2008-E-15
An Economic Analysis of Competitive Regionalism in East Asia
Shujiro Urata
Waseda University

September 2008

Presented at the Symposium on “Competitive Regionalism: Strategic Dynamics of FTA
negotiations in East Asia and Beyond” at Waseda University, Tokyo, Japan, May 30-31,
2008. The author is grateful to Professors Saori Katada, Mireya Solis, Masahiro Kawai,
and other participants of the symposium for very helpful comments.

I. Introduction
In the 21st century, East Asia has finally caught up with the frenzy of free trade
agreements (FTA). Although East Asia was not active in the formation of FTAs untilvery recently, the rest of the world had begun to actively look at FTAs as a means ofpromoting trade liberalization since the early 1990s, when multilateral tradenegotiations under the GATT (the General Agreement on Tariffs and Trade) weremaking little progress. Interest in FTAs increased even after the establishment of theWTO (World Trade Organization) in 1995, which succeeded the GATT with a broader
coverage and stronger legal foundation, especially after the new multilateral tradenegotiations (the Doha Development Agenda, DDA) under the WTO entered into thedeadlock. Indeed, the cumulative number of FTAs reported to the GATT/WTO since1949 increased from 86 in 1990 to 165 in 1995, to 251 in 2000, and further to 404 as ofAugust 10, 2008.1
In East Asia, the AFTA (ASEAN Free Trade Area) covering ASEAN countries
was enacted in 1993 but this was the only major FTA in East Asia until theJapan-Singapore FTA was enacted in 2002. East Asian countries began discussing
FTAs toward the end of the 1990s, and they have become very active in establishing
FTAs in the 21st century as if they are competing with each other.
In light of the rapid expansion of competitive FTAs in East Asia, this chapter
analyzes how economic competition leads to FTA proliferation in the region.
Specifically, the chapter examines the factors that have led to the proliferation of FTAs
in East Asia and their economic impacts. The analysis finds that competition among
East Asian countries especially between China and Japan for obtaining market accessin East Asian countries and for gaining a leadership role in East Asian integration has
been a crucial factor leading to the proliferation of FTAs in the region. Specifically,
East Asian countries hurriedly entered into FTA negotiations with other East Asian
countries because of the concern about the negative effects of FTA exclusion.
Empirical analyses have found that FTAs have promoted trade between and among
FTA members in many FTAs, while they have found that the negative impacts arisen
from being excluded from FTAs are rather limited.
The structure of the chapter is as follows. Section II examines the impacts and
1

The figure includes those FTAs which became inactive as well as those active. The
figures are taken from the WTO’s website on August 27, 2008.
http://www.wto.org/english/tratop_e/region_e/summary_e.xls
1determinants of the formation of FTAs mainly from a theoretical aspect. Section III
examines empirically the changing patterns of trade and foreign direct investment(FDI) in East Asia by focusing on their intra-regional relationship. This section also
summarizes trade liberalization experiences up to the end of 1990s, which contributed
to increasing trade and FDI in East Asia. Section IV examines the developments of
FTAs in East Asia, as an FTA became an important trade policy tool for East Asian
countries. This section also empirically evaluates the quality of FTAs and the impactsof FTAs. Section V presents some concluding comments.
II. Economic Analyses of FTAs
Contrary to the most-favored nation principle of the WTO, the essence of FTAs isthe exchange of trade preferences that are not made available to third parties.
Preferential liberalization, therefore, creates new incentives for private sector lobbies
and governments to achieve competitive goals through these agreements. These
objectives include the desire to gain preferential access to a main market ofdestination; to counter the trade and discrimination effects from existing FTAs; and toleverage tariff concessions in one FTA negotiation into more substantial gains insubsequent trade talks. These are some of the economic motivations behind theformation of FTAs.
This section reviews the economic literature on FTAs. Specifically, I first review
the studies that analyzed the impacts of FTAs with an observation that a government
forms an FTA if the perceived net benefit (benefits-costs) of an FTA outweighs thecosts. The theories reviewed here are rather basic, but it is important to grasp them wellin order to understand actual developments. Then I turn to economic studies whichanalyzed explicitly the factors leading to the formation of FTAs. These studies, which
incorporate explicitly government behavior, are rather new but have shed light on thefactors determining the formation of FTAs.
II.1 Economic Impacts of FTAs
One can classify the economic impacts of FTAs into two groups: static effects anddynamic effects.2 Static effects are “trade creation effects,” “trade diversion effects”
2

The analysis here is intended to give concise explanation of the major points andtherefore lacks theoretical rigor. For a detailed analysis of the economic impacts of
RTAs, that is customs unions and FTAs, see, for example, Baldwin and Venables
2and “terms of trade effects,” while the dynamic effects include “market expansion
effects” and “competition promotion effects.”“Trade creation effects” result from the elimination of trade barriers among FTA
members and, therefore, the new trade created among them, resulting in an
improvement in resource allocation. “Trade diversion effects” address the ways that
FTAs replace highly efficient products of non-member countries by imports from lessefficient FTA members. In general and from the viewpoint of FTA members, “tradecreation effects” have positive impacts while the impacts of “trade diversion effects”
are ambiguous. Despite ambiguity of the impacts of FTAs on FTA members, one canderive several important policy implications from the analysis of trade creation andtrade diversion. To reduce the negative impacts caused by trade diversion, tariffs on
non-members or MFN tariff rates should be low. To maximize the scope for tradecreation, a country should form an FTA with a highly productive country. Having
pointed out the ambiguity of the impacts of FTAs, it has been proven theoretically thatany FTAs can be welfare-improving if they are properly formulated.3
The analysis of trade creation and trade diversion effects above can be applied toa small country, which does not have any influence on international prices or the termsof trade. As such, the terms of trade effect of FTAs is not considered in the above
analysis. For a large country or a large FTA group consisting of FTA member countries,
the formation of an FTA enables a large country or a large FTA group to gain as it
improves its terms of trade by expanding trade between FTA members at the expenseof its trade with non-members.
Beyond the economic impacts of FTAs on their members, it is important torecognize that the static impacts of FTAs on non-FTA members are negative. Non-FTA
members suffer from welfare loss because trade diversion effects reduce the level of
their exports to FTA members and because the terms of trade effect would reduce
non-members’ welfare as the terms of trade for non-FTA members deteriorate. Indeed,
as we will discuss below, the emergence of negative impacts of FTAs for non-FTA
members leads to competitive FTAs and the proliferation of free trade agreements, as(1995).
More accurately, this point is proven for the case of customs union (CU), where themembers share common external tariff while they remove tariffs on intra-CU trade.
This is known as the “Mead-Ohyama-Kemp-Wan theorem”. See, Baldwin and
Venables (1995) and Bhagwati, Greenaway and Panagariya (1998).
3

3

non-FTA members try to cope with the negative impacts by creating new FTAs or
joining existing FTAs.
As for the dynamic effects of FTAs, both market expansion effects andcompetition promotion effects contribute to economic growth of FTA members.
“Market expansion effects” involves expanded market size needed to achieve efficient
production/distribution and economies of scale. “Competition promotion effects” result
from market integration in ways that would make regionally oligopolistic industries
more competitive thus achieving higher productivity through the introduction ofcompetitive pressures. For non-FTA members these effects are likely to have positive
impacts as economic growth of FTA members tends to promote the exports ofnon-members to the members.
There are two important issues, which arise as a result of the proliferation of FTAs,
that I will discuss before turning to empirical investigation. One is the “spaghetti bowl
effect” and the other is “hub and spoke” FTA system. The “spaghetti bowl effect,”coined by Bhagwati (1995), refers to a situation where numerous and crisscrossing
FTAs with different rules of origin (ROOs) increases transaction costs and facilitates
protectionism, thereby reducing the welfare of both FTA members and non-members.
ROOs play a key role in determining the impacts of FTAs on foreign trade, since FTAs
give preference to the products produced in FTA partner members and the nationalityof the products are determined by ROOs. Although the spaghetti bowl effect (in East
Asia, some observers call it the “noodle bowl” effect) attracted a lot of attention ofresearchers and policy makers, its negative impacts may be exaggerated because the“spaghetti bowl” effect may not increase trade cost from the pre-FTA level and thus it
does affect trade. In other words, trade can increase if preferential treatment is applied
under an FTA, while trade remains the same if preferential treatment is not applied
because the product in question does not qualify as local product without passing the
ROO test.
Thus, the cost of the “spaghetti bowl effect” due to different ROOs applied indifferent FTAs could be overstated. It is important, however, to point out that ROOs
have become an important tool for protectionists to restrict trade. Under an FTA treaty,
products qualified as local products by passing ROO test can be exported to an FTA
partner country without facing import tariff. Under such situation, the FTA partnerinterested in protection adopts very stringent definition of ROOs, in order to restrict
imports. Indeed, in many FTAs countries have established very complicated and4restrictive ROOs.
A hub and spoke FTA system has emerged in many parts of the world. In East
Asia, for example, Singapore has become a hub with many bilateral FTAs involving
spoke countries. ASEAN is likely to become a hub-region, when it forms “bilateral”
FTAs with various spoke countries including China, Korea, Japan and possibly India,
Australia, and New Zealand. The benefits to the hub country are likely to be greaterthan benefits to the spoke countries, because a hub country is able to reduce thenegative impacts of trade diversion while spoke countries cannot do so. To understandwhy, one should keep in mind that unilateral trade liberalization, which is essentially
identical to having FTAs with all the countries, does not give rise to the trade diversion
effect. For a spoke country, the welfare implications depend on whether the exports of
the new spoke are complements or substitutes to those of old members. If they aresubstitutes, existing spoke countries may be harmed by an erosion of their degree ofpreference in the hub market. If they are complements, the initial members tend to
gain. 4 Therefore, the hub-and-spoke dynamics create incentives for countries tobecome an FTA hub to ensure positive gains.
In addition to its impacts on trade, an FTA also affects other foreign economic
activities such as foreign direct investment. As the FTA eliminates regional tradebarriers and expands market size, foreign direct investment is likely to flow into theregional market in the expectation of selling more products. This is FTA’s investment
creation effect. Investment may also be undertaken in member countries at the expenseof investment in non-member countries because of increased attractiveness of member
countries for investment. This is FTA’s investment diversion effect. These observations
indicate that FTAs would promote economic growth of FTA members by enablingthem to attract FDI, which would bring the members various factors needed to achieve
economic growth such as funds for fixed investment, technology, and management
know-how. The Spaghetti bowl effect due mainly to complicated ROO systems would
affect investment negatively as they would distort investment decision of the firms
which face difficulty in meeting ROO requirements.
II.2 Determinants of the Formation of FTAs
The findings from the studies above on the expected impacts of FTAs highlight4

Baldwin and Venables (1995).
5the factors determining the formation of these trade agreements. More specifically, an
FTA is formed if the government believes the benefits of the FTA exceed its costs.
According to the theories/models analyzed above, the benefits of an FTA arise from thetrade creation effect, terms of trade effect, market expansion effect or economies ofscale effect, and competition promotion effect; while the costs emerge from the trade
diversion effect.5 As discussed, many of those impacts are not determined a priori, but
are influenced by FTA partner selection.

Thus, it is imperative to examine thecharacteristics or relationships of potential FTA partners. Although rigorous theoreticalinvestigations are lacking, several conditions for beneficial FTAs have been discussed
from the static point of view, which include broad membership, high pre-FTA tariffs,
low pre-FTA external tariffs and substantial overlap between FTA partners’ production
bundles.6
In general, however, the trade diversion effect motivates an excluded country
form a new FTA in order to avoid reduced export opportunities as it is discriminatedagainst by FTA members in their markets. Indeed, overcoming the trade diversion
effect is very important factor behind the proliferation of competitive FTAs.. The termsof trade effect is another factor leading to the formation of FTAs. Small countries
attempt to increase their welfare levels by becoming ‘large’ as they eliminate
cross-border trade barriers through FTA formation.7 The incentive is that a “large”
country can exploit the benefit in the form of terms of trade improvement.
Very few empirical studies on the formation of FTAs have been conducted. Oneof them is by Baier and Bergstand (2004), which examines the economic factors
affecting the formation of FTAs for 54 countries. They find that the probability of theformation of an FTA increases when two countries are in close geographical proximity,
both relatively large and similar in economic size. They also confirmed that thelikelihood of a FTA between a pair of countries is higher if one or some of thefollowing conditions are met: the more remote a pair from the rest of the world, thegreater the difference in capital-labor endowment ratios between two countries due tothe gains from traditional comparative advantage, and the less the difference incapital-labor endowments ratios of the member countries relative to that of the rest of5

Milner (1997) argues the scale effect is important for the firms.
Winters (1991).
7
See, for example, Riezman (1985) and Kennan and Riezman (1990) for the analysisof the terms of trade effect.
66

the world due to less inter-industry trade diversion.8
One of the problems of the theories/models discussed in the previous section for
the analysis of the determinants of FTA formation is the exclusion of policy variables
such as the presence of other FTAs in the discussions. Accordingly, the analysis
neglected the political and strategic interaction of the governments in the formation of
FTAs.
Dealing with the problem, recent models take into account of government
behavior explicitly. For instance, Grossman and Helpman (1995) assume thatgovernments respond to political pressures from industry special interests but also pay
some attention to the effect on the average voter. Using this framework, they show thatthe government endorses an FTA in two types of situations. One is when the FTA
would generate substantial welfare gains for the average voter and adversely affectedinterest groups fail to coordinate their efforts to defeat the FTA. The other is when an
FTA would create profits for actual or potential exporters in excess of the losses thatwould be suffered by import-competing industries, plus the political cost of any
welfare loss that might be inflicted on the average voter. They also show that theformation of an FTA is likely when there is a relative balance in the potential trade
between the FTA partners. Furthermore, they show that the prospects for an FTA
agreement improve, if some industries can be excluded from the agreement.
Indeed, several studies found that many FTAs in East Asia excluded sensitive
sectors. Ravenhill’s (2005) survey of Asia-Pacific early FTA initiatives leads him toconclude that these governments are lured by the goal of achieving “liberalization
without political pain.” Industrialized nations seem increasingly interested in bilateral
FTAs with small trade partners because they can offer economic rents to specificproducers through preferential treatment; while keeping off limits the most sensitive
sectors (Pekkanen, Solís, and Katada, 2007). This combination of targeted rents forexporters and investors with exclusions for import-competing sectors provides a
powerful impetus in the FTA race.
Endoh (2005) extends the analysis of Grossman and Helpman by incorporating
Cournot type monopolistic competition and introducing tariff revenue increases as oneof the government objectives. In addition, he considers that the quality of government-defined as the extent of its acceptance of requests from the industry- affects FTA
8“Trade diversion” will be discussed in the next section.
7

decisions. According to Endoh, an FTA is likely to be formed between the twocountries under the following conditions: large countries of similar sizes, with highquality governments, and in geographical proximity. Finally, he demonstrates that the
incentive for a country to form an FTA increases with the number of FTAs it hasestablished. The reasoning behind this observation is as follows. A new FTA gives
benefits to exporters as they expand their exports in the FTA partner’s market, and soexporters desire new FTAs. FTAs incur losses to domestic producers as competition
from imports increases. Under the model framework, one can show that the additional
cost to domestic producers declines with the number of FTAs weakening the
opposition to subsequent FTAs. Combining these two effects, one finds that additional
net gain (benefits-costs) for a new FTA increases. This finding may be interpreted as
the “domino effect” discussed by Baldwin (1995). Endoh’s empirical analysis of 118
countries for the year 2002 confirmed all the expected relationships discussed above. It
is particularly noteworthy that Endoh corroborates that the greater the number of FTAs
established by a country in question, the more likely it is for that country to haveanother FTA.
Having laid out the main theoretical findings on determinants and impacts of
FTAs, I turn to the empirical analysis by examining first the situation in East Asia
before the FTA wave and the subsequent pattern of FTA proliferation in the region.
III. East Asia Prior to the FTA Race
East Asia experienced substantial changes in the patterns of foreign trade andforeign

directinvestment

(FDI)

in

recentdecades. 9

One

is

increasedintra-regionalization in foreign trade. Another is increased share of machinery,especially electronic machinery, in foreign trade and FDI. The third distinguishable
pattern is increased role of multinational corporations (MNCs) in international trade,intensifying the linkage between FDI and foreign trade. These observed patterns
appear to reflect the formation of regional production networks by MNCs. Thesechanges in international trade and FDI in East Asia are mainly promoted by trade and
FDI liberalization policies pursued by East Asian countries.

9

East Asia in this paper 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).
8

III.1 Changing Patterns of Foreign Trade and Foreign Direct Investment in EastAsia
A rapid increase in intraregional trade in East Asia is clearly discernable in Table
1.10 Intra-regional trade in East Asia increased 2.19 times in ten years from 1995 to2005, while world trade expanded only twofold. 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’s
intraregional trade is significantly larger than NAFTA’s intraregional trade, but
substantially smaller than the EU’s. In 2005, the shares of intraregional trade in world
trade for the NAFTA and the EU are 7.7 and 25.4 percent in 2005, respectively.
During the 1995-2005 period East Asia’s intraregional trade grew faster than its
overall trade, as its exports and imports increased 2.08 and 2.03 times, respectively. As
a result of rapid expansion of intra-regional trade in East Asia, 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 importance of intraregional trade
for the region’s trade in East Asia is greater compared to the NAFTA (55.1 percent forexports 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).
The changes in intra-regional trade in East Asia from 1995 to 2005 are quite
striking, In particular the increased importance of China and shrinking importance ofJapan. The shares of China and Japan in East Asia’s exports changed from 7.4 and 8.5
percent in 1995 to 14.1 and 7.4 percent in 2005, respectively, while those for East
Asia’s imports changed from 7.2 and 13.4 percent to 16.1 and 11.9 percent,respectively. These changes in the positions of China and Japan in East Asia’s trade arelargely attributed to the differences in economic growth rates of China and Japan11.
East Asian countries became more important trading partners for most East Asian
countries from 1995 to 2005, as the shares of East Asia in their trade increased.
However, it was not the case for China, for which the shares of East Asia in its exports
and imports declined. Although the importance of overall East Asia in China’s trade10

Many studies have identified the rapid expansion of intra-regional trade in East Asia
See, for example, Ng and Yeats (2003), and Urata (2001, 2005a)
11
The average annual GDP growth rates of China and Japan for the 1995-2005 period
are 9.1 and 1.2 percent, respectively. (Computed from the data obtained from theWorld Bank’s World Development Indicators 2007, CD-ROM.)9has declined, the share of ASEAN in China’s trade increased reflecting substantial
growth in China-ASEAN trade albeit from a low base. In addition, the importance of
the NIES4 for China and ASEAN4 in their trade is crucial. 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 Kong and Singapore as entrepôts.
Intra-ASEAN4 trade has also increased noticeably, as reflected in the increased sharesof such trade in ASEAN4’s trade. The ASEAN Free Trade Area (AFTA) certainly
fostered such increase, as trade barriers on intra-ASEAN trade were removed. Finally,
though Japan was surpassed by China in terms of the importance as a trading partner
for East Asian economies during the 1995-2005 period, for ASEAN4, unlike the casefor the NIES4, Japan still has a larger, though rapidly shrinking, trade share thanChina.
The changing importance of East Asian countries as trading partners for other
East Asian countries has significant implications for foreign economic policies in areas
such as trade, FDI and economic assistance, as will be discussed below.
The rapid expansion of foreign trade by East Asian countries was accompanied bysubstantial changes in commodity compositions from 1990-94 to 2000-04 (Table 2).
The changes are especially notable for exports, among which manufactured goods andin particular machinery increased remarkably. Among machinery, exports of electronicand electrical machinery grew particularly fast for ASEAN4, NIES4 and China.
Exports of automobiles and auto parts account for much smaller share in the exports
for the NIES4, ASEAN4 and China, compared to electronic and electrical machinery.
Among other manufactured exports, textiles and garment either grew relatively slowly
or experienced a decline in their share in total exports for East Asian developing
economies, although their share is still high for China and the NIES4.
Turning to the import composition of East Asian countries, one finds relatively
small changes, when compared to the case for exports. The share of manufactures
remained around 70-80 percent throughout the period for East Asian developing
countries. Similar to the changes observed for exports, imports of machinery, inparticular electronic and electrical machinery, increased their shares in total imports inmany East Asian countries.
The increasing share of machinery products, especially electronic and electricalmachinery, in both exports and imports for East Asian countries indicates increasing
importance of intra-industry trade. Indeed, various studies including Fukao et.al (2003)10

have found an increasing share of intra-industry trade rather than one-way trade for
intra-regional trade dynamics in East Asia. They have also found that a large part of
intra-industry trade in East Asia can be characterized as vertical intra-industry trade,under which parts and components with different quality and characteristics areactively traded.12
The importance of parts in intra-East Asian trade was found by a comparison withtrade with the US and the EU. Urata (2006) found that East Asia’s exports have lower(higher) share of parts (finished products) in its trade with the US and the EUcompared with its trade with East Asia. These trade patterns reflect the regional
production network, under which parts are traded in East Asia for the assembling of thefinished products, which in turn are exported to the US and the EU. Such trade pattern
has been described as “triangular” trade, reflecting that East Asia has become a factory
for the world. A closer examination of international trade patterns at disaggregatedcountry levels in East Asia reveals that China has become an increasingly important
country for the location of assembling finished products.
Foreign direct investment inflows to East Asia have increased rapidly since themid-1980s, and they have exhibited several notable characteristics with implications
on trade patterns in East Asia. First, the source of FTA inflows to East Asia extends
beyond the region, and unlike the case of international trade, no particular increase in
intra-regional orientation was observed (Table 3). Out of eight countries, for which thedata on the sources of FDI inflows are available, only three countries, Indonesia,
Thailand, and Korea, saw the increase in the share of East Asia as a source of FDI
inflows. Unlike the pattern observed for international trade, where intra-regional tradeaccounted for approximately 40-60 percent of total trade for all the East Asian
economies, dependence on intra-regional FDI varies widely.
Second, somewhat similar to the pattern found for international trade, themachinery sector, especially electrical and electronic sector, received substantial FDI
in many East Asian countries (Table 4), suggesting close relationship between FDI andinternational trade.

12

The other type of intra-industry trade is characterized as horizontal intra-industry
trade, where products of similar characteristics in quality and price but with different
design and other characteristics are traded. Such trade may occur between the countries
with similar income levels, where consumers have similar taste but they also havedemand for variety.
11Multinational corporations (MNCs), major suppliers of FDI, have had huge
impacts on East Asian economies through various forms including generatingproduction, fixed investment and employment. Among those activities, their impacts
on foreign trade are substantial.13 For example, the share of MNCs’ exports in China’s
overall exports increased from 29 percent in 1994 to 55 percent in 2003, while thecorresponding share for the imports increased from 46 to 56 percent.14 Althoughsimilar information for many other East Asian countries is not available, thecontributions of MNCs for many East Asian countries’ trade appear substantial,
indicating their elevated position in East Asia and their well-developed regional andglobal trading networks. In light of these observations, it is useful to investigate thetrading patterns of MNCs in East Asia, in order to deepen our understanding of thechanging trade patterns in East Asia. Due to the limited availability of necessary
information, I focus the examination on the patterns of trade by Japanese MNCs as anillustration.
An examination of the patterns of trade for the Asian affiliates of Japanese MNCs
reveals several interesting patterns. First, Asian affiliates of Japanese MNCs havestrong trade orientation, when compared to the affiliates in other parts of the world.15
In 2004, the share of exports in total sales for the Asian affiliates in the manufacturingsector is 51 percent, significantly higher than 14 percent for the affiliates in North
America. Among different sectors, trade orientation is particularly strong for themachinery sectors with the highest orientation registered by the electrical andelectronic sector. Transportation machinery exhibits quite a contrasting pattern in that alarge share of sales as well as procurement involves transactions in the local market.
Low trade orientation found in the transportation machinery stems from several factors.
One important reason is import protection policies applied to the transportation
machinery sector, the industry which many countries are eager to develop.
Second, intra-Asia trade dominates trade by Asian affiliates of Japanese MNCs,
reflecting strong regional orientation of Japanese MNC strategy, which in turn
indicates that Japanese MNCs have contributed to the regionalization of foreign tradein East Asia. Intra-regional orientation is particularly strong for the procurements of13

On the impacts of FDI on trade, see, for example, Urata (2001), Kawai and Urata(1998, 2004), and Urata et. al (2006).
14
China’s Statistical Yearbook, various years.
15
See Urata (2006) for more detailed information.
12the Asian affiliates, as more than 95 percent of their imports come from other Asian
countries. Among the Asian countries, Japan is by far the most important trading
partner for the Asian affiliates of Japanese MNCs. In this way, the Asian affiliates ofJapanese MNCs have engaged in regional production network with China, ASEAN4,and NIES4, as their shares in Asian affiliates’ imports are substantial.
Third, a large portion of trade conducted by Asian affiliates of Japanese firms takethe form of intra-firm trade, trade which takes place between MNC’s parent firm inJapan and its affiliates in Asia or between overseas affiliates. For manufacturing as awhole, in 2001 more than 70 percent of Asian affiliates’ exports are destined to theiraffiliated firms regardless of destinations.16 Coupled with the observation that a large
share of international trade by Japanese MNCs’ parent offices is destined to theiroverseas affiliates, our findings on Japanese MNCs’ trade and intra-firm trade in Asia
appear to indicate that Japanese MNCs have developed their own production anddistribution network in Asia. Furthermore, our findings about a high share of intra-firmtrade in Japanese MNCs’ trade underscore the closed nature of production anddistribution network developed by Japanese MNCs.
In sum, this section has revealed the emergence of regional production network inelectronic and electric machinery in East Asia. Such regional production networks havebeen created mainly by MNCs from Japan, Korea, Taiwan, the US, and the EU, as they
break up the production process into various sub-processes and locate each process in acountry where the sub-process is conducted most efficiently. This kind of
fragmentation strategy has been adopted by MNCs, as they take advantage ofsubstantial diversity in the level of economic development and wages among the East
Asian countries.
III.2 Changing Trade Policies in East Asia
The rapid expansion of foreign trade and FDI inflows in East Asia discussed
above can be attributed to many factors such as a buoyant world economy.
Nevertheless, one of the most important factors is trade and FDI liberalization pursued
by East Asian countries. Liberalization of trade and FDI regimes led to the expansionof exports and inward FDI because it shifted the incentives from import-substituting
production to export production, and increased the attractiveness of these countries to
16

In the METI survey information on intra-firm is collected every three years. The
most recent data are available for 2001 in the 34th survey.
13foreign MNCs. Foreign trade and FDI policies in East Asia have undergone dramaticchanges in the last two decades.17
In the 1980s and 1990s, East Asian countries embarked on unilateral liberalizationof trade and FDI policies and deregulation in domestic economic activities as part ofmore comprehensive structural reform policies. It is true that such policy changes werepartly induced by their commitments to the World Bank and the IMF for obtaining
economic assistance, but it came largely from the realization on the part of East Asian
governments that liberalization and deregulation would promote economic growth.18
East Asian countries unilaterally liberalized their import regimes by lowering
tariff rates and non-tariff barriers from the early 1980s through the early 2000s. As
shown in Table 5, many East Asian countries reduced their tariff rates from the late1980s to early 2000s. In spite of substantial reduction in tariff rates, some countries
such as Korea and Thailand still maintain relatively high tariff rates. It should be notedthat for many countries the primary sector is relatively more protected than the
manufacturing sector.
Those governments also started to liberalize policies toward FDI inflows in the
mid-1980s, largely because they realized that FDI inflows would promote economic
growth. It is difficult to quantify the restrictiveness of an FDI regime, but it is clear thatmany East Asian economies have reduced restrictions on market access and rights ofestablishment by diminishing the number of sectors and industries on the negative list,
and have relaxed the limits on foreign equity ownership through expanding
most-favored-nation treatment and national treatment. 19 In addition, a number of
economies introduced incentives such as tax breaks to attract FDI.
Liberalization of trade and FDI also progressed in regional contexts in the 1990s.
The members of the ASEAN launched the ASEAN Free Trade Area (AFTA) process in1992 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
17

This section expands Urata (2005a)
See, for example, the World Bank (1993) on this point in its assessment of trade
policies during the 1980s. The World Bank (2000) notes that the determination to
pursue trade liberalization by policy makers in East Asian countries can be confirmedby their unwillingness to retreat into protectionism in response to the crisis.
19
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.
18

14

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 has been in effect among 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 is long and individual country circumstances vary. Vietnam is to comply with thesame 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, except for the
CLMV members which are given later deadlines. FDI liberalization has been
underway after the creation of the ASEAN Investment Area (AIA) in 1998, which
provides coordinated investment cooperation and facilitation programs, market access,and national treatment of all industries. But some ASEAN members continue tomaintain sizeable sensitive and exclusion lists from FDI liberalization.
The Asia-Pacific Economic Cooperation (APEC) forum is another regionalframework that promoted trade and FDI liberalization in East Asia. This trans-regional
forum, which was established to promote economic growth in the region, includes not
only East Asian economies but also economies in North and South America andOceania. Following the Bogor declaration in 1994 calling for full liberalization of trade
and

FDI

by

2010

for

developed-economy

members

and

by

2020

for

developing-economy members, APEC members agreed to prepare and implement
individual action plans (IAPs) specifying near- and medium-term liberalization
measures. Because voluntarism is the basic principle of APEC in implementing policy
measures such as trade and FDI liberalization, peer pressure is to play a crucial role in
the implementation of liberalization schemes. All APEC members have madesignificant progress toward freer trade and FDI regimes. APEC lost its vigor in the late
1990s because it could not help the crisis-affected members. However, APEC regained
its attention in 2006, when the United States proposed a Free Trade Area of the
Asia-Pacific (FTAAP), which will be discussed below.
In short, East Asian economies have undertaken trade and FDI liberalization
policies, which contributed to the rapid expansion of trade and FDI as well as theformation of regional production networks by MNCs. There still remain, however,various obstacles in foreign trade and FDI. As will be discussed in the next section, oneof the factors that have led to the recent surge of free trade agreements (FTAs) in East
Asia is the desire for East Asian countries to overcome high protection barriers to15

expand business opportunities.
IV. FTA Proliferation in East Asia
IV.1. Rapidly Emerging Bilateral and Regional Frameworks in the 21st Century
East Asia was not active in the formation of regional trade agreements (RTAs),
which include FTA and customs union, until recently.20 Indeed, ASEAN Free Trade
Area (AFTA) was the only major FTA until Japan and Singapore enacted Japan–Singapore FTA (formally named a New Age Japan-Singapore Economic Partnership
Agreement, JSEPA) in 2002.21 However, the situation changed dramatically in recent
years. Many countries in East Asia began to form FTAs with the countries not only inthe region but also outside the region.
Besides AFTA, ASEAN as a group as well as its members individually havebecome active in FTA negotiations with other countries in recent years. One of theFTAs involving ASEAN that has received most attention recently is that with China.
ASEAN and China enacted FTA in goods trade in July 2005 and they are currently
negotiating an FTA in services trade. ASEAN enacted an FTA with Korea with the
exception of Thailand, which did not reach an agreement because of the exclusion ofrice, a commodity of Thai’s strong interest, from the FTA agenda. ASEAN reached anagreement with Japan and it is currently negotiating FTAs with India, Australia-New
Zealand. Several 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 began negotiations with many countries. Thailand
has also become active in establishing FTAs, as it has implemented FTA with Australia,
New Zealand, and Japan, and it is currently negotiating FTAs with several countries.
Malaysia enacted an FTA with Japan and it began FTA negotiations with several
economies including the US. Both the Philippines and Indonesia signed FTA withJapan separately.
Compared to ASEAN countries in Southeast Asia, the economies of Northeast
Asia including China, Japan, Korea, and Taiwan had not been active in FTA
negotiation . Recently, however, China, Japan and Korea have been very proactive in
20

For the list of FTAs in East Asia, see a table in the framework chapter.
AFTA was discussed in an earlier section. For discussions on FTAs in East Asia, seefor example, Aggarwal and Urata (2006), Urata (2005b), and Pangestu and Gooptu(2004), Soesastro (2006) and Sally (2006).
21

16

their FTA policies. China implemented an FTA with ASEAN, Hong Kong, Macau, and
it is negotiating FTAs with over 20 countries. Japan enacted FTA with Singapore,
Mexico, Malaysia, Chile and Thailand. It has signed an agreement with Brunei, thePhilippines, Indonesia and ASEAN, and it is currently in negotiations with Australia,
India, GCC, Korea and others. Korea implemented FTAs with Chile, Singapore and
ASEAN and has reached an agreement with the US. Korea is actively pursing FTA
policies, as it is currently in FTA negotiations with several countries including the EU,
Canada, India, and Mexico.
An idea of an FTA covering East Asian countries has also emerged. 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 the long term vision foreconomic cooperation. The group has presented the leaders 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 its
recommendations to the Economic Ministers in 2006 to start the process in 2007
toward establishment of an East Asia FTA. The recommendations by the Expert Group,
however, were not adopted and the Expert Group was asked to conduct further study.
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). ASEAN+3+3 are also the members of the East
Asian Summit. Recognizing the rivalry between Japan and China as will be discussed
below, it is very likely that behind the CEPEA idea lies Japan’s strategy of taking aleadership role in setting up regional institutions in East Asia, as it was China that had
taken an initiative in the EAFTA discussions.
One notable characteristic of FTAs in East Asia is their comprehensiveness on
issue coverage. As such, some of the FTAs established in East Asia are termed as
Economic 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 andfacilitation of foreign direct investment (FDI), and economic and technical cooperation,in addition to trade liberalization, which is included in traditional FTAs. The basic
philosophy behind these new types of FTAs is interestingly similar to that of Asia
Pacific Economic Cooperation (APEC) forum, whose three pillars are (1) liberalizationand (2) facilitation of foreign trade and foreign investment, and (3) economic and17technical cooperation.
There are various reasons behind the recent surge of FTAs in East Asia. First, therapid 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 theirexport 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 and EU firms in the Mexican market
because the US and the EU have FTAs, under which their firms have duty-free accessto Mexico. Japanese firms put pressure on Japanese government to negotiate an FTA
with Mexico to overcome their disadvantage.
It should be added here that a stalemate of the negotiations under the Doha
Development Agenda under the WTO turned the attention of the WTO members withan interest in trade liberalization to FTAs. I come back to the issue of bilateralism andmultilateralism in trade in more detail in a later section addressing economic analysis
of FTAs.
Second, countries interested in promoting structural reform to achieve economic
growth use FTAs to gain leverage over opponents to liberalization. Third, the Asianfinancial crisis in 1997-98 prompted East Asian economies to be aware of the need forregional cooperation such as FTAs in order to avoid another crisis.
Finally, rivalry among East Asian economies over market access in potential FTA
partners’ market, as well as rivalry over gaining a leadership role in the region (asdiscussed more fully in the political/security chapter) has spurred FTA strategies ofcountries in the region. The rivalry between China and Japan is most notable. Both
China and Japan, which are competing to become a ‘leader’ in the region, are keen on
using FTAs to strengthen the relationships with ASEAN, Korea and other countries.
Indeed, in November 2002, Japan proposed an economic partnership framework to
ASEAN one day after China agreed to start FTA negotiations with ASEAN. It should
also be noted that ASEAN, Korea and other countries also consider FTAs as a means tomaintain and increase their influence in East Asia.
IV.2 Empirical Analysis of Welfare and Trade Impacts of FTAs
The theoretical models discussed before showed that the economic welfare
impacts of FTAs on members are ambiguous, while their impacts on non-members arelikely to be negative. Given the indeterminacy of the impacts of FTAs theoretically, it
18

is necessary to examine the impacts empirically. Two types of empirical research havebeen conducted to examine the impacts of FTAs on members and non-members. One isa simulation analysis using computable general equilibrium (CGE) models, and theother is to use econometric methods. Each approach has its strengths and weaknesses.22
A CGE model is constructed to mimic the actual working of the economic systemby specifying activities of economic agents such as producers, consumers andgovernments. A typical CGE model covers the world consisting of a large number ofcountries and a large number of sectors. The most popular CGE model used for FTA
analysis is the GTAP (Global Trade Analysis Project) model and the most up-to-date(the year 2001) database used for the GTAP analysis includes 87 countries and 57
sectors. The strength of the CGE model is its theoretical consistency andcomprehensive coverage in that it captures all economic impacts through the market
mechanism including inter-industry and inter-country impacts of policy changes suchas FTAs. At the same time, there are several weaknesses. One is the difficulty inconstructing a model that reflects the actual economic system. For example, a typical
CGE model assumes perfect competition. Although the perfect competition assumption
may not be appropriate in many cases, a lack of knowledge on the type of actual
competition forces researchers to make the perfect competition assumption.23 Anotherproblem is the difficulty in obtaining appropriate data and parameters used for themodel. Indeed, the more detailed and realistic the model becomes, the more difficult it
is to obtain the appropriate data. The third problem is that the results of CGE modelcannot be tested statistically, in order to evaluate the validity of the results.
A large number of simulation exercises have been conducted to investigate thepossible impacts of FTAs by using CGE models.24 Indeed, it has become customary to
conduct a CGE model simulation when policy makers formulate FTA policies. The
results of CGE studies show two common trends. First, FTA members are shown togain in terms of economic welfare and GDP, while non-FTA members generally lose.
These findings are consistent with the theoretical predictions. For example, Scollay
22

On the discussions of these approaches, see, for example, Baldwin and Venables(1995).
23
A few CGE models incorporate imperfect competition, but the models andparameters used in these models suffer from their arbitrariness. For example, theMichigan model developed mainly by Alan Deardorf and Robert Stern incorporates
imperfect competition. (Brown, Deardorf and Stern, 1996).
24
See Ando and Urata (2007) for a survey of the CGE studies on East Asian countries.
19and Gilbert (2001) obtain the following results from their analysis of an FTA
comprised of ASEAN, China, Japan, Korea, Australia, and New Zealand. All themembers gain in terms of economic welfare, while non-members such as the US, theEU and Taiwan lose. The world as a whole is shown to gain. Similar patterns of gains
and losses are found by Ando and Urata (2007), who examine the static as well as
dynamic impacts of FTAs involving East Asian countries using the GTAP model. Theirresults are reproduced in Table 6. Although there are exceptions, they found that the
FTA members gain in terms of economic welfare and GDP growth, while non-FTA
members lose in both accounts. Specifically, in terms of economic welfare whichreflects the level of consumers’ satisfaction, Japan is estimated to lose USD$1,569,776,
7,625 million dollars. if ASEAN forms an FTA with China, Korea, and China-Korea,
respectively, while Japan gains when it forms an FTA with ASEAN. These results from
CGE simulations indicate the reasons for competitive FTAs, because a country
excluded from an FTA is shown to lose.
Another general trend observed from the results of CGE simulation studies has to
do with the number of FTA members or the country coverage. Generally, it is observedthat the greater the number of FTA members, the larger the gain from an FTA. This canbe seen by comparing the results of FTAs with different country coverage using thesame model. Scollay and Gilbert (2001) also find that the welfare gains for the world
as well as FTA members tend to increase through wider coverage of countries under
liberalization as the coverage of FTAs change from a group consisting of ASEAN,
China, Japan, Korea, Australia, and New Zealand to a group of economies belonging to
APEC and then to the all the countries in the world. A similar pattern was observed byAndo and Urata (2007) shown in Table 6. These observations are consistent with thetheoretical analyses in that the scope for trade creation increases and the scope fortrade diversion declines with the number of FTA members.
An econometric analysis of the impacts of FTAs typically examines the impactsof FTAs on foreign trade. Specifically, the gravity model, which is constructed on theassumption that the magnitude of bilateral trade depends on the economic size of thetwo countries and the distance between them, is estimated to examine the tradecreation and diversion effects of FTAs. One weakness of the econometric approach in
the FTA analysis is its inability to incorporate simultaneous changes in a number ofpolicy variables. For example, econometric analysis finds it difficult to deal withsimultaneous removal of tariffs in many sectors from many countries, as they result in20

a complicated interplay of the effects. Another problem is the difficulty in dealing witha large change such as the removal of tariffs under FTAs, which tends to havesubstantial impacts not only on trade but also on other economic activities such as
production and employment, which in turn would affect trade.
Similar to the case of CGE model studies, a large number of gravity model
estimations have been conducted to examine the impacts of FTAs on foreign trade.
Many studies found that FTAs promoted intra-FTA trade, indicating the presence of the
trade creation effects. For example, Frankel (1997) conducted a gravity model
estimation covering 63 countries in the 1965-94 period with a variety of different
model specifications. He finds that intra-regional trade in Western Europe, East Asia,
APEC, and the Western Hemisphere is significantly higher than the predicted values.
A recent study by Baier and Bergstrand (2007) reports very significant trade creation
effects as they find that an FTA approximately doubles two members’ bilateral trade
after 10 years.
Relatively few studies examined the presence or absence of the trade diversion
effect. Urata and Okabe (2007) analyze the impacts of selected FTAs on trade by
explicitly considering trade between FTA members as well as trade between FTA
members and non-members. Their results indicate the presence of trade creation effects
for most FTAs they study. Specifically, out of 11 FTAs they examine, only three FTAs,
ASEAN-China, Singapore-Japan, and Singapore-US, were found to have no significant
trade creation effect. As to the trade diversion effect, five out of 11 FTAs were shownto have significant trade diversion effects. These findings indicate that FTAs tend topromote trade between and among FTA members, possibly implying that FTAs arewelfare enhancing for FTA members.
Many FTAs are rather new with short history, and thus conducting statisticalanalysis such as the gravity model estimation faces the problem of insufficient data.
Further statistical analysis is warranted and will become feasible with the expansion of
the data with the passage of time.
V. Concluding remarks
East Asia has seen a rapid proliferation of FTAs since around the turn of the
century. For many countries, this is a shift from a single track GATT/WTO-based
multilateral trade policy to multiple track trade policy composed of not only amultilateral approach but also bilateral and regional approaches. The analysis in this21

chapter shows that the new bilateral and regional trade policy was preceded by theintensification of regionalization of economic activities based upon regional
production networks and market-driven activities in East Asia. As such, the new trade
policy is likely to solidify the on-going regionalization and further promote it.
The economic analysis of FTAs in this chapter identifies several economic
reasons leading to the proliferation of FTAs in East Asia. One of the most importantfactors is a defensive motive on the part of many East Asian governments as they felt
disadvantage in foreign markets, where the sharp increase in FTAs led to thediscrimination against non-FTA members such as those East Asian countries. To
overcome the (perceived or real) negative trade-diversion effects, East Asian countries
became active in forming FTAs. This defensive motive has clearly contributed to theformation of many bilateral FTAs in East Asia. In this regard, China and Japan rivalry
has contributed to the precipitation of this trend. One important question is whether the
proliferation of bilateral FTAs would lead to the formation of region-wide FTA. Fromthe view point of economic analysis, the future development depends on the costs andbenefits of FTAs to potential FTA members. Such calculation of costs and benefits
would be extremely dependent on government policies. In other words, thegovernments could formulate policies so that FTAs would bring net benefits, leading to
the formation of FTAs.
A brief survey of empirical analysis of the impacts of FTAs has shown that many
FTAs have contributed to an improvement of economic welfare and economic growthfor FTA members, as FTAs promoted intra-FTA trade. In other words, for many FTAs
the trade creation effects are detected. Some FTAs are found to produce the trade
diversion effects. This finding justifies the rationale for many countries to formulate
FTAs, which in turn results in FTA proliferation. Due to new and short history of East
Asia’s FTAS, further investigations and follow up on those FTAs are essential inunderstanding their determinants and economic impacts.

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26

Table 1 Changing Patterns of East Asia's Trade from 1995 to 2005
Change from 1995Share of world Share of region/country's total trade
to 2005
trade
Exports
Imports
Exports Imports
1995 2005
1995
2005 1995
2005
East Asia East Asia
2.19
2.19
12.3
13.2
47.4
49.9
54.7
59.1
China
3.96
3.74
1.8
3.3
7.4
14.1
7.2
13.4
Japan
1.81
1.49
2.9
2.3
8.5
7.4
16.1
11.9
NIES4
1.92
2.14
5.4
5.3
21.8
20.1
22.6
23.9
ASEAN4
1.78
2.31
2.3
2.2
9.8
8.3
8.7
9.9
NAFTA
1.78
1.22
5.0
3.8
24.0
20.5
16.8
10.1
EU25
2.11
1.49
3.5
3.1
14.9
15.1
14.0
10.3
World
2.08
2.03
24.3
24.4
100.0
100.0
100.0
100.0
China
East Asia
3.74
3.96
1.8
3.3
55.7
40.6
66.8
59.6
China
--------Japan
2.95
3.65
0.5
0.8
19.1
11.0
15.0
12.4
NIES4
3.97
3.72
1.2
2.2
32.9
25.5
48.1
40.3
ASEAN4
5.72
8.26
0.1
0.4
3.7
4.1
3.8
7.0
NAFTA
6.82
3.53
0.4
1.1
17.8
23.7
9.6
7.7
EU25
7.08
3.31
0.4
1.0
13.6
18.9
13.3
9.9
World
5.12
4.44
2.9
6.8
100.0
100.0
100.0
100.0
Japan
East Asia
1.49
1.81
2.9
2.3
41.7
46.4
37.9
43.4
China
3.65
2.95
0.5
0.8
5.0
13.4
9.6
18.0
Japan
--------NIES4
1.30
1.29
1.6
1.0
24.7
24.0
16.9
13.8
ASEAN4
1.00
1.61
0.9
0.5
12.1
9.0
11.4
11.6
NAFTA
1.15
0.88
2.0
1.0
29.7
25.5
24.9
14.0
EU25
1.22
1.26
1.1
0.7
16.1
14.6
14.6
11.6
World
1.34
1.58
7.3
5.1
100.0
100.0
100.0
100.0
NIES4
East Asia
2.14
1.92
5.4
5.3
48.4
57.2
58.0
63.0
China
3.72
3.97
1.2
2.2
13.1
26.9
9.9
22.2
Japan
1.29
1.30
1.6
1.0
9.4
6.6
22.0
16.3
NIES4
1.55
1.55
1.6
1.2
14.9
12.7
16.1
14.1
ASEAN4
1.80
1.86
1.1
1.0
11.1
11.0
10.0
10.5
NAFTA
1.32
1.13
2.0
1.2
22.2
16.2
16.0
10.3
EU25
1.73
1.35
1.4
1.1
14.1
13.4
13.1
10.0
World
1.81
1.77
10.1
8.9
100.0
100.0
100.0
100.0
ASEAN4 East Asia
2.31
1.78
2.3
2.2
51.4
54.7
62.3
69.9
China
8.26
5.72
0.1
0.4
2.8
10.8
2.7
9.6
Japan
1.61
1.00
0.9
0.5
17.4
13.0
25.9
16.4
NIES4
1.86
1.80
1.1
1.0
25.6
21.9
28.5
32.4
ASEAN4
3.51
3.51
0.2
0.4
5.6
9.0
5.2
11.5
NAFTA
1.87
1.16
0.6
0.5
20.8
17.9
12.3
9.0
EU25
1.82
0.97
0.6
0.4
15.4
12.9
15.7
9.6
World
2.17
1.59
3.9
3.6
100.0
100.0
100.0
100.0
NAFTA East Asia
1.22
1.78
5.0
3.8
22.6
16.0
32.5
26.8
China
3.53
6.82
0.4
1.1
1.7
3.4
2.7
8.6
Japan
0.88
1.15
2.0
1.0
8.6
4.5
13.5
7.2
NIES4
1.13
1.32
2.0
1.2
9.3
6.2
12.2
7.4
ASEAN4
1.16
1.87
0.6
0.5
3.0
2.0
4.1
3.6
NAFTA
2.04
2.04
7.8
7.7
46.2
55.1
40.5
38.3
EU25
1.53
2.32
2.9
2.8
16.5
14.8
16.1
17.3
World
1.71
2.16
18.0
17.2
100.0
100.0
100.0
100.0
EU25
East Asia
1.49
2.11
3.5
3.1
7.6
6.0
9.8
10.4
China
3.31
7.08
0.4
1.0
0.9
1.6
1.0
3.6
Japan
1.26
1.22
1.1
0.7
2.1
1.4
3.5
2.2
NIES4
1.35
1.73
1.4
1.1
3.1
2.2
3.7
3.3
ASEAN4
0.97
1.82
0.6
0.4
1.5
0.8
1.5
1.4
NAFTA
2.32
1.53
2.9
2.8
7.5
9.1
7.0
5.4
EU25
1.91
1.91
27.3
25.4
66.1
66.3
68.9
66.1
World
1.90
1.99
40.5
38.4
100.0
100.0
100.0
100.0
Source: Computed from JETRO's trade matrix.

27

Table 2 Commodity Composition of International Trade for East Asian Economies with East Asian Economies(percentage share of total)
East Asia
ASEAN
NIES
China
Japan
World
1990-94 2000-04 1990-94 2000-04 1990-94 2000-04 1990-94 2000-04 1990-94 2000-04 1990-94 2000-04
Agriculture
7.0
4.1
15.7
9.0
4.7
2.3
13.7
5.2
1.1
1.0
12.1
8.8
Mining & fuels
5.4
5.1
16.5
12.6
2.1
3.5
6.4
4.1
1.3
1.7
9.9
11.3
Total manufacture
86.1
88.7
65.2
75.6
92.7
93.2
78.5
90.1
95.8
93.0
74.9
76.9
Chemicals
5.0
6.5
3.8
6.2
5.2
6.8
5.3
4.6
5.6
7.8
9.0
10.4
Lther, rubber, trvl goods, ftwear
4.0
2.9
2.3
1.7
7.1
3.5
6.9
5.4
1.3
1.2
2.5
2.1
Wood, paper, & furnitures
2.3
2.0
4.6
3.3
2.2
1.5
2.0
3.3
0.8
0.6
3.5
3.2
Metal
4.6
4.3
1.7
1.6
5.7
5.1
4.4
5.1
5.5
5.0
5.1
4.6
Machinery
46.6
53.6
37.6
51.0
36.8
52.6
17.4
40.6
71.6
67.1
38.0
41.4
Power gnrtr
1.9
1.7
0.9
0.9
0.9
1.0
0.8
1.1
3.9
3.9
2.5
2.6
Indstral & metal wrking
6.8
6.3
3.1
3.0
4.7
4.9
2.6
3.8
12.8
12.6
8.3
7.1
Electronic
15.9
19.4
19.5
22.0
14.4
21.6
6.3
22.3
17.7
12.2
7.9
10.2
Electrical
11.1
16.8
11.9
23.2
11.2
18.0
4.0
10.1
12.7
15.2
6.9
9.3
Autos
9.0
7.7
0.9
1.3
3.9
4.9
3.0
2.6
21.8
20.6
9.3
9.5
Oth. transpt
1.8
1.7
1.2
0.6
1.7
2.3
0.6
0.8
2.7
2.5
3.0
2.6
Textiles & garment
12.7
9.1
8.7
5.8
20.6
11.8
29.1
18.3
2.1
1.5
7.1
5.7
Other manufactures
11.0
10.2
6.6
6.0
15.0
11.9
13.4
12.8
9.0
9.8
9.7
9.3
Others
1.5
2.1
2.6
2.8
0.5
1.0
1.4
0.6
1.8
4.3
3.1
3.0
Total
100
100
100
100
100
100
100
100
100
100
100
100
Exports

EA
ASEAN
NIES
China
Japan
World
Imports
1990-94 2000-04 1990-94 2000-04 1990-94 2000-04 1990-94 2000-04 1990-94 2000-04 1990-94 2000-04
Agriculture
12.9
8.9
8.5
6.9
9.9
6.2
9.3
7.7
23.3
15.6
12
9.1
Mining & fuels
15.4
16.8
11.5
13.6
11.5
14.7
7.7
13.7
27.9
25.5
12.2
13.3
Total manufacture
68.8
72.7
76.5
77.5
75.4
77.8
82.3
77.9
45.7
56.7
72.5
74.7
Chemicals
8.8
9
8.9
8.6
9
8.3
11.7
12.2
7
7.3
9.1
10.5
Lther, rubber, trvl goods, ftwear
2.3
1.9
1.1
1
3.6
2.8
1.8
1.2
1.9
2
2.4
2.1
Wood, paper, & furnitures
2.1
1.7
1.6
1.3
2.2
1.5
2.7
1.5
2.3
2.6
3.4
3.2
Metal
5.3
4
6.6
4.6
5.1
4.1
8.6
5.5
2.7
2.1
5.1
4.6
Machinery
34.3
41.8
47.6
52.9
34.4
42.6
42
45
16.9
27.6
36
39.5
Power gnrtr
2.1
1.8
3.3
2.1
1.8
1.6
2.7
2
1
1.6
2.3
2.5
Indstral & metal wrking
9
6.8
12.1
7.8
8.4
6.4
18
10.5
2.9
3.2
7.9
6.7
Electronic
7.5
11.6
10.2
12.3
7.8
13.2
6.6
10.3
4.4
10.1
7.8
9.9
Electrical
9.7
18.1
14.5
25.9
11.4
19.3
5.6
18.6
4.1
8.8
6.8
9.5
Autos
3.7
2.3
4.1
2.9
3.3
1.5
5.7
2.3
3
2.9
9
9
Oth. transpt
2.3
1.2
3.4
1.9
1.8
0.8
3.3
1.5
1.5
1
2.2
1.9
Textiles & garment
7.3
5.4
3.7
2.9
10
7
9.4
4.4
6.6
6.5
6.8
5.5
Other manufactures
8.7
8.9
7.2
6.3
11
11.5
6.2
8
8.2
8.5
9.7
9.3
Others
2.9
1.6
3.5
2
3.2
1.3
0.7
0.7
3.1
2.2
3.3
2.9
Total
100
100
100
100
100
100
100
100
100
100
100
100

28

Table 3 Sources of FDI Inflows to East Asian Developing Economies (%)
China (actualized) Indonesia (Approved)
Malaysia (Approvedt)
Philippines (BOP) Singapore (commited)Thailand (BOP)
Korea (Approved) Taiwan (Approved)
1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04
World
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
East Asia
73.1
61.6
38.3
41.7
45.4
36.4
48.5
37.5
29.0
21.6
52.0
99.1
26.3
26.5
34.8
31.0
Japan
8.3
8.6
14.7
9.7
18.6
11.6
25.4
24.3
29.0
21.6
26.5
42.1
8.8
13.5
17.2
15.2
East Asia ex Japan
64.8
52.9
23.6
32.0
26.8
24.9
23.1
13.3
0.0
0.0
25.5
57.0
17.6
13.0
17.7
15.8
China
0.0
0.0
0.1
10.2
0.7
4.4
2.7
0.0
0.0
0.0
0.0
0.5
0.2
2.9
0.0
0.0
NIES4
62.9
51.2
17.6
16.6
25.5
19.3
19.2
12.5
0.0
0.0
24.5
53.1
7.3
4.5
14.2
13.3
ASEAN4
1.9
1.6
5.9
5.3
0.6
1.2
1.1
0.8
0.0
0.0
0.9
3.2
10.1
5.5
3.5
2.5
US
8.5
8.8
4.0
1.7
29.7
21.2
20.6
19.1
45.3
42.4
20.4
2.2
31.3
31.5
24.9
16.6
EU
7.7
7.0
24.0
17.0
9.1
30.3
18.7
4.8
23.2
30.8
17.3
-0.2
29.5
21.6
7.5
17.0
Note: The EU includes Italy, UK, the Netherlands, France and Germany. In the case of Singapore, the EU indicates Europe.
Source: Country data sources.

29

Table 4 Sectoral Distribution of FDI Inflows (%)
Malaysia (Approved)
Thailand (BOP)
Korea (Approved) Taiwan (Approved)
1995-99 2000-04 1995-99 2000-04 1995-99 2000-04 1995-99 2000-04
Manufacturing
100
100
100
100
100
100
100
100
Food
2.5
3.5
7.3
7.3
11.9
4.4
3.2
3.4
Textiles
2.6
1.9
4.2
2.6
1.3
0.9
2.8
1.3
Wood
8.2
8.0
a
a
11.3
0.9
0.5
1.6
Metals
8.3
9.6
20.2
13.6
3.6
5.1
12.2
6.9
Chemicals
33.0
17.1
9.3
10.2
18.9
18.5
12.6
10.0
General machinery
2.2
1.7
25.9
32.2
8.7
13.2
3.1
5.3
Electric/electronic machinery 35.4
43.1
26.9
11.9
29.6
35.9
56.9
61.9
Transport machinery
2.9
6.5
b
b
8.8
12.6
5.3
4.0
Others
4.9
8.4
10.9
22.3
5.5
8.4
3.4
5.5
Manufacturing
na
na
39.6
53.5
49.4
36.4
48.6
35.0
share of total
Note: For Thailand Wood (a) is included in others and tranport machinery (b) is included in general machinery.
Source: Country data sources

Table 5 Trade Liberalization in Selected East Asian Economies

Binding
Coverage

All products
ImportUnweighted weighted
averages averages

Primary products
ImportUnweighted weighted
averages averages

China

40.4
32.1
36.1
1992
9.8
6.0
10.0
2004
100
Indonesia 1989
19.2
13.0
18.2
6.4
5.2
8.0
2003
96.6
Japan
4.2
3.6
8.3
1988
2.9
2.4
5.3
2004
99.6
Korea
18.6
14.0
19.3
1988
15.5
9.5
20.9
2002
94.4
Malaysia 1988
14.5
9.7
10.9
7.3
4.2
4.5
2003
83.7
Phillipines 1988
28.3
22.4
29.9
4.5
2.6
5.7
2003
66.8
Singapore 1989
0.4
1.1
0.2
0.0
0.0
0.0
2003
69.8
Thailand 1989
38.5
33.0
30.0
14.0
8.3
16.4
2003
75.0
Source: World Bank, World Development Indicators 2005

30

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 Ad valorem
Importequivalent
Unweighted weighted of non-tariff
averages averages barriers

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

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

1.5
0.5
1.6
0.0
1.7
0.4
0.5
0.3

Table 6 Economic Effects of FTAs in East Asia
FTA Partner Countries
A
A+C
A+J
A+K
A+C+J
A+C+K A+J+K
A+C+J+K
Static Effects Only
Welfare (US$million)
China
-241
-211
-731
-524
-623
189
-1,131
800
Japan
-497
-1,569
933
-776
6,555
-2,123
1,783
6,584
Korea
-135
-630
-378
912
-1,761
7,625
640
5,973
ASEAN
2,665
6,646
4,777
2,903
7,355
6,197
5,186
7,107
Change in GDP (%)
China
0.00
0.02
-0.01
-0.01
0.09
0.01
-0.02
0.13
Japan
0.00
0.00
0.00
0.00
0.01
-0.01
0.00
0.01
Korea
0.00
-0.03
-0.01
-0.02
-0.09
1.12
0.03
1.11
ASEAN
0.07
0.22
0.16
0.10
0.30
0.25
0.22
0.36
Static and Dynamic Effects
Welfare (US$million)
China
-308
3,575
-872
-690
8,487
5,580
Japan
-265
-1,632
3,038-516
10,544-2,208
Korea-184-1,130-507
2,514-3,213
16,046
ASEAN
10,603
21,67020,55813,033
27,46822,374
Change in GDP (%)
China
-0.01
0.49
-0.03
-0.04
1.23
0.65
Japan
0.00
-0.02
0.07
0.00
0.18
-0.03
Korea
-0.03
-0.21
-0.07
0.55
-0.62
4.15
ASEAN
1.93
3.64
3.74
2.44
4.80
3.90
Notes: A, C, J, K indicate ASEAN, China, Japan, Korea, respectively.
The cell with hatching indicates the membership in FTAs.
Source: Ando and Urata (2007)

31-1,384
4,457
3,754
22,77911,306
11,054
14,50828,423

-0.06
0.10
1.13
4.17

1.41
0.19
4.19
5.07

GIARI Working Paper Vol. 2008-E-15,
September 30, 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

32