助成Institute forInternational Policy Studies・Tokyo・IIPS International Conference“Building a Regime of Regional Cooperation inEast Asia and the Role which Japan Can Play”

TokyoDecember 2-3, 2003

“FTA in East Asia and Agenda for Regional Cooperation”
ByDr. Yoshiko Kojo
Professor of International Relations
Department of International Relations, University of Tokyo

Paper Prepared for IIPS Symposium
Building a Regime of Regional Cooperation in East Asiaand the Role which Japan Can Play
December 2-3, 2003
ANA Hotel, Tokyo
Session 2
The Potential of Free Trade Agreements to Enhance Regional Cooperation in East Asia

FTA in East Asia and Agenda for Regional Cooperation
Yoshiko Kojo
Professor of International Relations
Department of International Relations, University of Tokyo---------------------------------------------------------------------------------------------------------Introduction
There have been three waves of the development of bilateral and regionalcustoms unions and free trade agreements since the end of the World War II. Now weare in the middle of the third wave. The first wave was recognized in the 1950s mainlyin Western Europe. The European Coal and Steel Community (ECSC), the origin of theEEC, was an example. Following the Western European trend, regional tradeagreements were reached mainly in Latin America and Africa. However, the West
European case was the only successful one. The second wave started in the latter half ofthe 1980s. In Western Europe, the Single European Act and the Maastricht Treaty wereagreed upon to create the European Union (EU) with a single European market andmonetary union. In North America, the North American Free Trade Agreement(NAFTA) incorporated Mexico into the pre-existing U.S.-Canada Free Trade Agreement.
In the Asia-Pacific region, APEC was established in 1989. The third wave is notable in
the recent emergence of many bilateral and regional trade agreements. Many FTAs wereconcluded in recent years and are now under negotiation.
Why have a number of countries sought to conclude FTAs in recent years?
Are there any characteristics of the recent proliferation of FTAs in East Asia? Does the１proliferation of FTAs contribute to the enhancement of the regional community? This
paper aims to answer these questions. Before examining these questions, the next
section will describe the characteristics of the recent proliferation of FTAs.
The Recent Proliferation of FTAs
The bilateral and regional trade deals increased in number and speed in recentyears. Some 250 RTAs (Regional Trade Agreements) have been notified to theGATT/WTO up to December 2002. Out of the 250, 130 were notified after January
1995. Over 170 RTAs are currently in force; an additional 70 are estimated to be
operational although not yet notified. According to the WTO, by the end of 2005, if
RTAs reportedly planned or already under negotiation are concluded, the total numberof RTAs in force might well approach as many as 300.1
Geographically, there are two kinds of FTAs. One is the FTA across regions
such as EU-Mexico, US-Jordan, New Zealand-Singapore, Japan-Mexico, and the otheris the FTA within the region with geographical proximity such as the Free Trade Area ofthe Americas (FTAA), the ASEAN+3, and the EU. The former type sometimes includes
strategic concerns apparent in such FTAs as US-Jordan and US-Israel. In East Asia,
compared to regional economic arrangements in Europe and North America, it isgenerally argued that there is much less regional institutionalization in East Asia,
although there are regional frameworks such as ASEAN and the Asia-Pacific Economic
Cooperation (APEC).2 However, recently we can notice the proliferation of FTAs aswell as in other regions. FTAs such as Japan-Singapore and Singapore-Australia wereconcluded, and more than ten FTAs such as ASEAN-China, ASEAN-Japan,Japan-Mexico, Australia-Thailand, Japan-Thailand were proposed and are under study
or negotiation (Figure 1. 2).
As for the content of FTA, FTA has been allowed to establish under the Article
XXIV of the GATT. Although almost all FTAs include trade liberalization, theircontents vary widely. Some cover liberalization of capital transfer and service trade,others include protection of intellectual property rights. As far as they comply with the12WTO (http://www.wto.org/english/tratop_e/region_e/region_negoti_e.htm)

Grieco, Joseph M. (1999), ‘Realism and Regionalism: American Power and German and Japanese Institutional
Strategies During and After the Cold War,’ in Ethan B. Kapstein and Michael Mastanduno (eds), Unipolar Politics,
Columbia University Press, New York: 1999, pp. 319-353, Katzenstein, Peter J. (1997), ‘Introduction: AsianRegionalism in Comparative Perspective,’ in Peter J. Katzenstein and Takashi Shiraishi, Network Power: Japan andAsia, Cornell University Press, Ithaca, pp. 1-44.

２principle of non-discrimination of the Article XXIV of the GATT, countries can design
FTAs at their own discretion. It is easier for countries to utilize FTAs to their own
purpose compared to the multilateral agreements such as the WTO. As a result, wemight see various kinds of FTAs, which vary in level and scope of liberalization.
Why Do Countries Seek to Conclude FTAs? : The Case of Japan
There are mainly two objectives for FTA formation: economic and politicalobjectives. Of course, countries that pursue FTA formation recognize the economic
benefits from liberalization of trade and service. However, it seems that countries
pursue FTA formation not only for economic reasons but also for political reasons.
For example, why did Japan come to show its interest in an FTA in the late
1990s? Japan's policy change to pursue FTA, even though it regards multilateralliberalization may be the best way to its welfare, affected other countries' perceptions onFTAs in East Asia. According to the Ministry of Foreign Affairs, there are economic
political/diplomatic reasons for FTAs. As for economic reasons, "FTAs lead to theexpansion of import and export markets, the conversion to more efficient industrial
structures, and the improvement of the competitive environment. In addition, FTAs help
reduce the likelihood of economic friction becoming political issues, and help expand
and harmonize existing trade-related regulations and systems." As for political/
diplomatic reasons, "FTAs increase Japan's bargaining power in WTO negotiations, andthe results of FTA negotiations could influence and speed up WTO negotiations. The
deepening of economic interdependence gives rise to a sense of political trust among
countries that are parties to these agreements, expanding Japan's global diplomatic
influence and interests."3Actually, the Japanese government has been hesitant to participate in regional
economic arrangements in the postwar period, in contrast to its supportive attitude
towards global frameworks since it joined the IMF and the GATT in the 1950s.
However, in the late 1990s and early 2000s, the Japanese government seemed to take a
new policy orientation in trade and international finance such as its emphasis on“multi-layered trade policy” and its proposal of the regional monetary fund to deal with3

MOFA, Japan's FTA Strategy (Summary), October 2002
(http://www.mofa.go.jp/policy/economy/fta/strategy0210.html).
３

financial crisis.4
It is generally argued that Japan’s increasing economic transactions such as
trade and direct investment with East Asia after the mid-1980s can explain the interestin formulation of an FTA. It is no doubt that increasing economic transactions with East
Asian countries prompted the Japanese government to pay attention to regional bilateralframework. Japanese businesses that expanded activities across borders in East Asia
also supported the government’s commitment to a regional framework. However,economic explanation cannot fully account for Japan’s pro-active attitude; for example,
in the late 1990s, after the Asian financial crisis, Japan’s direct investment in Asia andtrade with Asia declined.
There are three political factors to explain Japan’s policy change besides increasing
economic transactions. The first factor is the stability of global economic frameworks
such as the GATT/WTO and the IMF. Since Japan has relied on export-led economic
growth, global economic frameworks have been regarded as essential for Japan’seconomy to eliminate barriers to foreign markets, and a stable international monetarysystem as necessary to conduct trade smoothly. Moreover, Japan has been one of themost eager supporters of a multilateral global framework, and until the late 1980s, it had
never committed to a single regional or bilateral FTA.
However, since the 1970s, global economic frameworks showed frequent instability
and cast skepticism for their future role. In the late 1980s, the GATT Uruguay Roundstalled, due to conflicting interests between the United States on the one hand and theEC and Japan on the other on agricultural products, and a new international financial
system was not agreed to either. In the late 1990s, the WTO Ministerial Conference
failed to reach agreement, and the IMF could not solve the Asian financial crisis
effectively. Instability in the global economic framework prompted the Japanese
government to seek alternative frameworks that Japan can rely on for securing stableforeign economic relations.
The second factor is the situation of Japan-U.S. relations. Good economic relations
with the United States have been crucial for Japan's economy. Since the 1980s, however,conflicts between these two countries increased. The main cause of Japan-U.S.
economic friction was U.S. domestic complaints over its large trade deficit with Japanand Japan’s large current account surplus. The U.S. government put pressure on theJapanese government to adjust Japan’s current account surplus by reducing the trade
4

MITI (2000), White Paper on International Trade 2000 , Okurasho Insatsukyoku, Tokyo４

surplus with the United States by opening its markets, deregulating capital control, andexpanding domestic demand. When the bilateral economic negotiations became moretense, Japan was likely to seek alternative or supplemental economic ties with othercountries to avoid over-dependence on the United States.
The third factor is the perceptions of East Asian countries on Japan’s role inestablishing regional frameworks. Even in the late-1980s, East Asian countries wereskeptical about Japan’s assertive role due to their WWII experiences. On the Japaneseside, the Japanese government and business were well aware of such skeptical feelingsin the region and while the Japanese government became more interested in regionalframeworks such as APEC than ever before, lingering skepticism restrained theirbehavior.
East Asian countries became more positive toward Japan’s role in the region in
the late 1990s after the Asian financial crisis. The crisis made East Asian countries seek
Japanese leadership in preventing future regional financial crises. In the case of FTAs, it
was Japan who was approached to consider seriously the FTA proposals of Singapore
and South Korea. Moreover, China's increasing interest in regional frameworks after it
joined the WTO prompted the Japanese government to move further toward a regionalframework. It can be concluded that three factors explain Japan’s more assertive policy
position on regional frameworks in the late 1990s than in the previous period.
Political Aspects of the Proliferation of FTAs in East Asia
There are two important political aspects of the proliferation of FTAs in East
Asia. First, although there are various reasons behind each country's motives for an FTA,
one crucial reason common to almost all countries in East Asia is that they do not want
to be left out of other countries' moves for FTA. This reason is most likely to explain therapid proliferation of FTAs in East Asia. Since the Early Voluntary Sectoral
Liberalization (EVSL) failed in the negotiation of the APEC, the expectation of theleading role of the APEC in liberalizing trade and investment in East Asia has been
degraded. Along with the stalemate in the WTO, countries in this region came to fear
missing the vehicle for liberalization. Since the fear of being left out is the mostessential motive for many countries in the region, they tend to propose establishment ofFTAs with other countries without being well prepared and having a specific purpose.
This means that although there are many proposals for FTAs, at this moment it is notclear that what kind of FTA is desirable in East Asia.
５Second, there has been no country to take leadership role in coordinating theincreasing number of FTAs in East Asia. Leadership here means the initiative ofdesigning an FTA to promote liberalization in a wider scope and implementing the codeof liberalization. Bigger countries such as Japan and China seemed not to take this kindof leadership role until now, unlike the United States in the Americas and France andGermany in the EU. China proposed an FTA with ASEAN in November 2000 andconcluded the Framework Agreement on ASEAN-China Comprehensive Economic
Cooperation in November 2002. China wants to hedge the risk of liberalization within
the framework of the WTO by promoting regional economic relations. However, thecontent of the proposed FTA is still under negotiation. Japan concluded theJapan-Singapore Economic Partnership Agreement and proposed an economic
partnership agreement with ASEAN in January 2002. In October 2003, Japan also
concluded the Framework Agreement for Comprehensive Economic Partnership
between ASEAN and Japan. However, there have been few attempts from both Chinaand Japan to utilize the ASEAN+3 framework to promote a free trade area in the region.
Japan's proactive attitude toward FTA with ASEAN was reactive to China's behavior
toward ASEAN.
These two political aspects restrained the proliferation of FTAs fromconstructing a regional community.
Agenda for Regional Cooperation
Whether the formation of FTAs will facilitate regional cooperation in East
Asia will depend on how countries in the region manage at least the following threeproblems.
First, although there is an increase in the number of FTAs, as described before,
there is no leadership to coordinate them and no leading idea to make them to contributeto regional community. There is also some diversification in the level and scope ofliberalization among countries. This diversification makes the creation of a regional
community difficult, as was seen in AFT. The region needs a leadership role and acommon idea regarding the regional community.
The second problem is how to manage the relations between FTAs andmultilateral frameworks such as APEC and the WTO. Do countries consider an FTA
complementary or as an alternative to a multilateral framework? If they consider theFTA alternative to the multilateral framework, unlike the EU, there will be low
６possibility to construct regional community in this region. Moreover, as someeconomists point out, the increase in the number of FTAs does not simply lead to amore liberalized world, due to the so-called “spaghetti bowl effects.”5 In order to avoid
this problem, it is necessary for countries to commit themselves to APEC and the WTO
principle and facilitate the process of them.
Third, there is no consensus in each country domestically on how much andwhat kind of liberalization should be realized. For example, in Japan, sensitive sectors
such as the agricultural sector opposes liberalizing the market of agricultural products.
This opposition in domestic politics made the Japan-Mexico FTA negotiation fail. Inorder to create a regional community, it needs to make FTAs less discriminatory. Less
discrimination might put a burden on the sensitive sector. Therefore, the political will of
the government to overcome the domestic opposition is necessary for creation of aregional community. Otherwise, the negotiation will be hard to be agreed upon due tothe existence of sensitive sectors.
Japan’s Role
As for the role of Japan in an international economic order, since the late 1980s,
in particular in the late 1990s, the Japanese government has tried to play a leading rolein a multi-layered international economy. However, Japan is hesitant to translate its
economic power resources into an assertive political leadership so far in formulating a
regional framework such as APEC and AMF. It is no doubt that Japan is a major player
in formulating an international economic order, but its policy has been restricted not
only by international but also domestic constraints. International constraints come fromthe United States and East Asian countries. As described before, it seems difficult forJapan to play an assertive role without a consensus from both the United States and East
Asian countries. For example, East Asian countries are not so interested in theinternationalization of the yen. Keizai Doyukai, one of major industrial associations,
reported that “there are even suspicions that Japan is attempting to shift the entire
exchange risk to its trading partners, under the disguise of internationalizing the yen.”
The Japanese government has to struggle with these perceptions.i
Domestic constraints come from political commitments to the protection of sensitive
sectors such as agriculture from economic globalization. In particular, Japan’s
5Jagdish Bhagwati, and Panagaiya, Arvind (1996), “Preferential Trading Areas and Multilateralism:Strangers, Friends, or Foes?” in Jagdish Bhagwati and Arvind Panagariya, eds., The Economics ofPreferential Trade Agreements, Washington, D.C.: American Enterprise Institute.
７

reluctance to open the agricultural sector has limited its bargaining power in APEC as
well as in the WTO, and will be an obstacle to concluding FTAs with other developingcountries.
In the early 2000s, the Japanese government began to more seriously consider
regional and bilateral frameworks to strengthen the international economic order as wellas increase Japan’s welfare. Whether these frameworks can reinforce each other to makethe WTO negotiation in favorable to the region will depend on how much bilateral andmultilateral cooperation among countries in East Asia can be achieved. Japan’s
preference for gradual institutionalization could be a way of facilitating cooperation.
Whether this approach is successful or not also depends on the Japanese government’s
ability of adjusting domestic opposition from sensitive sectors.

iKeizai Doyukai, “A Private-sector Perspective on the Internationalization of the Yen: A Study on Japanese andAsian Stability and Growth,” May 2000.

８Table 1
Number of FTAs

Year
1955-1959
1960-1964
1965-19691970-1974
1975-1979
1980-1984
1985-1989
1990-1994
1995-1999
2000Total

WesternEurope,
Middle East,
Mediterranean
11Central &Eastern
Europe,Russia, CIS

Sub-SaharanAfricaAsia andPacificAcrossregions

153
1
1830
1776

North &SouthAmericas

121

725
1042

Source: JETRO based on WTO figures

1124

11222
1022231412

1511Total

12185433160
40155

Figure 1
Source: METi