2008-E-16
Institutionalization of Regional Economic Integration in East Asia
Shujiro URATA
Waseda University
December 2008

An earlier version of the paper was presented at the 13th International Conference of
Korean Economic Association ―Leap-off Strategy for Global Korea‖ in Seoul, Korea,
August 12-13, 2008.

I Introduction
The world is witnessing the advances in regional economic integration invarious parts of the world. Indeed, Western Europe, North America and East Asia areoften referred to as the areas comprising a three polar system as economic activities
such as foreign trade and foreign direct investment (FDI) have become concentrated inthese regions. Despite the similarities in increased regional economic activities, thedrivers leading to such phenomena are different in three regions. For Western Europe,
regional institution in the form of regional trade agreement, more specifically thecustoms union, played a crucial role, while for North America it was market mechanism
rather than regional institution that contributed to regional integration in the first placebut it was later supplemented by free trade agreement (FTA), a form of regional trade
agreement.
Unlike Western Europe or North America, regional economic integration in
East Asia was promoted by market forces without regional institution until recently. It
was around the turn of the 21st century that East Asia started to establish FTAs. Another
difference in regional economic integration in East Asia compared to the cases inWestern Europe or North America is a lack of region-wide framework. Indeed, one
could characterize the situation in East Asia as the proliferation of bilateral andminilateral FTAs. Recognizing the benefits of region-wide FTAs, several ideas havebeen floated for establishing region-wide FTAs. However, differences in the opinions
about region-wide FTAs among East Asian economies have so far precluded them fromestablishing a region-wide FTA.
In light of these developments in East Asia, this paper attempts to examine theprospects of establishing a region-wide FTA in East Asia. In order to examine the issue,
section II analyzes the characteristics of regional economic integration in East Asia from1the 1980s/1990s to the recent period, to set the stage for an analysis of the main issue.
The analysis reveals that market forces, which are activated by unilateral trade and FDI
liberalization by East Asian economies, played a crucial role in deepening regional
economic integration in East Asia until the late 1990s. Section III examines
institution-driven regionalization in East Asia. It first reviews the developments andproliferation of FTAs in East Asia and then it identifies special their characteristics andthe factors behind the proliferation of FTAs. The section then examines the economic
impacts of region-wide FTAs by undertaking simulation analysis based on a generalequilibrium model. Section VI discusses the future prospects of region wide FTAs andother types of region-wide cooperation.

II. Market-Driven Regionalization in East Asia
East Asia has seen rapid advances in regional economic integration in recent
decades with foreign trade and investment being main drivers. Multinational
corporations (MNCs), which are major investors as well as major international traders,have played an important role in promoting regional economic integration in East Asia,
as they actively set up regional production networks, in order to achieve efficient
production. What is notable is that it is trade and FDI liberalization policies not theformation of preferential regional trading frameworks such as an FTA that promoted
regional economic integration in East Asia, at least until the turn of the 21 st century. As
such, the type of regional economic integration emerged in East Asia can becharacterizedasmarket-driven

regionalization

ratherthan

institution-driven

regionalization. This section provides an overview of market-driven regionalization in
East Asia and an analysis of the factors leading to such development.

2

II.1. Increasing Intraregional Dependence in Foreign Trade

Table 1

East Asia

China

Japan

NIES4

ASEAN4

NAFTA

Changing Patterns of East Asia's Trade from 1995 to 2005

East Asia
China
Japan
NIES4
ASEAN4
NAFTA
EU25
World
East Asia

Share of region/country's total trade
Change from 1995 Share of world
to 2005
trade
Exports
Imports
Exports Imports
1995
2005
1995
2005
1995
2005
2.19
2.19
12.3
13.2
47.4
49.9
54.7
59.1
3.96
3.74
1.8
3.3
7.4
14.1
7.2
13.4
1.81
1.49
2.9
2.3
8.5
7.4
16.1
11.9
1.92
2.14
5.4
5.3
21.8
20.1
22.6
23.9
1.78
2.31
2.3
2.2
9.8
8.3
8.7
9.9
1.78
1.22
5.0
3.8
24.0
20.5
16.8
10.1
2.11
1.49
3.5
3.1
14.9
15.1
14.0
10.3
2.08
2.03
24.3
24.4
100.0
100.0
100.0
100.0
3.74
3.96
1.8
3.3
55.7
40.6
66.8
59.6

China
Japan
NIES4
ASEAN4
NAFTA
EU25
World
East Asia
China

-2.95
3.97
5.72
6.82
7.08
5.12
1.49
3.65

-3.65
3.72
8.26
3.53
3.31
4.44
1.81
2.95

-0.5
1.2
0.1
0.4
0.4
2.9
2.9
0.5

-0.8
2.2
0.4
1.1
1.0
6.8
2.3
0.8

-19.1
32.9
3.7
17.8
13.6
100.0
41.7
5.0

-11.0
25.5
4.1
23.7
18.9
100.0
46.4
13.4

-15.0
48.1
3.8
9.6
13.3
100.0
37.9
9.6

-12.4
40.3
7.0
7.7
9.9
100.0
43.4
18.0

Japan
NIES4
ASEAN4
NAFTA
EU25
World
East Asia
China
Japan
NIES4
ASEAN4
NAFTA
EU25
World
East Asia
China
Japan
NIES4
ASEAN4
NAFTA
EU25
World
East Asia
China
Japan
NIES4
ASEAN4
NAFTA
EU25
World

-1.30
1.00
1.15
1.22
1.34
2.14
3.72
1.29
1.55
1.80
1.32
1.73
1.81
2.31
8.26
1.61
1.86
3.51
1.87
1.82
2.17
1.22
3.53
0.88
1.13
1.16
2.04
1.53
1.71

-1.29
1.61
0.88
1.26
1.58
1.92
3.97
1.30
1.55
1.86
1.13
1.35
1.77
1.78
5.72
1.00
1.80
3.51
1.16
0.97
1.59
1.78
6.82
1.15
1.32
1.87
2.04
2.32
2.16

-1.6
0.9
2.0
1.1
7.3
5.4
1.2
1.6
1.6
1.1
2.0
1.4
10.1
2.3
0.1
0.9
1.1
0.2
0.6
0.6
3.9
5.0
0.4
2.0
2.0
0.6
7.8
2.9
18.0

-1.0
0.5
1.0
0.7
5.1
5.3
2.2
1.0
1.2
1.0
1.2
1.1
8.9
2.2
0.4
0.5
1.0
0.4
0.5
0.4
3.6
3.8
1.1
1.0
1.2
0.5
7.7
2.8
17.2

-24.7
12.1
29.7
16.1
100.0
48.4
13.1
9.4
14.9
11.1
22.2
14.1
100.0
51.4
2.8
17.4
25.6
5.6
20.8
15.4
100.0
22.6
1.7
8.6
9.3
3.0
46.2
16.5
100.0

-24.0
9.0
25.5
14.6
100.0
57.2
26.9
6.6
12.7
11.0
16.2
13.4
100.0
54.7
10.8
13.0
21.9
9.0
17.9
12.9
100.0
16.0
3.4
4.5
6.2
2.0
55.1
14.8
100.0

-16.9
11.4
24.9
14.6
100.0
58.0
9.9
22.0
16.1
10.0
16.0
13.1
100.0
62.3
2.7
25.9
28.5
5.2
12.3
15.7
100.0
32.5
2.7
13.5
12.2
4.1
40.5
16.1
100.0

-13.8
11.6
14.0
11.6
100.0
63.0
22.2
16.3
14.1
10.5
10.3
10.0
100.0
69.9
9.6
16.4
32.4
11.5
9.0
9.6
100.0
26.8
8.6
7.2
7.4
3.6
38.3
17.3
100.0

3

EU25

East Asia
China
Japan
NIES4
ASEAN4
NAFTA
EU25
World

1.49
3.31
1.26
1.35
0.97
2.32
1.91
1.90

2.11
7.08
1.22
1.73
1.82
1.53
1.91
1.99

3.5
0.4
1.1
1.4
0.6
2.9
27.3
40.5

3.1
1.0
0.7
1.1
0.4
2.8
25.4
38.4

7.6
0.9
2.1
3.1
1.5
7.5
66.1
100.0

6.0
1.6
1.4
2.2
0.8
9.1
66.3
100.0

9.8
1.0
3.5
3.7
1.5
7.0
68.9
100.0

10.4
3.6
2.2
3.3
1.4
5.4
66.1
100.0

Source: Computed from JETRO's trade matrix.

Rapid expansion of intraregional trade in East Asia can be discerned from various
aspects in Table 11. Intraregional trade in East Asia increased 2.19 times in ten years
from 1995 to 2005. During the same period East Asia‘s overall exports and imports
increased 2.08 and 2.03 times, respectively. As a result of rapid expansion in
intraregional trade, the share of East Asia‘s intraregional trade in world trade increased
from 12.3 percent in 1995 to 13.2 percent in 2005. The magnitude of East Asia‘sintraregional trade is significantly larger than NAFTA‘s intraregional trade, but
substantially smaller than the EU‘s intraregional trade. The shares of intraregional tradein world trade for the NAFTA and the EU are 7.7 and 25.4 percent in 2005, respectively.
East Asian economies have become increasingly important trading partners foreach other, as intraregional trade increased its importance for East Asian economies.
The share of East Asia in East Asia‘s overall exports and imports increased from 47.4
and 54.7 percent in 1995 to 49.9 and 59.1 percent in 2005, respectively. The importanceof intraregional trade for the region‘s trade in East Asia is greater compared to the
NAFTA (55.1 percent for exports and 38.3 percent for imports, both in 2005) but
smaller compared to the EU (66.3 percent for exports and 66.1 percent for imports).

1

East Asia in the table is defined to consist of the following 10 countries andeconomies, China, Japan, NIES4 (South Korea, Taiwan, Hong Kong, and Singapore),and ASEAN4 (Indonesia, Malaysia, the Philippines, and Thailand) because of data
availability. Many studies have identified rapid expansion of intra-regional trade in East
Asia See, for example, Ng and Yeats (2003), and Urata (2001, 2005a) .
4Among the East Asian economies, China increased the importance the most forother East Asian economies as a trading partner from 1995 to 2005, as East Asia‘sexports to and imports from China expanded 3.96 and 3.74 times during the 1995-05
period, much faster compared with East Asia‘s trade with other East Asian economies.
For Japan, NIES4, and ASEAN4, international trade with China expanded the fastest
compared to their trade with other countries/regions. It should be added that it is not
only the East Asian economies but also the NAFTA and the EU that saw their trade with
China increase very fast. Increased importance of China as a trading partner for many
East Asian economies as well as non-East Asian countries is largely due to China‘s rapid
economic growth. In addition, China‘s substantial trade and FDI liberalization
contributed significantly to this effect.
For China, international trade with ASEAN4 expanded at remarkable speed, as
China‘s exports to and imports from ASEAN4 expanded 5.72 and 8.26 times,
respectively, from 1995 to 2005, much faster compared to its trade with other East Asian
economies. Rapid expansion in China-ASEAN4 trade appears largely due to China‘s
rapid economic growth, but the establishment of the ASEAN-China FTA in 2005 is
likely to have some positive impacts. Despite the rapid increase in the China-ASEAN4
trade, the share of China-ASEAN4 trade in both China‘s and ASEAN4‘s overall trade isstill small. For China, ASEAN4 account for 4.1 and 7.0 percent of its exports andimports, respectively in 2005, while the shares of China in ASEAN4‘s exports andimports are 10.8 and 9.6 percent, respectively, in the same year.
The increasing importance of China-ASEAN4 trade was emphasized above,
but one cannot dismiss the importance of the NIES4 for China and ASEAN4 in theirtrade. Indeed, the NIES4 were by far the largest trading partner for China and ASEAN4
in 2005. The importance of the NIES4 can be partly explained by the roles of Hong

5

Kong and Singapore as an entrepot. It should also be noted that intra-ASEAN4 trade
increased noticeably by 3.51 times. This increase is certainly helped by the ASEAN
Free Trade Area (AFTA), under which trade barriers on intra-ASEAN trade have been
increasingly removed.
Contrary to the increased importance of China as a trading partner for other
East Asian economies, Japan‘s importance declined substantially from 1995 to 2005,
largely because of Japan‘s long recession. For the East Asian economies other thanJapan, the share of Japan in their exports and imports declined from 8.5 and 16.1
percent in 1995 to 7.4 and 11.9 percent in 2005, respectively. Indeed, Japan was
surpassed by China in terms of the importance as a trading partner for East Asian
economies during the 1995-2005 period. An examination of the changing geographicalpatterns of trade for the NIES4 and ASEAN4 reveals that for ASEAN4, unlike the casefor the NIES4, Japan has a larger share than China, although the gap is rapidly
narrowing.
These differences in the changing importance of East Asian countries as trading
partners for other East Asian countries have important implications on foreign economic
policies such as trade and FDI policies and economic assistance policies for East Asian
countries. Specifically, ―rivalry‖ between rising China and declining Japan for gaining aleadership role in regional economic integration in East Asia is attracting a lot of
attention from policy makers, researchers, business people and others. I will come backto this issue in a later section.

II.2. Creation of Regional Production Networks by MNCs
One notable characteristic of intra-regional trade in East Asia is increasing andhigh importance of trade in machinery parts. This observation is supported by the6figures in Table 2. For office and telecommunications, electrical appliances and roadvehicles, the share of parts in intra-East Asian trade increased from 1990-94 to 2000-04,
although the magnitude of the shares differ among the products. Although the share ofparts in textile/apparel trade is also high as that for road vehicles, it declined over time.
Among the machinery sectors, the share of parts is highest for electrical appliances,which is followed by office and telecommunications equipment and then by roadvehicles. The importance of parts in intra-East Asian trade can be observed from acomparison with trade with the US and the EU. One finds that East Asia‘s exports havelower (higher) share of parts (finished products) in its trade with the US and the EUcompared to that with East Asia.
The pattern of intra-East Asian trade in parts differs by the products and by the
economies. For electrical appliances approximately 80 percent of East Asia‘s exports
take the form of parts and the remaining 20 percent of finished products regardless of
their export destinations. High share of parts in electrical appliances may be attributable
to high shipping cost, as white goods, a large portion of traded electrical appliances, arebulky and heavy. However, one exception is China in that the share of finished productsin the exports of electrical appliance is high, especially for its exports to developed
countries, possibly reflecting very competitive (low) prices of Chinese products.
A similar trading pattern of China‘s electrical appliances trade can be found forEast Asia‘s trade in office and telecommunications and textiles/apparel. East Asian
economies import parts from other East Asian economies and export finished products
to developed countries.
Our findings on the pattern of trade in parts and finished products in office andtelecommunications, electric appliances, and textile/apparel suggest the presence of
triangular trade. Under the triangular trade, parts produced by Japan and the NIES are7

Table 2 Parts Trade for East Asian Economies: Share of Total (%)
Export Destinations
Exporting
East Asia
ASEAN
NIES
China
Japan
India
US
EU
World
Regions
90-94 00-04 90-94 00-04 90-94 00-04 90-94 00-04 90-94 00-04 90-94 00-04 90-94 00-04 90-94 00-04 90-94 00-04
Office and telecommunications equipment: (SITC 759 + 764 ) / (SITC 75+76)
East Asia 58.2 66.7 65.3 76.4 47.6 61.5 70.8 80.7 49.4 45.8 57.0 68.6 41.0 43.8 38.2 43.7 44.5 54.2
ASEAN
56.9 62.3 68.7 76.2 39.0 54.9 73.7 64.7 42.6 43.5 43.3 53.2 33.7 39.1 24.8 38.4 38.3 49.2
NIES
69.4 75.0 65.0 81.1 69.3 73.3 79.5 81.7 56.5 51.6 77.1 85.1 41.3 56.6 36.2 52.3 46.9 64.9
China39.0 56.6 44.1 72.1 36.5 58.5
51.1 42.3 29.0 74.3 40.2 34.8 32.7 36.5 37.1 46.2
Japan
53.3 71.7 60.6 74.0 50.0 61.1 42.9 88.5
61.0 66.6 46.0 42.1 47.9 43.8 48.1 51.6
Electrical & Apparatus: (SITC 771+772+773+776 ) / SITC 77
East Asia 81.2 85.4 84.3 88.1 79.0 84.6 68.5 83.8 86.7 83.1 74.7 73.1 73.1 69.7 64.7 70.0 74.2 79.3
ASEAN
87.1 91.8 85.6 89.8 87.5 95.1 69.2 90.3 89.8 90.3 80.6 86.0 90.7 93.1 87.8 93.7 86.6 91.6
NIES
82.3 87.2 87.3 91.8 83.8 88.9 68.4 84.6 85.1 83.4 76.3 73.5 67.9 69.1 56.5 68.0 71.5 80.9
China
56.3 72.2 63.2 76.2 52.4 72.4
77.4 68.2 53.9 52.9 33.9 37.0 27.6 35.8 47.2 55.9
Japan
79.4 80.2 81.7 84.9 78.5 77.5 69.0 77.9
71.0 57.8 68.7 60.2 59.3 59.6 71.3 73.1
Road vehicles: SITC 784 / (SITC 722+781+782+783+784)
East Asia 48.7 53.9 45.0 48.8 63.2 58.4 20.6 46.4 94.9 92.7 87.9 90.9 21.5 19.5 13.2 18.8 23.3 23.6
ASEAN
67.7 78.1 58.3 68.5 56.7 89.0 64.9 86.0 91.4 87.3 81.6 94.4 97.7 98.3 19.0 40.2 55.8 58.5
NIES
30.0 44.2 32.2 32.4 44.0 60.9 21.2 39.0 93.3 92.2
96.0 33.5 14.9 15.7 10.8 26.4 21.5
China
97.7 88.3 79.2 79.1 98.4 63.6
99.1 99.2
52.7 95.6 95.7
92.3 92.8 83.5
Japan
42.4 50.7 43.6 47.2 45.6 55.1 18.4 50.9
88.5 86.2 20.2 18.2 12.7 18.5 20.2 20.8
Textiles and Apparel: SITC 65 / SITC (65 + 84)
East Asia 62.6 56.0 84.9 79.8 64.4 56.9 91.1 83.0 21.8 18.5 97.6 97.0 14.1 16.6 21.7 23.8 44.5 43.8
ASEAN
63.3 62.5 73.1 74.8 77.8 71.2 94.0 91.1 29.1 37.2 96.3 93.4
9.2
6.3
23.0 18.5 32.7 29.8
NIES
75.4 76.2 91.2 86.9 93.3 88.5 90.8 80.0 19.5 22.9 98.3 97.2 10.7 14.4 13.8 16.9 47.2 53.4
China
37.3 32.4 76.3 62.3 40.8 42.6
23.1 15.4 88.1 98.1 24.0 25.4 31.4 29.0 35.5 33.5
Japan
93.6 93.6 97.0 97.0 92.2 84.2 94.3 98.3
99.9 99.8 82.7 85.7 82.0 85.1 91.3 92.5
Source: Computed from World Bank trade databaseexported to China and ASEAN countries to be assembled as finished products, which inturn are exported to North America and Europe.
East Asia‘s trade pattern in road vehicles is different from the patterns observedfor electronics or textiles. Similarly to the case for office and telecommunications
equipment, and electrical appliances, the share of parts in intra-East Asian trade isincreasing, but unlike these products finished products account for a large share for roadvehicle exports from Japan and the NIES. Unlike the case for office andtelecommunication equipment or textiles/apparel, almost all of Japan‘s imports in roadvehicles from East Asia are parts and not finished products. This finding indicates a lackof competitiveness in assembling automobiles in East Asian developing economies
vis-à-vis Japan. However, with an improvement in technical capability, East Asiandeveloping economies may improve competitiveness and successfully export finishedproducts to Japan, just like the cases of other machinery products.
The findings in this section reveal developing East Asia‘s role as a worldfactory for electronics and electric machinery and textiles, as they produce finishedproducts by assembling parts supplied by developed and developing economies and sellfinished products in the world market. Indeed, we observe the emergence of regional
production network in electronic and electric machinery in East Asia, which havepromoted regional economic integration in East Asia. Such regional production
networks have been created mainly by MNCs from Japan, the US, the EU, as they breakup the production process into various sub-processes and locate each process in acountry or a region where the sub-process is conducted most efficiently through active
foreign direct investment. This kind of fragmentation strategy has been adopted by9

MNCs, as they take advantage of substantial diversity in the level of economic
development and wages among the East Asian countries. 2

II.3. Trade and FDI Liberalization in East Asia
Various factors such as buoyant world economy contributed to rapid expansionof foreign trade and FDI in East Asia. One of the most important factors that contributed
to rapid expansion in trade and particularly intra-regional trade is trade and FDI
liberalization pursued by East Asian countries. This section reviews the recent
development in the changes in foreign trade and FDI policies in East Asia.
In the 1980s and 90s, East Asian countries embarked on unilateralliberalization of trade and FDI policies and deregulation in domestic economic activities
as part of comprehensive structural reform policies. Such policy changes were induced
partly by their commitments to the World Bank and the IMF for obtaining economic
assistance and largely by the realization on the part of East Asian countries thatliberalization and deregulation would promote economic growth. Liberalization of tradeand FDI regimes led to the expansion of exports and inward FDI because it shifted the
incentives from import-substituting production to export production and increased
attractiveness of these countries to foreign MNCs.
East Asian countries unilaterally liberalized their import regimes by lowering
tariff rates and non-tariff barriers from the early 1980s through the early 2000s (Table 3).
The notable exceptions were Hong Kong and Singapore, which had adopted virtually
free trade regime for a long time. Many East Asian countries had high tariff rates in thelate 1980s and early 1990s. Among nine East Asian countries shown in the table Japan2

See Ando (2006) and Kimura (2006) for regional production networks in East Asia..
10

Table 3

Trade Liberalization in Selected East Asian Economies

All products

Binding
Coverage
1992
2004
1989
Indonesia
2003
1988
Japan
2004
1988
Korea
2002
1988
Malaysia
2003
1988
Phillipines
2003
1989
Singapore
2003
1989
Thailand
2003
China

100
96.6
99.6
94.4
83.7
66.8
69.8
75.0

Unweighted
averages
40.4
9.8
19.2
6.4
4.2
2.9
18.6
15.5
14.5
7.3
28.3
4.5
0.4
0.0
38.5
14.0

Primary products
Import weighted
averages
32.1
6.0
13.0
5.2
3.6
2.4
14.0
9.5
9.7
4.2
22.4
2.6
1.1
0.0
33.0
8.3

Source: World Bank, World Development Indicators 2005

Unweighted
averages
36.1
10.0
18.2
8.0
8.3
5.3
19.3
20.9
10.9
4.5
29.9
5.7
0.2
0.0
30.0
16.4

Import weighted
averages
14.1
5.6
5.9
3.1
4.4
3.9
8.3
19.0
4.6
2.1
18.5
5.0
2.5
0.0
24.3
4.4

Manufactured products

Unweighted
averages
40.6
9.7
19.2
6.1
3.5
2.4
18.6
7.8
14.9
7.8
27.9
4.2
0.4
0.0
39.0
13.5

Import weighted
averages
35.6
6.0
15.1
5.8
2.7
1.6
17.0
5.0
10.8
4.6
23.4
2.0
0.6
0.0
35.0
9.3

Ad valorem
equivalent of
non-tariff barriers
1.5
0.5
1.6
0.0
1.7
0.4
0.5
0.3

and Singapore are the only two countries, whose average tariff rates were lower than 10
percent in the late 1980s. China, Thailand and the Philippines imposed particularly hightariff rates. Since then all the countries pursued liberalization policies. China and thePhilippines reduced their tariff rates dramatically so that their respective average tariff
rates came down to less than 10 percent by the early 2000s. Other countries carried out
trade liberalization as well, but their magnitude of tariff cuts was less dramatic. In spiteof substantial reduction in tariff rates, some countries still maintain relatively high tariff
rates. The average tariff rates for Korea and Thailand are around 15 percent in the early
2000s. It should be noted that the primary sector is relatively more protected than the
manufacturing sector, as the average tariff rates for primary products are higher thanthose for manufactured products in all the economies in the table except Malaysia andSingapore.
Policies toward FDI inflows started to be liberalized in the mid-1980s andliberalization of FDI policies has continued since then, because East Asian economies
began to realize that FDI inflows would promote economic growth. Although it isdifficult to quantify the restrictiveness of an FDI regime, it is clear that many East Asian
economies have liberalized their policies toward FDI inflows since the mid-1980s3.
Restrictions on FDI take various forms, including restrictions on market access or rightof establishment, most-favored-nation treatment, and national treatment. Many East
Asian economies reduced restrictions on market access by lowering the number ofsectors and industries on the negative list and by relaxing the limits on foreign equity
ownership. Among them, Indonesia, Korea, Malaysia, the Philippines, and Thailand
adopted substantial FDI liberalization measures in an effort to attract foreign investors.

3

Japan PECC (2002) examined the impediments to FDI in APEC economies, andfound that many East Asian economies reduced the number and the level of
impediments by liberalizing FDI policies.
13

Furthermore, recognizing the important contribution that FDI may make toward
economic growth, a number of economies introduced incentives such as tax breaks toattract FDI. Indeed, there has been keen competition among the countries in the region
to attract FDI by reducing barriers and providing incentives.
Having discussed that East Asian economies have undertaken trade and FDI
policies, which contributed to rapid expansion of trade and FDI as well as the formationof regional production networks by MNCs, there still remain various obstacles inforeign trade and FDI. For example, many East Asian economies still apply high tariff
and restrictive FDI measures on the automobile sector with an objective of developingthat sector. Similar protection is also found in material producing sectors such as ironand steel. It should also be reiterated that agriculture is subject to substantial protection
both in developed as well as developing economies. As will be discussed in the next
section, one of the factors that have led to the recent surge of free trade agreements(FTAs) in East Asia is the desire for East Asian economies to overcome high protection
barriers to expand business opportunities.

III. Institution-Driven Regionalization
East Asia‘s regional economic integration was mainly market-driven as tradeand FDI liberalization by East Asian economies promoted foreign trade and FDI ofthese economies, which in turn resulted in rapid economic growth of the East Asian
region. Rapid economic growth led to further liberalization in trade and FDI policies,
resulting in a virtuous cycle of economic growth and trade and FDI liberalization. Rapid
economic growth coupled with trade and FDI liberalization contributed to regional
economic integration in East Asia, as rapidly growing economies became the sources aswell as destinations of foreign trade and FDI. This market-driven regionalization was

14gradually complemented by an element of institution-driven regionalization, as free
trade agreements (FTAs) have become popular among East Asian economies. Thissection analyzes emergence of institution-driven regionalization in East Asia in recent
years.
East Asia was not active in the formation of regional trade agreements (RTAs),
which include FTA and customs union, until recently (Table 4)4. Indeed, ASEAN Free
Trade Area (AFTA), which was established in 1992, was the only major FTA until Japanand Singapore enacted Japan –Singapore FTA (formally named a New Age
Japan-Singapore Economic Partnership Agreement, JSEPA) in 2002 5. However, thesituation changed dramatically in recent years. Many countries in East Asia began toform FTAs with the countries not only in the region but also outside the region.
The members of the ASEAN started the ASEAN Free Trade Area (AFTA)
process in 1992 to make ASEAN a competitive region for exports and for attracting FDI.
The 1992 agreement provided for the liberalization of tariff and non-tariff measures
under the Common Effective Preferential Tariffs. The target year for achieving tariff andnon-tariff liberalization was originally set for 2008, but was later moved forward to
2002.

The

AFTA hasbeen in effectamong the original

five

ASEAN

members—Indonesia, Malaysia, Singapore, Thailand and the Philippines—since
January 2002 when the tariff rates were reduced to 0-5 percent, though the exclusion list
4

In the GATT/WTO, regional trade agreements (RTAs), which violate one of its basic
principles of non-discrimination, are permitted under GATT Article XXIV with several
conditions, which include liberalization of substantially all the trade of the members,
not increasing trade barriers on non-members, and completing the RTA process within
ten years. For developing members, more lenient conditions are applied under the
enabling clause. An FTA is considered to be a shallow form of regional integration,
because it only removes tariff and non-tariff barriers among the members, while acustoms union is a deeper integration, as it adopts common external tariffs on
non-members, in addition to the removal of tariff and non-tariff barriers on trade among
the members.
5
For discussions on FTAs in East Asia, see for example, Aggarwal and Urata (2006),
Urata (2005), and Pangestu and Gooptu (2004), Soesastro (2006) and Sally (2006)..
15

III.1. Expansion of Bilateral and Minilateral FTAs

Table 4

Major FTAs Involving East Asian Economies (as of July 7 2008)

In effect
In negotiation
In negotiation
Bangkok Treaty(1976)
Japan-Korea
Singapore-Peru
AFTA(1992)
Japan-Philippines**
Thailand-EFTA
Singapore-NZ (2001)
Japan-ASEAN**
Thailand-Australia
Japan-Singapore (2002)
Japan-GCC
Thailand-India*
Singapore-Australia (2003)
Japan-Brunei*
Thailand-US
Singapore-EFTA (2003)
Japan-Vietnam
Hong Kong-NZ
Singapore-US (2004)
Japan-India
Taiwan-El Salvador
Korea-Chile (2004)
Japan-Australia
Taiwan-Guatemala
China-Hong Kong (2004)
Korea-US**
Taiwan-Nicaragua
China-Macao(2004)
Korea-Canada
Taiwan-Paraguay
Taiwan-Panama(2004)
Korea-India
Singapore-Jordan(2004)
Korea-Mexico
Japan-Mexico (2005)
Korea-EU
China-ASEAN(2005)
China-Australia
Thailand-Australia(2005)
China-NZ**
Thailand-NZ(2005)
China-GCC
Singapore-India(2005)
China-Pakistan
China-Chile (2006)
China-SACUFTA
Korea-Singapore(2006)
China-Singapore
Japan-Malaysia(2006)
Malaysia-Australia
Korea-EFTA(2006)
Malaysia-NZ
Korea-ASEAN(2006）
Malaysia-Pakistan
Singapore-Panama(2006)
Malaysia-US
Japan-Chile (2007)
Singapore-Canada
Japan-Thailand (2007)
Singapore-Mexico
China-Pakistan (2007)
Singapore-Egypt
Japan-Indonesia (2008)
Singapore-Qatar
Notes: ** indicates that treaty has been signed and waiting for ratification by the legislative
bodies. * indicates that the negotiation reached an agreement.
Source: WTO website and respective government sources.

is long and individual country circumstances vary. Furthermore, Vietnam is to comply
with the same tariff standards by 2003, Laos and Myanmar by 2005, and Cambodia by
2007. By 2010 ASEAN is expected to become a complete free trade area free fromtariffs with the exception of CLMV members, which are given later deadlines. FDI

16

liberalization in the ASEAN has been underway after the creation of the ASEAN
Investment Area (AIA) in 1998, which provides coordinated investment cooperationand facilitation programs, market access, and national treatment of all industries. But
some ASEAN members continue to maintain sizeable sensitive and exclusion lists from
FDI liberalization. In 2003 the ASEAN Leaders agreed to set the target year of 2020 for
the establishment of an ASEAN Community, which is composed of the ASEAN
Security Community, the ASEAN Economic Community and the ASEAN
Socio-Cultural Community. Under the ASEAN Economic Community free flow ofgoods, services, investment and capital is to be established. The target date for theestablishment of an ASEAN Community was later moved forward to 2015.
Besides AFTA, ASEAN as a group as well as its members individually havebecome active in FTA discussions with other countries in recent years. One of the FTAs
involving ASEAN that has received most attention recently is that with China. ASEAN
and China enacted an FTA in goods trade in July 2005 and they are currently
negotiating FTA in services trade. ASEAN excluding Thailand enacted an FTA with
Korea in July 2006 and it has signed an agreement with Japan. Currently, ASEAN is
negotiating FTAs with India and CER (Australia-New Zealand) separately. Once thesenegotiations are successfully concluded and enacted, ASEAN will be a major hub of
FTAs in East Asia.
Many ASEAN members have become active in establishing bilateral FTAs.
Singapore enacted many FTAs with countries such as New Zealand, Japan, Australia,
the USA, the EFTA, and India and it is negotiating with many countries. Thailand has
also become active in establishing FTAs, as it has implemented FTAs with Australia,
New Zealand, and Japan and it is currently under negotiations with the US and others.
Malaysia enacted an FTA with Japan and it began negotiations with several economies

17including the US. Indonesia enacted an FTA with Japan while the Philippines signed an
FTA with Japan.
Compared to ASEAN countries in Southeast Asia, the economies in Northeast
Asia including China, Japan, Korea, and Taiwan had not been active in FTAs until theend of the 1990s. However, China, Japan and Korea have become very active in FTAs.
China implemented FTA with ASEAN, Hong Kong, Macau, and it is negotiating FTAs
with over 20 countries. Japan enacted FTAs with six countries including Singapore,
Mexico, Malaysia, Chile, Thailand and Indonesia. It has signed an agreement with thePhilippines, Brunei and ASEAN, and it is currently in negotiations with Australia, theGulf Cooperation Council (GCC), Korea and others. Korea implemented FTAs with
Chile, Singapore, the EFTA, and ASEAN and it has signed an agreement with the US.
Korea is actively pursing FTA policies as it is currently negotiations with the countries
including the EU, Canada, India, and Mexico.
Taiwan is very keen on having FTAs with many countries but politicalproblems with China have precluded them from achieving the objective. Taiwan enacted
FTAs with small countries in Central America such as Nicaragua and El Salvador.
An idea of a region-wide FTA covering East Asian countries has emerged but
no formal attempt has been made to date. At the Leaders‘ summit meeting of ASEAN+3(China, Japan, and Korea) in 1998 the leaders decided to set up the East Asia Vision
Group to study long term vision for economic cooperation. The group has presented theleaders with recommendations including the establishment of East Asia FTA (EAFTA).
The Expert Group, which was set up at the recommendation of ASEAN+3 Economic
Ministers, presented recommendations to the Economic Ministers in 2006 to start theprocess in 2007 toward the establishment of an East Asia FTA. The recommendations

18

by the Expert Group were not adopted and the Expert Group was asked to conduct
further study. The Expert Group has begun a phase two of the project.
Japan proposed the CEPEA (Comprehensive Economic Partnership in East
Asia), which is an Economic Partnership Agreement including an FTA covering
ASEAN+3+3 (India, Australia, and New Zealand) or ASEAN+6, at ASEAN+6
Economic Ministers‘ meeting in 2006. ASEAN+6 are also the members of the East
Asian Summit, which was held for the first time in 2005 It has been argued that behind
the CEPEA idea lies Japan‘s strategy of taking a leadership role in setting up regional
institution in East Asia, as it was China that has taken an initiative in the EAFTA
discussions. A study group has been set up to examine the feasibility of the CEPEA and
it is expected to submit a report at ASEAN+6 Economic Ministers‘ meeting in August
2008.
It should be noted that the US proposed an FTAAP, or Free Trade Area of the
Asia-Pacific covering 21 APEC member economies, at APEC Leaders‘ Meeting in 2006.
At the Leaders‘ Meeting in 2007, the leaders agreed to examine the prospects of FTAAP.
Behind the US proposal of an FTAAP is a concern that the US would be excluded from
East Asia to result in the decline in its economic activities in East Asia. It should be
noted that the differences in the members between ASEAN+6 and APEC give rise toimportant implications of the groupings. Taiwan and Russia, important economic
players, are included in an FTAAP, while India, a member of ASEAN+6, is excluded
from it.

III.2. Characteristics and Motives of FTAs in East Asia
One notable characteristic of FTAs in East Asia is their comprehensiveness incoverage. As such, some of the FTAs established in East Asia are termed as Economic

19

Partnership Agreement (e.g. Japan-Singapore EPA, JSEPA), or Closer Economic
Partnership Arrangement (e.g. China-Hong Kong CEPA), and others. These new types
of FTAs typically include facilitation of foreign trade, liberalization and facilitation offoreign direct investment (FDI), and economic and technical cooperation, in addition to
trade liberalization, which is included in traditional FTAs. It may be worth noting thatthe basic philosophy behind these new types of FTAs is similar to that of Asia Pacific
Economic Cooperation (APEC) forum, whose three pillars are (1) liberalization and (2)facilitation of foreign trade and foreign investment, and (3) economic and technicalcooperation.
Among the three pillars economic and technical cooperation is given a special
attention because narrowing gap between the high-income and low-income countries is
considered very important for achieving economic prosperity and social and politicalstability of the region, which consist of the countries with very different levels of
economic development. Economic assistance has been used to gain support for FTAs
from FTA partners by China and Japan, which are eager to play a leadership role inregional integration.
Having noted a common characteristic of comprehensiveness of FTAs in East
Asia, specific contents do differ among the FTAs, reflecting different motives of thecountries concerned. Japan emphasizes the importance of liberalization and facilitationof investment and service trade, as such measures would provide free, transparent andstable business environment for Japanese firms, which have invested heavily in East
Asia. In particular, Japan is interested in having well functioning intellectual property
right protection By contrast, developing countries such as ASEAN and China do nothave equally strong interests in these measures. Indeed, ASEAN and China haveadopted a gradual and sequential approach by dealing with trade in goods and services

20and investment separately with different timing, as liberalization in trade in goods isfollowed by liberalization in service trade and investment.
Let us turn to the discussions on the motives of East Asian countries behind
their FTA strategies. Various common motives, despite the differences in theirimportance among the countries, can be identified.
First, rapid expansion of FTAs in other parts of the world has made East Asian
economies realize the importance of establishing FTAs in order to maintain and expand
their export opportunities. This market seeking FTAs pursed by East Asian countries islargely of defensive nature. A case in point is Japan‘s FTA with Mexico. Japanese firms
were in disadvantageous position vis-à-vis US firms or EU firms in the Mexican market
because the US and the EU had FTAs, under which their firms had duty-free access to
Mexico. Japanese firms put pressure on Japanese government to negotiate an FTA with
Mexico to overcome their disadvantage. It should be noted here that a stalemate of thenegotiations under the Doha Development Agenda under the WTO turned the attentionof the WTO members with an interest in trade liberalization to FTAs. The market accessmotive played a role for FTAs among East Asian economies, as trade barriers are still
substantial for many sectors in East Asian economies, as we saw above.
Second, countries interested in promoting structural domestic reform to achieve
economic growth use FTAs as foreign pressure on the opposition to structural reform, inorder to force domestic structural reform. The motive of promoting domestic reform
was important for Korea in pursing an FTA with the US. Being sandwiched between
China, a rapidly catching up economic giant, and Japan, highly competitive anothereconomic giant, Korea needed to carry out structural reforms to maintain and improve
competitiveness.

21

Third, rivalry among East Asian economies over gaining a leadership role in
the region has activated their FTA strategies. Both China and Japan, which arecompeting to become a ‗leader‘ in the region, are keen on using FTAs to strengthen therelationships with ASEAN, Korea and other countries. Indeed, in November 2002 Japanproposed an economic partnership framework to ASEAN one day after China agreed tostart FTA negotiations with ASEAN. It should also be noted that ASEAN, Korea andother countries consider FTAs as a means to maintain and increase their influence in
East Asia. ASEAN has been rigorously pursing FTAs with major countries in order forthem to take a ―driver‘s seat‖ in regional integration in East Asia, while Korea ismoving ahead of other countries such as Japan and China to take a lead in the race.
Fourth, the financial crisis in East Asia in late 1990s increased the awarenessamong East Asian countries of the need for regional cooperation such as a region-wide
FTA to avoid another crisis and to promote regional economic growth. The immediateconcern about financial problems resulted in regional cooperation in financial areas.
Specifically, bilateral currency swap arrangements to deal with the shortage in foreignexchange under the name of Chiang-Mai Initiative were set up in 2000. Furthermore,
ASEAN+3 countries are developing Asian Bond Market, in order to develop efficientand liquid bond markets in East Asia, enabling better utilization of East Asian savings
for East Asian investments. It is also expected to contribute to the mitigation of currency
and maturity mismatches in financing.
Fifth, countries with outward foreign direct investment use FTAs to improvebusiness environment in FDI recipient countries, so that MNCs can perform efficiently.
This motive is sought by including FDI liberalization and facilitation in FTAs. Indeed,this motive is one of the most important motives for Japan as many Japanese MNCs
have invested in East Asia.

22

III.3. Economic Impacts of Comprehensive Region-wide FTAs
In the previous sections we found that a number of bilateral and mini-lateral
FTAs have been established, negotiated and studied in East Asia. We also identified
several initiatives toward the establishment of region-wide FTAs. This section attempts
to examine the economic impacts of region-wide FTAs by conducting a simulation
analysis based on the general equilibrium framework. Specifically, we use a Global
Trade Analysis Project (GTAP) model, which has been used extensively for the analysis
of FTAs.
We undertook three kinds of simulation for three different region-wide FTAs.
Three kinds of simulation include; 1) trade liberalization, 2) trade liberalization andfacilitation, 3) trade liberalization and facilitation, and economic cooperation. Threedifferent region-wide FTAs are ASEAN+3 (EAFTA), (ASEAN+1)x5, and ASEAN+6
FTAs (CEPEA). (ASEAN+1)x5 indicates ASEAN‘s five bilateral FTAs with China,
Korea, Japan, India, and Common Economic Relations (CER) involving Australia and
New Zealand.
Trade facilitation program, which takes various forms such as thesimplification of customs procedures and harmonization of technical standards, reduces
the impediments to trade. Trade facilitation is assumed to have greater impacts on tradeunder the region-wide FTAs such as East Asia FTA and CEPEA compared to bilateral
FTAs such as ASEAN+1 FTAs. This is because region-wide FTAs can avoid possible
trade-reducing effects, which may be caused by the ―spaghetti bowl effect‖ due to theproliferation of bilateral FTAs with different rules of origin, because region-wide FTAs
should adopt common rules of origin. In the simulation analysis, we also consider the
impacts of economic cooperation, which is one important component of the EAFTA and23

Table 5

Tariff Rates of East Asian Countries (import-weighted average tariff rates by sector, 2001)

Japan

China

Korea

ASEAN

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Other
Southeast
Asia

Australia

New
Zealand

India

Agriculture and food

30.2

37.6

81.7

13.9

5.0

17.1

9.5

0.4

29.4

36.6

20.4

2.8

2.0

50.2

Fishery and forestry

1.8

0.7

6.9

2.7

0.6

0.2

0.5

0.0

10.3

3.9

1.0

0.1

0.0

6.8

Mining

0.0

0.3

3.7

0.7

0.3

1.6

3.2

0.0

0.2

3.8

2.6

4.9

0.0

16.2

Texitle and apparel

9.0

20.5

10.0

11.1

8.6

12.3

6.5

0.0

18.5

31.3

10.1

17.0

6.0

26.6

Wood and paper

1.1

9.0

4.0

5.4

3.4

6.6

4.7

0.0

11.0

14.7

5.3

3.6

1.1

22.0

Mineral products

1.1

13.0

6.7

5.2

4.4

5.9

4.5

0.0

11.7

7.8

5.4

3.0

1.3

28.8

Iron and steel

0.5

7.5

3.8

5.6

5.9

8.5

3.9

0.0

9.3

5.1

3.5

3.6

1.4

33.6

General machinery

0.1

13.1

6.1

3.3

3.0

3.9

2.3

0.0

8.2

8.0

6.0

3.5

2.1

25.4

Electronic machinery

0.0

10.1

1.1

0.8

2.1

0.4

0.1

0.0

4.7

8.8

8.8

0.8

1.2

15.1

Transport equipment

0.0

20.5

3.9

14.6

9.6

31.7

11.5

0.0

24.0

46.9

25.0

12.9

3.5

27.4

Other manufacturing

5.3

13.9

8.5

6.1

6.5

6.8

6.1

0.0

7.1

20.2

13.7

5.2

3.8

33.8

Construction

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Trade

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Transport and communication

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Public services

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other services

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

All

4.1

11.6

8.5

4.0

3.6

4.7

2.8

0.0

8.8

10.3

9.0

4.3

1.7

21.8

Source: GTAP database

CEPEA (Simulation 3). Specifically, we assume that total factor productivity (TFP) of
developing members will increase by one percentage point as a result of the formationof the EAFTA and CEPEA.
Table 5 shows the level of protection expressed in the form of the pricedifferential between domestic and international prices, which reflect tariff andnon-tariff barriers. According to the table, agriculture and food receive substantial
protection for many countries including both developed and developing countries.
Among the manufacturing sectors, transport equipment and textile and apparel areheavily protected in many countries.

Table 6

Effects of Region-wide FTAs on GDP (%)
EAFTA (ASEAN+3)（ASEAN+1）ｘ5

CEPEA (ASEAN+6)

Sim 1

Sim 2

Sim 3

Sim1

Sim 2

Sim 1

Sim 2

Sim 3

0.01

0.44

0.44

0.13
1.13
0.07
0.39

1.66
3.56
1.74
5.83

4.72
3.55
3.94
8.62

-0.01
0.01
-0.04
0.07

0.10
0.20
0.20
1.00

0.05
0.14
1.15
0.07

0.54
1.77
3.72
1.94

0.54
4.84
3.71
4.14

0.21
0.06
0.68
2.21
0.09

3.94
4.22
4.49
7.08
0.88

6.28
4.24
7.02
9.67
2.91

0.51
0.20
0.10
0.80

3.30
2.20
2.30
2.80

0.50
0.25
0.05
0.74

6.21
4.18
4.40
4.78

9.00
6.52
4.42
7.32

2.33
0.11

5.00
0.50

2.25
0.10

7.33
0.92

9.92
2.95

-0.03
-0.03
-0.04
0.00
-0.06
0.00

-0.09
-0.06
-0.10
0.00
-0.09
-0.01

-0.09
-0.06
-0.10
0.00
-0.08
-0.01

0.01
0.00

0.20
0.10

0.16
0.10

1.35
1.87

1.35
1.87

0.31
0.00

0.50
0.00

0.41
0.00

1.30
-0.01

3.45
-0.01

0.00
-0.03

-0.01
-0.06

-0.01
-0.06

-0.03
0.00
0.00
-0.02

0.00
0.00
0.00
0.00

-0.07
0.00
-0.01
-0.03

-0.10
-0.01
-0.01
-0.08

-0.10
-0.01
-0.01
-0.08

ASEAN
ASEAN+3

0.36
0.14

3.60
1.18

5.67
1.93

0.41
0.04

2.14
0.30

0.39
0.17

3.83
1.30

5.89
2.05

ASEAN+6

0.12

1.02

1.68

0.05

0.31

0.19

1.30

2.11

Japan
China
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Other Souteast Asia
Australia
New Zealand
India
Hong Kong
TaiwanNAFTA
EU15Rest of the World

26

Source: author's calculation, based on the simulation results
Note: Simulations 1-3 are as follows:
Sim1: Trade liberalization
Sim2: Trade liberalization and facilitation.
Sim3: Trade liberalization, facilitation and economic cooperation.
Shaded areas indicate FTA members.

Table 7 Effects of Region-wide FTAs on Economic Welfare ($ million)（ASEAN+1）ｘ5

EAFTA (ASEAN+3)

CEPEA (ASEAN+6)

Sim 1

Sim 2

Sim 3

Sim1

Sim 2

Sim 1

Sim 2

Sim 3

Japan

6,436

29,55429,336

-903

1,935

7,048

32,65632,363

China

624

17,952

54,233-1,457-301

634

18,96455,270

Korea

5,945

18,81918,719

-267

631

6,264

19,787

19,690Indonesia

693

4,527

7,906

1,733

4,139

1,165

5,270

8,661

Malaysia

1,466

10,443

13,393

3,400

8,717

2,523

12,02915,040Philippines

139

3,367

5,054

422

2,334

122

3,457

5,142

Singapore

1,802

7,610

7,765

2,822

6,391

2,046

8,236

8,389

Thailand

2,851

8,815

11,872

3,878

7,421

2,645

8,829

11,888Vietnam

633

2,723

3,488

942

2,243

645

2,813

3,578

Other Souteast Asia

-27

691

2,338

12

404

-1

729

2,379

Australia-723-1,684-1,694

-152

359

4,832

11,669

11,682

New Zealand

-146

-230

-224

-10

82

267

1,655

1,669

India

-510

-1,049-1,077

-602

-79

2,744
-798

13,124
-589

-460

-691

-487

-69

-40

-885
-515

Taiwan-1,522-3,228-3,250-753-1,290-1,773-3,637-3,659NAFTA-4,526-11,843-12,476-2,541-5,016-5,893-14,282-15,022EU15-3,154-7,263-7,710-2,267-4,048-4,112-8,942-9,502

Rest of the World-2,971-9,606-10,038-1,721-3,787-4,311-13,410-13,933

ASEAN

7,557

38,17451,816

13,209 31,648

9,145

41,36455,078ASEAN+3

20,562 104,500 154,104

10,581 33,913

23,091 112,771 162,401

ASEAN+6

19,183 101,536 151,110

9,818 34,276

27,305 128,839 188,875

Hong Kong

Source: author's calculation, based on the simulation results
Note: Simulations 1-3 are as follows:
Sim1: Trade liberalization
Sim2: Trade liberalization and facilitation.
Sim3: Trade liberalization, facilitation and economic cooperation.
Shaded areas indicate FTA members.

27

Table 8

Effects of Region-wide FTAs on Welfare Per Capita ($)
EAFTA (ASEAN+3)（ASEAN+1）ｘ5

Sim 1 Sim 2 Sim 3

Sim1

Sim 2

CEPEA (ASEAN+6)
Sim 1

Sim 2

Sim 3

Japan

51

233

231

-7

15

56

258

255

China

0

14

43

-1

0

0

15

44

Korea

125

396

393

-6

13

132

416

414

Indonesia

3

21

37

8

19

5

25

41

Malaysia

62

441

566

144

368

107

508

635

Philippines

2

42

63

5

29

2

43

64

Singapore

541

2,285

2,332

847

1,919

614

2,473

2,519

Thailand

45

140

189

62

118

42

141

189

Vietnam

8

34

44

12

28

8

35

45

Other Souteast Asia

0

10

35

0

6

0

11

35

Australia

-37

-87

-87

-8

18

249

601

601

New Zealand

-38

-60

-58

-3

21

69

430

433

0

-1

-1

-1

0

Hong Kong

-64

-97

-68

-10

-6

-1
-72

3
-111

13
-82

Taiwan

-68

-145

-146

-34

-58

-80

-163

-164

NAFTA

-11

-29

-30

-6

-12

-14

-35

-37

EU15

-8

-19

-20

-6

-11

-11

-24

-25

Rest of the World

-1

-4

-4

-1

-2

-2

-6

-6

ASEAN

14

72

98

25

60

17

78

104

ASEAN+3

10

53

78

5

17

12

57

82

ASEAN+6

6

34

50

3

11

9

43

62

India

Source: author's calculation, based on the simulation results
Note: Simulations 1-3 are as follows:
Sim1: Trade liberalization
Sim2: Trade liberalization and facilitation.
Sim3: Trade liberalization, facilitation and economic cooperation.
Shaded areas indicate FTA members.

The results of simulations are shown in Tables 6, 7 and 8. Several interestingfindings are identified.

First, the impacts of trade liberalization alone are limited,while trade facilitation is expected to have substantially larger impacts. For example, inthe case of the EAFTA, trade liberalization increases GDP of ASEAN+3 countries by28

0.14 percent, while trade facilitation pushes up GDP of ASEAN+3 countries by 1.18
percent. It should be added that the impacts on ASEAN are substantially larger. Second,
among

the

three

alternatives,

EAFTA(ASEAN+3),(ASEAN+1)x5

and

CEPEA(ASEAN+6), CEPEA members‘ gains are the largest in the case of CEPEA.
Without considering economic cooperation (Simulation 2), CEPEA members‘ can
expect their GDP to increase by 1.30 percent and their economic welfare by 128.8
billion dollars, or 43 dollars per capita, while their gains are smaller for the cases of
EAFTA or (ASEAN+1)x5. Indeed, those CEPEA members, which are excluded fromthe membership of EAFTA, will lose in the case of EAFTA.
The impacts of economic cooperation are substantial for developing country
members of EAFTA or CEPEA (Simulation 3). In the case of CEPEA, ASEAN‘soverall GDP will increase by 5.89 percent, while the increases for ASEAN+3 and
ASEAN+6 members are significantly smaller. Among the CEPEA members, someASEAN members including Vietnam, Malaysia, Thailand and the Philippines will
benefit notably, while the gains for the developed members such as Japan, Australia
and New Zealand are limited. The impacts of CEPEA on its member countries largely
depend on the initial level of import barriers and the importance of foreign trade in
their economic activities (trade/GDP ratios). Generally we find the following
relationship among the CEPEA countries: the higher the level of import barriers,
and/or the larger the trade/GDP ratios, the greater the gains from CEPEA.
The impacts on economic welfare indicate somewhat different patterns,
although all CEPEA members gain from the formation of CEPEA (Table 7). A casual
observation appears to show that large country in terms of economic size gain muchcompared to small countries. In an attempt to take account of the economic size, thechange in economic welfare per capita is computed and shown in Table 8. The results

29

of the computation show that the gain to a Singaporean is by far the largest and thenpeople in more developed countries including Australia, New Zealand, Malaysia,
Korea and Japan are to gain, while the gains to people in developing countries such as
India are much smaller. One reason that developed countries gain much in terms of
economic welfare is an improvement in terms of trade in favor of these countries,
resulting from increased demand for their exports resulting from the increases inincomes of the CEPEA members. The level of economic welfare per capita also
depends largely on the size of population. Countries with large population such as
China and India tend to show relatively small gain in economic welfare per person.

VI. Future Prospects of Region-Wide FTAs and Beyond in East Asia
East Asia has seen a proliferation of FTAs recently. Many bilateral andminilateral FTAs have been established, but no region-wide FTA has been established.
Indeed, recognizing the economic benefits of FTAs with large number of members,
three different groupings, ASEAN+3, ASEAN+6 and APEC, for FTAs have been
proposed but none of them have yet been formally taken up for negotiation. In terms ofachievements as an organization, not necessarily in terms of FTAs, so far, ASEAN+3
and APEC (FTAAP) have accomplished much more than ASEAN+6. However,
ASEAN+6 is quickly gaining a momentum as Japan, India, Australia, and New
Zealand have become active proponents.
Several obstacles do stand in the way to the formation of a region-wide FTA.
The most serious obstacle is opposition to trade and FDI liberalization, which comesfrom non-competitive sectors. This problem is found in many economies except forSingapore and Hong Kong. Recognizing these obstacles, it is unrealistic to expect theformation of high-level, in terms of liberalization, FTAs covering all sectors and30

including all East Asian economies. Instead, a low-level FTA is likely to be establishedwith quite a few exclusions from trade and FDI liberalization. Although such an FTA is
not ideal, one could expect gradual improvement over time, as it was the case for the
AFTA. What is important is joint effort toward achieving a common regional goal, that
is, a region-wide FTA in the area of trade, investment, and economic assistance.
Between ASEAN+3 and ASEAN+6 FTAs, economic benefits are greater for
ASEAN+6. But the negotiations are likely to be more difficult not only because of thelarger number of members but also because of very different attitudes toward tradeliberalization by the members. What appears to play a key role in the formation of aregion-wide FTA in East Asia is economic and technical assistance, since there are alarge number of developing economies, which could benefit from economic assistance.
In this regard, ASEAN+6 seems to have an edge, as a larger number of developed
countries are the members. Having noted that ASEAN+6 may have a better chance tobecome an East Asian-wide FTA, activities involving ASEAN+3 should not be
discouraged, as they have established foundation for regional cooperation. ASEAN+6
should be pursued with ASEAN+3 as a base.
Coming back to the discussions on the formation of an East Asia-wide FTA,
such an FTA cannot be established unless big countries, particularly China and Japan,
agree to open up their markets. For this, not only economic factors but also politicalfactors have to be dealt with. Accordingly, maintaining good political relationships isvery important for the formation of a region-wide FTA. It is needless to say thatdomestic reform and positive structural adjustment measures are required to establish
FTAs.
So far our discussions have focused on FTAs, although we argued theimportance of comprehensive FTAs including not only trade liberalization but also FDI

31

liberalization, trade and FDI facilitation and economic assistance, in order to achieve
economic growth and narrowing development gaps in East Asia. Before we end thispaper, we would like to discuss the need to promote cooperation in various areas inaddition to economic and technical cooperation discussed within the context of FTAs.
Two important areas of cooperation include energy and environment. Limited energy
supply and serious environmental problem are obstacles in achieving economic growth.
Regional cooperation can play an important role in alleviating these problems. For
example, joint development of gas fields and oil reserves should be effective inmaintaining energy supply while transfer of energy efficient technology fromdeveloped to developing countries should prove helpful not only in saving energy but
also in mitigating environment problems. Since cooperation in these two areas yield
benefits to all the countries, it should be formulated and implemented as soon as
possible.
Cooperation in financial areas should also be emphasized. As noted various
programs such as the Chaing-Mai Initiative and Asian Bond Initiative have alreadybeen developed. These regional programs should be further promoted. An idea of theintroduction of a regional common currency should be regarded as a long-term goal inthat cooperation and coordination mechanism of macroeconomic policies should be
gradually developed and implemented. Stable macroeconomic environment plays acrucial role in achieving economic growth.
Cooperation in non-economic areas such as political and social areas should
be encouraged. Issues of security and political systems are admittedly very difficult,especially so in East Asia because of the presence of the countries with very different
political systems. Having noted this, it is important to be reminded that favourable

32

political and social relationships would lead to promote economic activities, which inturn would lead to greater political and social stability.
We have discussed the need to establish a region-wide comprehensive
economic partnership agreement and to promote cooperation in various areas, in orderto achieve economic growth and social and political stability in East Asia. We also
identified various obstacles for realizing these objectives. To overcome these obstacles,
we need strong political leadership in all East Asian countries with a strong
determination to achieve these goals. Particularly important are leaderships in China,
Japan, Korea and ASEAN, which have decisive positions in determining the course ofregional development. Having noted the crucial role of political leadership informulating and implementing desirable policies for the region, one cannot
overemphasize the important role that general public play for supporting politicalleaders. Realizing this point, we cannot overstate the importance of mass media andacademic institutions in providing appropriate information and education.

33

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Ando, Mitsuyo (2006) ―Fragmentation and Vertical Intra-Industry Trade in East Asia,‖
North American Journal of Economics and Finance, 17(3), pp. 257-281.

Japan PECC (Pacific Economic Cooperation Conference) (2002) An Assessment of
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Kimura, Fukunari (2006) ―International Production and Distribution Networks in East
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Ng, Francis and Alexander Yeats (2003), Major Trade Trends in East Asia: What are
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Sally, Razeen (2006) ―Free Trade Agreements and the Prospects of Regional
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(2005a) ―East Asia‘s Multi-Layered Development Process: The
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GIARI Working Paper Vol. 2008-E-16,
December 15, 2008
Published by Waseda University Global COE Program
Global Institute for Asian Regional Integration (GIARI),
Waseda University, Nishiwaseda Bldg. 5F#507 1-21-1
Nishi-waseda, Shinjuku-ku, Tokyo 169-0051 Japan
E-mail: affairs@waseda-giari.jp
http://www.waseda-giari.jp
Printed in Japan by International Academic Printing Co.Ltd

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