to trade and investment. Currently, the 21 member economies jointly
account for more than half of the global production and 44 percent of world
trade. The APEC Senior Officials Meeting, chaired by U.S. Deputy National
Security Advisor Michael Froman in March 2011, just concluded in Washington with
an aim to build a seamless regional economy in the Asia-Pacific. This meeting will
definitely lead to discussion of practical and concrete ways to strengthen regional
economic integration, to promote growth under green technology , and to advance
regulatory cooperation and convergence.
They also agreed to identify the most onerous barriers faced by small- and
medium-sized businesses and to address next generation trade and investment
issues, such as to improve the performance of supply chain network and trade in
technology. To promote green economic growth, APEC members discussed how
to address non-tariff measures that affect trade in environmental goods, to
streamline import procedures for advanced technologies, and to facilitate trade in
products with recycled parts and materials.
To advance regulatory cooperation and convergence, the APEC senior officials
supported U.S. proposals to strengthen the implementation of good regulatory
practices and improve the effectiveness of regulatory cooperation activities. APEC
economies also agreed to address issues that have the potential to act as barriers to
trade in emerging green technologies, including smart grid technology. All
mentioned issues will be examined during the next APEC Senior Officials meetings,
which will then lead up to the APEC Trade Ministers Meeting in May 2011, hosted
by U.S. Trade Representative Ron Kirk.
3.2 TPP
There have been six meetings held so far between United States and its TPP (Trans
Pacific Partnership) partners, including Australia, Brunei Darussalam, Chile,
Malaysia, New Zealand, Peru, Singapore and Vietnam. The latest round of meeting
in Singapore this year made considerable progress and gave a strong boost to develop
a high-standard trade agreement that will also support the creation of jobs than simply
to promote economic growth. During this round, the United States and TPP
countries made substantial headway toward a key goal of developing the legal texts of
the TPP agreement, which includes commitments covering all aspects of trade and
investment relationship. Recognizing the challenge of negotiating a regional
agreement with nine countries, each country has displayed flexibility that is highly
demanded to seal the negotiation. As a result, the teams were able to narrow the gaps
in their positions over a wide range of issues displaced across the more than 25
chapters of the final agreement.
The United States also tabled legal text on regulatory coherence - a new issue to
feature in a trade agreement aimed at making the regulatory systems of the TPP
countries operate more seamlessly. The U.S. also addressed issues such as “behind
the border” that are key barriers for U.S. businesses trying to access foreign
markets. The participating teams get to review the texts and have the chance to
consult on the proposals in more detail with their respective governments. The
proposals are meant to facilitate business, promote the participation of small- and
medium-sized businesses in international trade and deepen the production and supply
chain linkages.
3.3 APTA
The Asia-Pacific Trade Agreement (APTA) is a preferential trade arrangement among
developing countries. Up to now signatories to the Agreement include China,
Bangladesh, India, Lao, Republic of Korea and Sri Lanka. APTA was formerly
known as the Bangkok Agreement, an initiative of the United Nations Economic and
Social Commission for Asia and the Pacific (UNESCAP) in 1975. The First Session
of the Ministerial Council of the Bangkok Agreement was held in Beijing on
November 2, 2005. Representatives from the member countries endorsed the revised
text of the agreement and decided to rename the agreement as the Asia-Pacific Trade
Agreement. To date, the outcome of the third round of tariff cut talks was
successfully implemented by all members of APTA. A framework agreement was
also signed during the third round of negotiations.
Since the implementation of the third round of tariff concession in September of 2006,
the number of certificate of origins under the Agreement issued by China increased to
146,000 in 2008 from 2,406 in 2004, an increase by 60% within 5 years.
Also, the
value of certificates in total amounted to 6,280 million USD in 2008 from 58.76
million USD in 2004, an increase by 106%. China’s imports under preferential
treatment increased to 6.89 billion USD in 2008 from 1.28 billion USD in 2004, up
by 438% in five years while the reduced tariff value amounted to 520 million USD in
2008 from 81.5 million USD in 2004, up by 539%. This is a much envied success in
Asia indeed.
3.4 Summary
The TPP, which is currently negotiated by nine countries including major agricultural
exporters Australia and the United States, is aimed at requiring members to reduce all
tariffs to zero within 10 years. Early this year in Washington, the United States
representative has informed Japan on Tokyo’s possibility of participation in
negotiation for the agreement. The US indicated that its broad goals for a TPP
accord will exceed those pursued in other free trade pacts.
Any country wishing to join the TPP negotiations also needs to secure the consent of
all nine countries through bilateral talks. It (TPP?) signaled to Tokyo that it must
make bolder steps to secure admission in TPP by eliminating most tariffs and offering
greater market access in areas such as rice, beef and automobiles. Japan decided in
November 2010 to start consultations with all nine countries to see if there is a
likelihood for allowing joining the TPP negotiations. Prime Minister Naoto Kan said
earlier this year that Tokyo’s stance on joining the TPP must be decided by June
2011#.
Section IV. ECFA and its Relevance in Northeast Asia
Most FTAs that are built on the foundation of the WTO Agreement may be seen as
helpful way to protect private investment, to develop market-oriented policies and to
promote trade.
FTAs are of various forms. Most FTAs deal with bilateral
relationship but some with multilateral agreements among several parties.
FTAs may come with all kinds of terms and under different labeling due to special
consideration and emphasis of needs by the related parties. For instance, the
agreement signed between the United States and Panama on June 28, 2007 is called
“trade promotion agreement” (TPA). To date, it still sits passively waiting for the
approval by US Congress even though Panama already approved the TPA on July 11,
2007. Another type of trade agreement adopted quite commonly is called Trade and
Investment Framework Agreement (TIFAs). TIFAs are more focused and allow for
relevant parties to resolve trade and investment related issues at early stage.
4.1 Factors Contributed to the Deal Making of FTAs
Trade agreements of all kinds can serve as means to work on capacity-building so as
to induce investment and more market openness. FTAs should be negotiated based
on the following principles as summarized from existing documents:
i. Comprehensiveness: Elimination of tariffs and non-tariff barriers of all sorts in all
areas, including plots and new regulation like “behind the border” rulings, a new kind
of not-tariff barriers.
ii. Consistency with WTO rules: Compliance with spirits of the WTO and with all the
requirements stipulated in Article XXIV of the General Agreements on Tariffs and
Trade (GATT) 1994 and Article V of the General Agreements on Trade in Services
(GATS)#.
iii. Consideration of sensitive sectors: Addressing the sensitivities of countries
involved and offering in the form of package with concrete and proper solution.
iv. Substantial liberalization: Significant liberalization beyond the level of
liberalization commitment within the framework of the WTO.
v. Sustainable development: Appropriate reflection of the international efforts to
promote sustainable development, such as in the area of energy and climate control.
Is there any pattern to follow for a high chance to strike a FTA deal? Take NAFTA
as one example - it was signed at a time when the US economy was not as good after
the first Gulf war of Kuwait in 1990.
Besides, the sorrowful experience out of the Japanese dominance over manufacturing
and inflow of foreign direct investment finally resulted in increasing trade deficit and
shrinking employment. It was shocking for all the Americans for a while. The US
became mentally prepared to grasp new opportunity and to meet competition from
Mexican labor directly by then.
Dated back to the presidential campaign in 1980, President Reagan proposed a "North
American Accord." In the mid-1980s, President de la Madrid of Mexico opened the
Mexican economy that led Mexico into the General Agreement on Tariffs and Trade
(GATT) in 1987. Negotiations to deepen this trade and investment liberalization
took place under the administration of President George Bush. Finally, this
agreement was passed with the strong support of President Clinton at a critical time
with the Republican dominance in Congress.
When Mexico made the proposal to the US President Bush in the late 80’s, both
countries suffered a heavy blow to the
economy by “Peso Crisis”. The proposal for
NAFTA was gladly accepted by three parties in North America and even expanded
further south to include Chile at one time. Beyond anyone’s expectation, Mexico has
since become actively in getting into FTA relationship as much as possible. Turkey
behaved similarly after the completion of FTA with EC in 1995 (See Table 1).
One simple measure of popularity of FTAs can be derived from Table 1. This can be
calculated in number of FTAs in force relative to potential number of contracts to be
proposed worldwide. We apply some selective criterion to come out with a narrow
set of trade active countries: First, to include most active or influential countries in
trade as clusters; Second, to include countries that are eager to look for FTA
opportunity as revealed by their notification to WTO; Third, to exclude countries that
do not have a chance to sign with more than two clustering countries (One can see the
relevance of this criterion by counting dots along each row in Table 1).
These three criteria help to narrow down a country list to a manageable set of 55
countries. This is done by using WTO list of RTAs in force and then ranking all
countries by number of FTA deals concluded and put in force. Those who are taken
as clusters come out with more than 8 notification of bilateral relationship while we
use a cutoff point equal to 4 notifications each for countries taken as FTA active. In
doing so, the final selective list actually excludes most countries from former Soviet
Union and many countries in Middle East, Central Asia, Africa and South America.
We treat EC, EFTA, Turkey, Chile, Japan, Mexico, Singapore, India, US and China
as countries with at least eight FTAs and include Australia, Israel, New Zealand,
Panama, ASEAN, Canada, Jordan, Korea, Costa Rica, Macedonia, Morocco, Peru,
Russian Federation and Thailand in the list of those who have signed at least four
FTAs.
As there are 27 country members in EC, 4 countries in EFTA and 10
countries in ASEAN, the maximal bilateral contracts proposed would be 1,891
proposals out of this country list of 62. The FTAs already in force according to
WTO record and applying to this restricted country list, amounts to 737. The ratio
comes out at 38.9%. It means that countries covered by FTAs, one way or the other,
amount to forty percent of them. The higher ratio means higher coverage of FTAs.
Likewise, the higher coverage means higher bilateral trade relationship with other
countries.
The reason of low coverage rate by FTAs is quite simple. To put the above question
from the opposite direction, if we can push integration between EC and ASEAN, for
instance, then we can raise the coverage rate from 38.9% to 53% instead. So the next
thing one can do to push for more trade integration is to focus on interrelationships of
cluster. The coverage rate can be raised effectively by pushing for Supra FTAs on
the top of existing FTAs.
The remaining effort is to help countries which were excluded for some reasons from
any multilateral FTAs to get into one.
For instance, the US has a total of 17
countries with FTA relationship bilaterally or indirectly through multi FTA. Other
than Guatemala and Honduras, most of these countries are already included in our
selective county list. The US strikes with a low achievement grade, a mere 15 out of
these 62 countries.
In our FTA-active country list, the average coverage is of 38.9%
while the US achievement amount to a coverage rate at 24%, way below indeed
Businessmen and citizens in countries left behind must get anxious and feel put in
disadvantage. They may even lose a great chance to enjoy market accession, cheap
supply and some variety of goods. To succeed in promoting for more room of free
trade and increasing competition, the above calculation comes out with a clear yet
simple answer: to speed up integration among multilateral organizations and to help
admission process for those countries left out for reasons we don’t know much.
4.2 Asian Experience with FTAs in the Past
After more than 15 years of experiment and experience on market openness in East
Asia and elsewhere in the world, several countries have invited more outside
participants while sticking to the very guiding principle of free trade.
ASEAN+1’s
are among the recent examples. When time is right and confronted with less
resistance, some courageous leaders will come forward to grasp the deal out of some
realistic needs. This best proves that regionalism is not always an obstacle for a lead
to multilateral free trade zone.
The proliferation of FTAs in East Asia is a natural consequence of the region’s need
to increase mutual trust and to expand trade in the absence of a Doha-round
agreement. It also comes at a time when round-about production is extended very
much and shipping of intermediate inputs becomes more frequent. Besides, a
low-tariff policy under FTAs benefits foreign affiliates through shipping home of
foreign production and so the domestic investors as foreign direct investment
becomes common.
However, the complicated knitting of FTAs brings both benefits and increasing cost
in administration in the end. Thus, the implementation of policies and closer
public-private sector cooperation will be needed to mitigate negative effects and
facilitate business response to FTAs. Besides, all three countries in North East Asia
are also eager to take lead in Asian affairs one way or the other (See Table 2). Japan
is to rebuild national confidence through active international presentation both
economically and politically. Korea focuses more on polishing an image of modern
society and boosting its product sale by using FTAs for more market access. China
has thorough consideration over increasing economic and political influence and is
eager to get integrated into the global economy.
In terms of headcount, the USA and China are comparable in a sense that each signed
FTAs with several countries. Some FTAs are signed as a group deal with regional
members such as Central America countries for the USA, and ASEAN for China
respectively. Currently, China has eight Trade Agreements signed into force. Due
to its sheer size and speed of development, the initial reactions among regional
partners tend to be rather defensive as they perceive China as a strong export
competitor and magnet for FDI inflow (See Table 3).
Thus, China plays a double role in the Pacific Rim with great potential. First, it
stiffens regional export competition in a broad spectrum of products. In this regard
the Chinese economy has been taken as a threat. Second, the long-term growth
trajectory makes China a prominent importer from the world. In fact, China intends
to improve longer term visibility and identify opportunity for other East Asian
economies. Unfortunately, this aspect of a potential market to come has so little
attention.
4.3 Proposals to Smooth Asian Economic Integration
Given the proliferation of FTAs in East Asia, one expects to see an increasing need
for consolidation of overlapping ROOs (rules of origin) and make FTAs into a
simpler but widening agreement. However, at the firm level, the results out of ADB
survey do suggest that exporting firms are benefited from FTAs (Chia,
2010). China’s economic neighbors should place higher priority on policies that
facilitate Chinese market access than on diverting the threat in export
competition. By expanding FTA area and increasing tariff cut to a wider spectrum of
Asian exporters, the cost and negative impact can be mitigated.
While commitment to the WTO by China invites a reappraisal of regionalism - the
real effects in existing arrangements would be far reaching and important to policy
makers. After the decision to apply for WTO membership, foreign investment into
China sky rocketed. Under WTO rulings, it comes naturally to question both the
concept of nonalignment in the political sphere and the central economic tenets of
regionalism.
Adoption of the WTO agenda has given special impetus to
globalization as the prevailing standard for multilateralism. For the reasons above,
East Asia's existing trade arrangements will undergo significant change in the coming
years.
For instance, including China in ASEAN could induce dramatic trade diversion
across the region and economies outside East Asia. Conversely, any East Asian
economy that follows cost effectiveness for trade orientation could seriously
compromise domestic and bilateral interests embedded in the existing regional
arrangements. Thus, the resurgence of APEC and motives behind TPP are other
responses to promote free trade under a multilateral system.
The argument that regionalism constitutes a gradualist’s approach to globalization
may not be defensible on its own. East Asian regionalism may or may not be "on the
path" to globalization is an open question to be examined over time. It is because
patterns of structural adjustment and burden of trade diversion may differ at various
stages of development. In fact, the political economy supporting regionalism verse
globalization may differ as well in nontrivial ways and vary from time to time. As
such, it’s no wonder to see that Japan was reluctant to any regional dealing in the 80’s
and early 90’s, and then became active in bilateral relationships between 1998 and
2005, and then begins to hesitate once again recently.
4.4 The Relevance of ECFA in North East Asia Integration
On Jan. 1 2010, the China-ASEAN Free Trade Area became in effect which resulted
in lower tariff on majority of exports and imports to near zero. This development
brings challenges for Taiwanese firms as members of the Association of Southeast
Asian Nations are major export markets for Taiwan. Taiwanese businesses grew
concerned and worried that they were being left out.
Previously, due to the lack of an economic agreement with the mainland and other
major economies, Taiwan has been unable to join in the region's economic integration
process. ECFA is welcomed in this sense although it is still at the early stage and
looks for more solid arrangement by two-way dialogue. It is full of possibility and
potential as the content of a FTA can be of anyone’s dream.
It allows China to show
its peaceful intention to the world.
ECFA can also serve as a stepping stone for
Taiwan to honor its obligation as well as its international citizenship. We address the
following questions and try to assess if ECFA can be of any help.
Question one: Can China and Korea lead in a new round of FTAs
development in Asia?
People wonder if there would be much interest and effort to promote free trade after
the financial crisis in 2009. Recently we saw Korea and China take the lead to wrap
up a joint study for feasibility of FTA and plan for immediate negotiation. The
leaders of both countries’ are in high mood to pursue this goal with an all-out effort.
On the other hand, there seems to be no intention to start a joint study for an FTA
between China and Japan. The tripartite effort for East Asia Free Trade Agreement
(EAFTA) is not clear in the near future as the joint study is still under way. As such,
Korea and China may need to move along with their separate FTA. It seems even less
likely to push through since Japan is fully occupied with rehabilitation of its
tsunami-damaged northeast region.
Question two: Can ECFA help speed up FTAs in Northeast Asia?
The risk to concentrate production at one location has been shown detrimental after
the earthquake in Japan. Besides, multiple sourcing as well as stretching the supply
chain can lead to best use of resources and leveraging comparative advantage from
various sources. ECFA might serve as a good substitute for either county in the
Northeast Asia to circumvent trade barrier and diversify investment risk one way or
the other.
In the past, we have seen many breakthroughs in negotiating trade agreement. The
pattern summarized from successful FTAs indicates that countries at disadvantage
and at a hard time, tended to propose first to win support from the strong countries
with upper hand. In countries where proposals for FTAs were accepted by strong
countries, the next development is to see that neighboring countries choose to follow
the example and jump in the bandwagon of FTA process.
Cases similar to Mexico’s admission into NAFTA or Turkey’s inclusion with EC are
abundant. Chile, with a total of 15 FTAs, also serves as a good example for
countries to pursue FTAs (See Table 1). After signed with Canada and Mexico in
the late 90’s respectively, Chile started a fast run to sign up with almost any country
active in trade and regional events. These cases are full of surprise and result in a
great achievement not just to boost local economies but modernize the business
environment and stimulate ambition in low developed neighboring community.
Even a large economy needs compelling reasons to persuade and win support from
domestic interest groups. Right after China signed an accord with ASEAN in 2005,
Japan agreed to sign into the same deal within three years. When the US proposed to
sign TPP with South countries, Japan starts to show its interest to join
gradually. Now we see a freer East Asian economy with increasing trade and
investment. How far can ECFA lead to change? There is no set of fixed rules to
follow but full of imagination.
Question three: How to classify ECFA according to the WTO ruling?
Notice that the cooperation deals between Hong Kong and Macau are treated and
listed as FTAs by State Administration of Industry and Commerce, China. Are we
going to see such official status recognized in the future for ECFA? If not, as
expected, then can we push further to sign with other countries or trading
partners? Even more interesting question is that: can ECFA start a new momentum
for a next round of boom in trade liberalization in Northeast Asia? Can other
countries agree to use some other forms of FTAs such as the formation of Trade and
Investment Framework Agreement to integrate Northeast Asian economies?
V. Concluding Remarks
Other than debates over extent and benefits of globalization, FTAs in East Asia
already confer economic gains and contribute to political stability. Thus, it’s safe to
say that regional extension and cooperation will become wider apart and deeper.
It’s
necessary for people in the academics to increase their understanding of the structural
details of trade liberalization, economic adjustment and growth.
Despite the complexity of strategic reasoning and uncertainty of the trade-offs
between prosperity and security issues, the path of regionalism in East Asia are
already well-trodden. After the current crisis in Japan, we expect to see more the
changing linkage and evolution of industrial supply chain, and finally the reallocation
of value-added production across Asian countries. This study may help economies to
realize the full potential of East Asian regional trade and facilitate in an eventual
transition to more liberal trade globally.
References
 Baldwin, Richard (2007) “Managing the Noodle Bowl: The Fragility of East
Asian Regionalism”, ADB Working Paper Series on Regional Economic Integration,
No. 7, Office of Regional Economic Integration, Asian Development Bank, Manila.
 Frankel, Jeffrey A., Ernesto Stein and Shang-Jin Wei (1997) Regional trading
blocs in the world economic system.
 Frankel, Jeffrey A., and Shang-Jin Wei., (1997) “The New Regionalism and Asia:
Impact and Options”, in M.G.Quibria and Arvind Panagariya, eds., The Emerging
Global Trading Environment and Developing Asia, Asian Development Bank.
 Frankel, Jeffrey, Ernesto Stein, and Shang-Jin Wei (1995) "Trading Blocs and
the Americas: The Natural, the Unnatural, and the Super-Natural." Journal of
Development Economics, 47(1): 61-96.
 Hufbauer, Gary Clyde and Wong, Yee (2005) “Prospects for Regional Free
Trade in Asia”, Institute for International Economics, Working Paper No. 05-12.
 Kawai, Masahiro and Wignarja, Ganeshan. (October 1, 2010) “Asian FTAs:
Trends, Prospects, and Challenges”, Asian Development Bank Economics, Working
Paper Series No. 226.

Krueger, A.O. (1999), “Are preferential trading arrangements trade-liberalizing
or protectionist?”, Journal of Economic Perspectives 13, 4, pp. 105–125.
 Sally, Razeen (2008) Trade Policy, New Century: The WTO, FTAs and Asia
Rising,.
Table 1. Worldwide FTAs Matrix by Most Active Countries
EC
(28)
EFTA
(18)
Turkey
(17)
Chile
(15)
EC(28)
◎
◎
◎
EFTA(18)
◎
◎
◎
Turkey(17)
◎
◎
Chile(15)
◎
◎
Ukraine
(12)
Japan
(11)
Mexico
(11)
Singapor India
e
(9)
(11)
US
(9)
China
(8)
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
Ukraine(12)
◎
Japan(11)
Mexico(11) ◎
Singapore(11
)
India(9)
◎
◎
◎
◎
◎
◎
◎
◎
◎
US(9)
◎
◎
China(8)
◎
◎
◎
Armenia(7)
◎
Australia(7)
◎
Georgia(7)
Israel(6)
Kyrgyz
Republic(6)
New
Zealand(6)
Panama(6)
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
Costa Rica(4)
El
Salvador(4)
Faroe
◎
Islands(4)
Former
Yugoslav
Republic of ◎
Macedonia(4)
Kazakhstan(4
)
Morocco(4) ◎
◎
◎
◎
◎
◎
◎
Korea(5)
◎
◎
◎
Canada(5)
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
◎
Peru(4)
Russian
Federation(4)
Thailand(4)
Others
◎
◎
ASEAN(5)
Jordan(5)
◎
◎
◎
◎
Albania
Algeria
Andorra
B&H
Cameroon
Cariforum
Côte
Albania
Croatia
Egypt
Lebanon
Palestinia
n
Authority
Albania
Colombi
Bosnia and a
Herzegovin
a
Croatia
Egypt
Montenegro
Azerbaijan
Belarus
Moldova
Tajikistan
Uzbekistan
Turkmenista
n
◎
Brunei
Darussala
m
Indonesia
Malaysia
Philippines
Switzerlan
Colombia
Guatemal
a
Honduras
Nicaragua
Afghanista Bahrain HK
n
Oman
Macao
Bhutan
Pakistan
Nepal
Mercosur
Sri Lanka
d'Ivoire
SACU
Croatia
Serbia
Egypt
Tunisia
Iceland
Lebanon
Montenegro
Norway
OCT
Palestinian
Authority
South
Africa
Switzerland
Syria
Tunisia
Palestinian
Authority
Serbia
Syria
Tunisia
d
Vietnam
Source of Data:
http://rtais.wto.org/ui/PublicMaintainRTAHome.aspx
WTO for Regio
Table 2. Status of FTAs with China, Japan and Korea
Free Trade Agreements
Concluded
FTA status 
of China



Free Trade Agreements
under Negotiation



China-ASEAN FTA
China-Chile FTA
China-Costa Rica FTA
China-New Zealand
FTA
China-Pakistan FTA



China-Peru FTA
China-Singapore FTA
Mainland and Hong

China-SACU(Southern
African Customs
Union) FTA

China-Switzerland FTA
Joint Study

Kong Closer Economic
and Partnership
Arrangement
Mainland and Macau
Closer Economic and
Partnership
Arrangement
FTA status 
of Japan







ASEAN-Japan

Comprehensive
Economic Partnership
Agreement

Japan-Brunei Economic
Partnership Agreement
Japan-Chile Economic
Partnership Agreement
Japan-India Economic
Partnership Agreement
Japan-Indonesia
Economic Partnership
Agreement
Japan-Malaysia
Economic Partnership
Agreement
China-Australia FTA
China-GCC(Gulf
Cooperation Council)
FTA
China-Iceland FTA
China-Norway FTA
Japan-Australia
Economic Partnership
Agreement
Japan-Peru Economic
Partnership Agreement
Free Trade Agreements
under Consideration



China-India Regional
Trade Arrangement
Joint Feasibility Study
China-Japan-Korea
Joint Study
China-Korea FTA Joint
Feasibility Study


Japan-Republic of
Korea Economic
Partnership Agreement
Japan-Mongolia
Economic Partnership
Agreement






FTA status 
of Korea







Japan-Mexico
Economic Partnership
Agreement
Japan-Philippines
Economic Partnership
Agreement
Japan-Singapore
Economic Partnership
Agreement
Japan-Switzerland
Economic Partnership
Agreement
Japan-Thailand
Economic Partnership
Agreement
Japan-Viet Nam
Economic Partnership
Agreement
Korea-ASEAN FTA
Korea-Chile
Korea-EFTA



Korea-Australia FTA
Korea-Canada FTA
Korea-Colombia FTA

Korea-EU FTA
Korea-India
Korea-Peru FTA
Korea-Singapore
Korea-U.S. FTA



Korea-GCC FTA
Korea-Mexico FTA
Korea-New Zealand
FTA
Korea-Turkey FTA








Source of Data： http://fta.mofcom.gov.cn/index.shtml
http://www.mofa.go.jp/index.html
http://www.mofat.go.kr/english/main/index.jsp
Korea-Central America
FTA
Korea-China FTA
Korea-China-Japan
FTA
Korea-Israel FTA
Korea-Japan FTA
Korea-MERCOSUR
TA
Korea-Russia BEPA
Korea-SACU FTA
Table 3.
World FDI Stock by Development Status, 1990-2009
Inward Stock ($Billions)
Host region/economy
1990
1995
2000
2005
2009
Total Inward Stock
2081.8
3381.3
7442.5
11524.9
17743.4
Developed Economies
Developed Share as % of total
US Inward Stock
US Share of Developed Stock
1555.6
74.7%
539.6
34.7%
2521.5
74.6%
1005.7
39.9%
5653.2
76.0%
2783.2
49.2%
8535.8
74.1%
2818.0
33.0%
12352.5
69.6%
3120.6
25.3%
Developing Economies
Developing Share as % of total
China Inward Stock
Chinese Share of Developing Stock
524.5
25.2%
20.7
3.9%
848.4
25.1%
101.1
11.9%
1728.5
23.2%
193.3
11.2%
2713.6
23.5%
272.1
10.0%
4893.5
27.6%
473.1
9.7%
1990
1995
2000
2005
2009
Total Outward Stock
2086.8
3606.6
7967.5
12416.8
18982.1
Developed Economies
Developed Share as % of total
US Outward Stock
1941.1
93.0%
731.8
3272.2
90.7%
1363.8
7083.5
88.9%
2694.0
10956.4
88.2%
3638.0
16010.8
84.3%
4302.9
US Share of Developed Stock
37.7%
41.7%
38.0%
33.2%
26.9%
Developing Economies
145.2
330.0
862.6
1308.4
Developing Share as % of total
7.0%
9.1%
10.8%
10.5%
China Outward Stock
4.5
17.8
27.8
57.2
Chinese Share of Developing Stock
3.1%
5.4%
3.2%
4.4%
Data Source: UNCTD Statistics__Foreign Direct Investment
http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx
2691.5
14.2%
229.6
8.5%
Outward Stock ($Billions)
Host region/economy
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010