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

“Potential of Free Trade Agreements to Enhance
Regional Cooperation in East Asia”
By
Dr. CHIA Siow Yue
Senior Research Fellow
Singapore Institute of International AffairsPotential of Free Trade Agreements to Enhance Regional Cooperationin East Asia

Dr CHIA Siow Yue
Senior Research Fellow
Singapore Institute of International Affairs

Brief paper for presentation at the Conference on Building aRegime of Regional Cooperation in East Asia andthe Role which Japan can PlayOrganized by the Institute for International Policy StudiesTokyo
2-3 December, 2003

1INTRODUCTION
East Asian economic regionalism is catching-up with regionalism trends in Europe, North
America and Latin America. Prior to the 1990s, East Asia is the only major economic region in theworld that has not established free trade areas (FTAs). This state of affairs changed with thedecision by ASEAN in 1992 to establish the ASEAN Free Trade Area (AFTA. Since themid-1990s, there has been have been a proliferation of cross-regional, sub-regional, and bilateralFTAs, some already implemented, but must still at the negotiating or study stages. The
proliferation of FTAs in East Asia is shown in the attached table.
DRIVING FORCES IN EAST ASIAN ECONOMIC REGIONALISM
Both political and economic forces are driving the proliferation of FTAs in the region.
First, the end of the Cold War has led to improved political and economic relations. In Southeast
Asia, ASEAN expanded to include Cambodia, Laos, Myanmar and Vietnam. In Northeast Asia,
political and economic relations are normalising. In particular, the region's relations with China
have improved dramatically.
Second, while East Asian economies remain fragmented, continental economic blocs haveemerged in the Americas (NAFTA, Mercosur etc) and Europe (EU) and the Free Trade Area ofthe Americas (FTAA) is under negotiation. East Asian exporters are discriminated against inthese markets and investors are diverted to Mexico to serve the NAFTA market and to central andeastern Europe to serve the EU market.
Third, the 1997-98 Asian financial crisis demonstrated the close economic and financial
interdependence and interconnectivity among East Asian economies, as well as the need forregional cooperation to help maintain regional economic stability and resilience. There is also
acute disappointment over the assistance provided by the IMF, US and EU. Also, the crisis createdthe opportunity for Southeast Asia and Northeast Asia to meet under the ASEAN+3 initiative forfinancial and monetary cooperation.
Fourth, disappointment with WTO and APEC. Trade liberalization under GATT/WTO has
become increasingly difficult with the large and diverse membership. It took over 7 years toconclude the Uruguay Round negotiations. Efforts to launch a new WTO round at Seattle in 1999
failed. Although the Doha Development Round was launched in December 2001, the negotiations
suffered a severe setback with the failure of the Cancun meeting in September 2003. There is also
growing concern over the ineffectiveness of APEC in liberalizing trade and investment among itsmembers.
Fifth, with the rise of China, there is growing realization that East Asia could form a large anddynamic economic bloc, able to harness regional resources to resolve regional problems, and seeka more effective voice in the global arena hitherto dominated by western interests. East Asia has
one third of the world's population, one quarter of the world's GDP and two-fifths of the world's
foreign reserves. China is showing growing interest in economic integration in East Asia and has
proposed an FTA with Southeast Asia.
Sixth, Japan has abandoned its purely multilateral position. With loss of economic dynamism and2challengedtoremaininternationally competitive, Japanese businessmen want better
access to overseas markets. Japan has since signed and implemented an FTA with Singapore andis negotiating bilateral FTAs with several countries, in addition to a framework agreement with
ASEAN. Not to be isolated, South Korea has also been pursuing FTAs aggressively in recentyears and proposed the formation of an East Asian economic community.
Seventh, the US had objected to earlier proposals by Malaysia to form an East Asian Economic
Group (EAEG) and by Japan to establish the Asian Monetary Fund. Since then, the US has notvoiced any objection to new initiatives such as ASEAN-China, ASEAN-Japan, ASEAN+3, andeven the East Asia FTA. In fact, the US has signed a trade and investment agreement withVietnam, is implementing an bilateral FTA with Singapore, and has proposed the Enterprise for
ASEAN Initiative (EAI).
MAJOR EAST ASIAN INITIATIVESASEAN-China Comprehensive Economic Co-operation
China first proposed an FTA with ASEAN in November 2000. An ASEAN-China Expert Groupwas formed and recommended the following ---- an FTA within 10 years, preceded by an “earlyharvest” package of mutually agreed list of goods to be liberalized; trade and investment
facilitation measures; technical assistance and capacity building for ASEAN members;
co-operation in a wide range of economic and technical areas; special and differential treatment
and flexibility for CLMV countries.
The Framework Agreement on ASEAN-China Comprehensive Economic Cooperation, signed inNovember 2002, broadly adopts the recommendations of the Expert Group. It commits ASEAN
and China to an FTA covering trade in goods and services and investment liberalization andfacilitation and other areas of co-operation. Negotiations on tariff reduction and rules of origin
started in 2003. For products on the normal track, tariff reductions will begin in January 2005 andend in 2010 for ASEAN-6 and China, and in 2015 for CLMV. For products on the sensitive track,
the tariff reduction schedule will be determined by mutual agreement. An "early harvest" packageof tariff reductions in agricultural goods under HS1-HS8 has been implemented, with each
ASEAN country having its own list of products.
What motivates China's offer and ASEAN's ready acceptance? China's motivations are both
political and economic. China's political and diplomatic normalization with the ASEAN states wascompleted only in the late 1980s. The overture seeks to further secure the political relationship as
well as allay ASEAN concerns over the China challenge in export markets and in attracting
foreign investment. Economically, China is eyeing the ASEAN region for both its market and its
raw materials, especially energy resources and minerals.
In turn, ASEAN governments readily welcomed the China initiative as a peace-seeking andfriendly offer from a rising power. China is a rapidly growing market for ASEAN products andservices (including tourism), and is serving as a new engine of growth to supplement thetraditional Japanese engine which has been considerably weakened by a decade-long Japaneseeconomic stagnation. Furthermore, ASEAN hopes to attract FDI to produce for the China market
and to attract Chinese FDI as well. The FTA will create a huge economic region of 1.7 billion
people, GDP of US$2 trillion and trade of US$1.2 trillion. A simulation study shows that the FTA
will increase ASEAN's exports to China by 48 per cent and China's exports to ASEAN by 55 per3cent.
At the same time, ASEAN countries are concerned over China's competitive strengths andadvantages, particularly competition in labour intensive products in domestic and third country
markets, and in competition for FDI. Hence the October 2003 ASEAN decision to improve
economic competitiveness, including accelerating the pace of ASEAN economic integration.
ASEAN-Japan Comprehensive Economic PartnershipJapan proposed an economic partnership agreement with ASEAN in January 2002, immediately
after the signing of the bilateral agreement with Singapore and soon after the initiation of theASEAN-China FTA. The Japan-Singapore Economic Partnership Agreement (JSEPA) wascompleted after only 14 months of negotiations, with the speed reflecting the strong political andeconomic ties as well as the economic complementarity of the two countries, particularly
Singapore's lack of an agricultural sector. JSEPA is dubbed a New Age Economic Partnership as
it covers not only liberalization of trade in goods, services and investment but also cooperation inareas such as information technology, science and technology, financial services, tourism, andhuman resource development.
In November 2002 ASEAN and Japan signed the Joint Declaration to develop the frameworkagreement and provide for separate bilateral partnership agreements. The Framework Agreement
for Comprehensive Economic Partnership between ASEAN and Japan was signed in October2003 with the following guiding principles. First, comprehensive coverage of countries andsectors. Second, special and differential treatment for ASEAN states, reflecting their lower
economic development levels, and greater flexibility for the CLMV countries. Third, flexibility
for the sensitive sectors of ASEAN and Japan. Fourth, early implementation of cooperation inareas which could provide more immediate benefits, such as technical assistance and capacity
building to ASEAN, especially for the CLMV countries; trade and investment promotion andfacilitation measures; trade and investment policy dialogue; business sector dialogue; measures tofacilitate the mobility of business people; exchange and compilation of relevant data such as
customs tariff and bilateral trade statistics; facilitation and cooperation programmes covering awide field. Negotiations on trade in goods and services and in investment are scheduled to begin in
2004 and implemented by 2012.
What motivates the Japanese overture and ASEAN's ready acceptance? Japan is concerned over
China's growing influence in Southeast Asia. A formalized relationship between Japan andASEAN will help consolidate Japan's trade and investment relations with Southeast Asia. Inaddition, a rejuvenated ASEAN would help Japan avoid putting all its investment eggs in theChina basket. For ASEAN, the Japanese initiative on top of the China initiative is a reassurance ofits central role in East Asia. ASEAN recognizes Japan as the second largest economy in the world
and its role as the regional engine of growth. For the less developed ASEAN economies, Japan isthe largest donor of technical and development assistance. But ASEAN is increasingly concernedover Japan's long drawn economic stagnation and the sharp decline in Japanese FDI and trade with
ASEAN in recent years. The CEP will anchor Japanese interests in Southeast Asia and balance
the rise of China. The Japan-ASEAN CEP is expected to expand ASEAN's trade to Japan by 44
per cent and Japan's trade to ASEAN by 28 per cent.
Japan's preference for a network of bilateral agreements under a general ASEAN-Japan
Framework Agreement is perceived both positively and negatively. On the positive side, it4
recognizes the difficulty of negotiating one comprehensive package and adopting a "onesize fits all" formula with a group of economically diverse economies. Bilateral agreements would
allow for flexible treatment of time frames and of sensitive sectors, including taking care ofJapan's sensitivity on agricultural trade liberalisation. On the negative side, the bilateral approach
could undermine ASEAN cohesiveness and negotiating leverage. It raises the issue of Japan"cherry picking". Japan has stated that the EPAs with other ASEAN countries would be modelledon the Japan-Singapore agreement. But some ASEAN countries would expect more opening ofthe Japanese agricultural market and would be reluctant to open up their financial services.
Bilateral discussions are ongoing with Malaysia, Philippines, Thailand and Vietnam.
ASEAN+3 and an Emerging East Asian Community
The ASEAN+3 regional initiative was driven by the need for monetary and financial cooperationin the wake of the Asian financial crisis. The grouping adopted the Chiang Mai Initiative with twocomponents, aimed at instilling regional financial stability and resilience. The first is a network ofbilateral swap and repurchase agreement facilities to assist beleaguered central banks facingliquidity crunches. This sends an important signal to the market, particularly in the absence of any
reforms in the international financial architecture. The second is a regional monitoring andsurveillance process to ensure that the macroeconomic and financial fundamentals and policies ofmember countries do not fall into the danger zone that could signal another currency attack. The
momentum for monetary and financial cooperation has also led to a revival of the Asian monetaryfund proposal and even proposals for a common currency. Also, there have been ministerial
meetings not only on finance, but also economics and trade, labour, agriculture and forestry,tourism, energy, and environment.
The ASEAN+3 process has spawned ideas for an eventual East Asian FTA or East Asiancommunity. The South Korean proposal at the November 1998 Summit was followed by two
studies to determine the forms and time-frames. The Final Report of the East Asia Study Group(EASG) identified the short, medium, and long-term measures to push forward East Asian
co-operation. The short-term measures include formation of an East Asia Forum, an East AsiaBusiness Council, and a network of East Asian eminent intellectuals, and the promotion of East
Asian studies. The medium and long-term measures include an East Asia Summit and an East
Asia FTA. It proposed that the East Asia Summit evolve from the ASEAN+3 process, so as toaddress ASEAN concerns that it may be marginalized if the pace is too fast, as well as the need tonurture a greater sense of ownership among the Northeast Asian countries. Economic ministers
have been tasked to study and formulate options on the gradual formation of an East Asia FTA.
Realization of an East Asian FTA or Community faces several political and economic challenges.
First, politically there is as yet no common political vision for East Asia, as is the case with thefounding members of the European Union. Countries have to be convinced that there is a common
destiny and that the political and economic gains of "being together" outweigh the pull of nationalsovereignty. Many countries would not wish to surrender the degree of national sovereignty
necessary for the creation of common institutions and common rules and disciplines. The
historical baggage of mistrust still exists, particularly between China and Japan. Confidencebuilding and community building are long processes. And for countries that see a continuing
strong need for the US security umbrella, there would be hesitation in forming an East Asian blocthat undermines relations with the US.
Second, the wide differences in development levels and economic competencies pose obstacles to5
free intra-regional movement of goods, services, investments, capital and people. Countries
would want to open up at different paces and exclude different sensitive sectors. Economic
diversity, however, should not be an insurmountable obstacle, as such diversity makes for
economic complementarity and provide opportunities for all. More importantly, not all perceive
an East Asian FTA or community as absolutely necessary for national economic growth andprosperity, notwithstanding the growing intra-regional economic ties. There are still strong
linkages to North America, Europe and Australia-New Zealand for trade, investments, finance andtechnology.
Given its growing weight in regional economics and politics, China will have to play a pivotal rolein the emergence of an East Asian FTA or Community. However, Chinese hegemony could cause
unease among its smaller and lesser neighbours. Instead, a stable East Asian bloc should rest on
three foundations, namely that of China, Japan and ASEAN.
One challenge is that East Asian economic integration should not splinter the world into three
antagonistic economic blocs and undermine the multilateral trading system embedded in the WTO.
Hence it is healthy that strong inter-regional links be maintained and developed. It is also
necessary that East Asian economies maintain a strong commitment to the WTO process.

Regional and Bilateral Trading Arrangements in East AsiaREGIONAL
AFTA, AFAS, AIA
AFTA-CER Closer Economic Partnership (noFTA)ASEAN-China Comprehensive Economic
Cooperation (with FTA)ASEAN-Japan Comprehensive EconomicPartnership (with bilateral FTAs)

Membership

StatusASEAN-10
ASEAN-10 , Australia-New Zealand

Implemented
Ministerial Declaration
September 2002
Framework Agreement
signed in November 2002,
Framework Agreement
signed in October 2003;
JSEPA implemented; otherbilaterals under official
discussion
Framework Agreement
signed in October 2003;
negotiations begin in January
2004.
Official discussions ongoing

ASEAN-10, China
ASEAN-10, Japan

ASEAN-India Comprehensive Economic
Cooperation (with FTA)ASEAN-10, India

ASEAN-South Korea Comprehensive
Economic Partnership (with FTA)ASEAN-US Enterprise for ASEAN Initiative(with FTA)ASEAN+3 (monetary and financialcooperation)
East Asia FTA

ASEAN-10, South Korea

China-Japan-Korea FTA
BILATERAL
China bilaterals
Hong Kong bilaterals
Japan bilaterals

South Korea bilaterals
Malaysia bilaterals
Philippines bilaterals

ASEAN-10, China, Japan, South
Korea
ASEAN-10, China, Japan, South
Korea
China, Japan, South Korea

Implemented Chiang Mai
Initiative
East Asia Vision Group
Report completed; officialdiscussions ongoing
Under consideration

with Hong Kong, South Korea
Official discussions ongoingwith China, New Zealand
Official discussions ongoingwith Canada, Chile, Mexico, Malaysia, Only Japan-Singapore
Singapore, Thailand
implemented; others official
discussions ongoingwith Australia, China, Chile, Japan,
None implemented yet;
Mexico, New Zealand, US
official discussions ongoingwith Japan, US
Official discussions ongoingwith US
Official discussions ongoing

Singapore's bilaterals

with Australia, Canada, EFTA, India, Bilaterals with Australia,Japan, Jordan, Mexico, New Zealand, EFTA, Japanand New
Sri Lanka, South Korea, US
Zealand implemented; others
under official discussion

Thailand's bilaterals

with Australia, Bahrain, Chile, China, None implemented yet;
Croatia, Czech Republic, India, Japan, official discussions ongoing
Mexico, New Zealand, Peru, South
Africa, South Korea, US