Trends in the RTA FTA Architecture of the Asia-Pacific Region Shujiro Urata

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<ul><li><p>Session IX: Trends in the RTA/FTA Architecture of the Asia-Pacific Region </p><p>Proliferation of FTAs in East Asia1 </p><p>Shujiro Urata Waseda University </p><p> I. Introduction East Asia has been witnessing a sudden and rapid expansion of regional economic cooperation programs in recent years. Regional economic cooperation programs take a variety forms such as financial cooperation, information technology cooperation, largely under the ASEAN+3 (China, Japan, and Korea) framework. Although there has not yet become a region-wide program, free trade agreements (FTAs) have been actively pursued by many East Asian countries both bilaterally and pluri-laterally. This note discusses the recent proliferation of FTAs in East Asia and it attempts to analyze the factors behind such development. It also identifies the obstacles to the formation of East Asia FTA and discusses the ways to overcome such obstacles. II. Recent Developments of FTAs in East Asia East Asia was not active in the formation of regional trade agreements (RTAs), which include FTA and customs union, until recently (Table 1)2. Indeed, ASEAN Free Trade Area (AFTA) was the only major FTA until Japan and Singapore enacted JSEPA in 2002. AFTA was established in 1992 with six ASEAN member countries, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Brunei. New ASEAN members, Cambodia, Laos, Myanmar, and Vietnam joined AFTA in the latter half of the 1990s, and currently AFTA has 10 member countries. Besides AFTA, ASEAN as a group as </p><p> 1 For the presentation at PECC Trade Forum to held in Jeju, Korea on May 23-24, 2005. 2 In the GATT/WTO, regional trade agreements (RTAs), which violate one of its basic principles of non-discrimination, are permitted under GATT Article XXIV with several conditions, which include liberalization of substantially all the trade of the members, not increasing trade barriers on non-members, and completing the RTA process within ten years. For developing countries, more lenient conditions are applied under the enabling clause. An FTA is considered to be a shallow form of regional integration, because it only removes tariff and non-tariff barriers among the members, while a customs union is a deeper integration, as it adopts common external tariffs on non-members, in addition to the removal of tariff and non-tariff barriers on trade among the members. </p></li><li><p>well as its members individually have become active in FTA discussions with other countries in recent years. One of the FTAs involving ASEAN that has received most attention recently is that with China. ASEAN and China started FTA negotiations in January 2003 and they signed an agreement on FTA concerning trade in goods in November 2004. They are scheduled to begin FTA negotiations concerning trade in services and investment in 2005. ASEAN also began FTA negotiations with Korea and Japan separately in 2005. Some ASEAN members have become active in establishing bilateral FTAs. Singapore enacted or signed several FTAs with countries such as New Zealand, Japan, Australia, the USA, the EFTA, and began negotiations with countries including Korea and India. Thailand has also become active in establishing FTAs, as it is currently under negotiations with the USA and Japan. The Philippines and Malaysia began negotiations with Japan in 2004. Indonesia is expected to begin negotiations with Japan in 2005. Compared to ASEAN countries in Southeast Asia, the economies in Northeast Asia including China, Japan, Korea and Taiwan had not been active in FTAs until recently. Despite increasingly strong interest in FTAs by Northeast Asian economies, there are only few FTAs that have been enacted so far, which include Japan-Singapore, Korea-Chile, China-Hong Kong and China-ASEAN. Chinas active FTA strategy has received a lot of attention. China joined the World Trade Organization (WTO) in 2001 and established an access to the world market, and it started to pursue regional strategies by using FTAs. China signed a framework agreement on comprehensive economic cooperation with ASEAN in November 2002. China and ASEAN concluded negotiations on FTA in 2004. In addition to ASEAN, China has informally proposed Japan and Korea to establish a trilateral FTA including these three countries. China enacted an FTA (Closer Economic Partnership Agreement: CEPA) with Hong Kong. After enacting FTA with Singapore in 2002, Japan enacted FTA with Mexico after overcoming obstacles from agriculture sector in Japan in 2005. Japan is currently negotiating FTAs with Korea, Malaysia, the Philippines, Thailand and ASEAN. Furthermore, it is planning to start negotiations with Indonesia and to start a study with India. Korea started having an interest in FTAs before Japan. In 1998 Korea disclosed a plan to start FTA negotiations with Chile, and it also set up a joint-study group at private level on FTA with Japan. Korea started negotiations with Chile in 1999, and Korea-Chile FTA was enacted in 2004 after difficult negotiations on liberalization of agricultural imports because of strong opposition from Korean farmers. Korea is </p></li><li><p>currently negotiating FTA with Singapore, ASEAN and Japan. An idea of FTA covering East Asian countries has emerged. At the Leaders Summit meeting of ASEAN+3 in 1998 the leaders agreed to set up an East Asia Vision Group (EAVG), and in 2000 established an East Asia Study Group (EASG). The mandate for EAVG, composed of intellectuals, was to study long-term visions for economic cooperation. EAVG presented the leaders with recommendations in 2001, including establishment of an East Asia FTA (EAVG 2001). EASG, consisting of government officials, in 2002 provided assessments of the EAVG recommendations and acknowledged the role of East Asia FTA for the promotion of trade and FDI in East Asia. Despite these recommendations an East Asia FTA has not become a concrete agenda item at leaders' meetings. Obviously, agreeing on an East Asian FTA at this time is politically very difficult, mainly because of strong opposition from non-competitive sectors in each member. However, the activities of EAVG and EASG were followed-up by establishing the Network of East Asian Think-Tanks (NEAT) in 2003. NEAT, which is supported by the governments of the ASEAN+3 countries, is to continue dialogue and deepen mutual understanding. Meetings were held in 2003 and 2004 to discuss issues related to the East Asian Community, of which an East Asia FTA is an important component. Recently the Joint Expert Group was set up to conduct a feasibility study of East Asia FTA under the initiative of China. They had the first meeting in Beijin in April 2005. Before ending this section on recent regionalization moves in East Asia, it should be noted that many of the FTAs discussed in the section have characteristics of wide and comprehensive coverage. As such, some of the FTAs established in East Asia are termed as Economic Partnership Agreement (Japan-Singapore EPA), or Closer Economic Partnership Arrangement (China-Hong Kong CEPA), and others. These new types of FTAs typically include facilitation of foreign trade, liberalization and facilitation of foreign direct investment (FDI), and economic and technical cooperation, in addition to trade liberalization, which is included in traditional FTAs. It may be worth noting that the basic philosophy of these new types of FTAs is similar to that of Asia Pacific Economic Cooperation (APEC) forum, whose three pillars are (1) liberalization and (2) facilitation of foreign trade and foreign investment, and (3) economic and technical cooperation. III. The Factors behind the Proliferation of FTAs in East Asia </p><p>One can identify various factors that led to rapid expansion of FTAs in East </p></li><li><p>Asia. There are several factors that are common to many countries, while there are some specific factors that may explain the motives of FTA for individual countries. We identify the motivating factors that are more or less common to many countries in East Asia in this section, and examine the factors that are specific to individual East Asian countries in the next section. </p><p>First, rapid expansion of FTAs in other parts of the world has prompted East Asian economies to form FTAs, in order to maintain and expand market access for their exports. The number of FTAs started to increase rapidly around 1990 and the rate of the increase accelerated in the mid-1990s. By the mid-1990s the worlds leading economies except those in East Asia had become a member of FTAs. Indeed, worlds two largest economic regions, North America and Western Europe, each formed FTAs. Faced with these situations, many East Asian economies became concerned about their export markets. </p><p>The formation of the North American Free Trade Agreement (NAFTA) had significant impacts on East Asian countries for several reasons. One is the change in US policy to regard FTA as an important trade policy. The US was regarded as a country that strongly committed to multilateralism in trade policy under the GATT. As such, an enactment of NAFTA signaled the increasing importance of regionalism to East Asian countries. The negative impacts of the NAFTA on East Asian countries in the form of a decline in exports to the US and a decline in FDI from not only the US but other countries made East Asian countries realize the importance of establishing FTAs to deal with these negative impacts. </p><p>Second, slow progress on multilateral trade liberalization under the WTO was one important factor that led to the proliferation of FTAs not only in East Asia but also in other parts of the world. Many countries, including those in East Asia became to realize the benefits of trade liberalization for the promotion of economic growth, as it led to rapid economic growth in the past. Despite the desire of many policy makers for promoting trade liberalization, trade liberalization under the WTO has become increasingly difficult. As the number of WTO members increased, their views on the pace and the extent of trade liberalization have become diverged. The increasing difficulty in reaching a consensus was a factor that delayed the start of the new round. Although an agreement was reached in Doha to launch a new round, the new round has faced difficulty in starting substantive negotiation. It was only July 2004 that the modality of the negotiations was more or less agreed. Faced with the difficulty in pursuing trade liberalization on the global scale, many countries in other parts of the world have opted to form FTAs with like-minded countries to pursue trade liberalization. </p></li><li><p>As a result of increasing FTAs in other parts of the world, East Asian countries started to feel that they are discriminated against in many markets in the world, as discussed above. To overcome such disadvantage and to secure markets for their exports, East Asian countries have become active in forming FTAs. </p><p>It should also be noted that many countries in the world including those in East Asia began to realize that the GATT/WTO rules cannot adequately deal with newly emerging international economic activities such as FDI, service trade, mobility of labor, and others. To put it differently, liberalization of border measures such as tariffs, which are main focus of the GATT/WTO, cannot provide foreign as well as domestic companies with the level-playing field. It is necessary go deeper beyond the border measures and to set up the rules covering domestic systems such as competition policy. Many countries share a view that GATT/WTO cannot provide such rules and opt for FTAs to deal with the problem. </p><p>Third, somewhat related to the point just made, East Asian economies have become interested in using FTAs as a way to promote deregulation and structural reforms in the domestic market. Many East Asian economies pursued deregulation and structural reforms in the 1990s, which contributed to rapid economic growth. Although the need for accelerating deregulation and structural reforms to further promote economic growth is recognized by many East Asian countries, it may not be easy for them to carry out deregulation and structural reforms as many economies are still recovering from the crisis, and as the room for further deregulation became limited as a result of earlier deregulation. Under these circumstances, many countries recognize the effective role of external pressures such as FTAs for the promotion of deregulation. Fourth, many East Asian economies have become interested in using FTAs to promote economic and other types of cooperation in East Asia. The financial crisis in the late 1990s in East Asia increased the awareness on the part of East Asian countries of the need for regional cooperation such as FTAs to avoid another crisis and to promote regional economic growth, because East Asian economies could not get as much assistance as they hoped from the countries outside the region to overcome the problems caused by the financial crisis. Indeed, as noted earlier, FTAs and prospective FTAs in East Asia include not only trade liberalization, but also trade and FDI liberalization and facilitation and economic and technical assistance under the name of EPAs. It should also be noted that regional cooperation in the area of finance has moved forward significantly, as many East Asian economies realized the need for such cooperation to avoid another financial crisis. Specifically, the Chaing-Mai Initiative, which consists of bilateral currency swap arrangements, was instituted by several East Asian countries. </p></li><li><p> Fifth, political factors have contributed to the increased interest in FTAs in East Asia. A rivalry between China and Japan for becoming a leader in East Asia has made them interested in using FTAs to strengthen their relationships with ASEAN and the NIEs. ASEAN and the NIEs themselves have become to use FTAs as a means to maintain their influence in East Asia. Since these political factors are different among East Asian countries, we will come back to these issues in the next section, where we examine FTA strategies of individual East Asian countries. IV. FTA Strategies of Selected East Asian Countries This section explores the FTA strategies of ASEAN, China, Japan and Korea. We attempt to identify special characteristics of their FTA strategies, which differ from the factors that are more or less common to all of these countries, discussed in the previous section. ASEAN Several motives can be identified behind ASEANs decision to establish AFTA in the early 1990s. One is rapid and substantial expansion of regional trade agreements in Western Europe and North America. Faced with emergence of trading blocs, ASEAN realized the need to integrate its internal market to maintain export markets for ASEAN members. Another factor that led to the formation of AFTA was the emergence of China. Recognizing the possible negative impacts of China on ASEAN in terms of attracting inward FDI an...</p></li></ul>

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