Presentation at the “East Asian Congress”, Kuala Lumpur, August 4-6,2003

 

Designing East Asian FTA

Zhang Yunling[1]

 

I.                    East Asian Economic Convergence

East Asian Economic convergence has achieved a high level. This process started by a “flying geese model” lead by Japan. It helped to build up a “vertical” chain through capital flow, technological transfer and supply of manufacturing parts, thus formulating a high level intra-regional integration based on market exchange. Until mid-1990s, intra-regional trade in East Asia was as high as 50%. 1997 financial crisis changed both environment and structure of East Asian economic growth and integration. As a result, intra-regional economic activities slowed down. But following the recovery of the economies, East Asian intra-regional trade has been come up again. In 2002, it showed even more evident trend. For example, the intra-regional exports of East Asia 8 economies[2] rose 13%, as compared to an increase of exports to the rest of world of only 3%. Exports of these economies to East Asia contributed 2/3 of their total export increase. Importantly, it is considered that this intra-regional trade is increasingly based on exchange of parts, components and other intermediate products, reflecting the development of intricate intra-regional production networks, in which production processes are subdivided among many different countries.[3] FDI flow plays a key role in creating this network. The network based on exchange of trade and capital will have profound impact to East Asian economic future development since it will create a kind of “parallel development” for the region. This is different from the traditional “flying geese model” that based on the vertical ad hierarchic transfer of technology. [4] This is also called as a phenomenon of “bamboo capitalism” since this culminating feature of FDI-driven supply chain has created diverse and vibrant local industries around the East Asian region. The further supply chains (the root system) are decomposed and extended geographically, the faster and more profuse will be the proliferation of new enterprises.[5]

However, comparing with other regions, East Asia is late in forging regional trade arrangements (RTA) and other institutional establishments. East Asian market based integration shows its vulnerability. Thus, the new initiative for regional cooperation will certainly help to enhance and facilitate further integration of East Asian region.

 

II.  East Asian RTA

 

East Asian RTA is currently undergoing in a multi-layered process. It includes both sub-regional, like AFTA, China-ASEAN FTA and bilateral (Japan-Singapore) arrangements. The question is how to consolidate all different efforts into an integrated process.

East Asian market liberalization used to be based on mostly multilateral approach. Real RTA appeared only until early 1990s when ASEAN launched its AFTA in 1992. Japan and South Korea began to approach from 1999 with a proposal of a bilateral FTA. Since then, several other initiatives have been made. Only Japan and Singapore have concluded their negotiation and signed an agreement for closer economic partnership (CEP) in early 2002 and China signed framework document for CEP in late 2002. It is expected that China, Japan and Korea may sign a framework document for economic cooperation.

How to move from current multi-layered efforts into an integrated process and finally toward an East Asian FTA (EAFTA)?  There may be three options:

Option 1: To encourage three “10 plus 1” FTA formula and merge the three into one EAFTA.

Option 2:  Northeast countries develop their own FTA and then integrate with AFTA into an EAFTA.

Option 3: To launch EAFTA in early time. This is parallel to the other multi-layered arrangements in the early stage.

It seems that option 3 is more feasible than the other two. So that, it is necessary to start an early preparation for EAFTA

While encouraging the existing multi-layered efforts, it is important to incorporate various cooperative mechanisms into a framework and organizational setup for long-term cooperation in East Asia in order to facilitate the long-term objective of the East Asian cooperation.

If we envisage that these multi-layered arrangements can be finalized within coming 5 years, then it is reasonable to expect a “convergence process” starting thereafter by launching a new EAFTA (or an East Asian Closer Economic Partnership, EACEP). The research work for this should be started right now, and hopefully the negotiation can be concluded by 2010, with an implementation and transitional period of 5-10 years, i.e. by 2015 for most members, and by 2020 finally for less developed economies. [6]

 

III. East Asian Identity

 

The long-term objective of the East Asia cooperation is to recognize itself as an integrated region with shared common interests and regional institution. Viewed from a geographical position, economic focus and practical angle, three large regions exist in the world today: The European Union (EU), North America, and East Asia. In comparison, cooperation in the East Asian region lags behind. Although progress has been made in starting cooperation, East Asia still lacks a clear vision for the long- term cooperation. "East Asia Vision Group" (EAVG) called for an East Asian community, but no a consensus has been reached yet.

Institutional building is crucial for the process of East Asian cooperation. Although the institutional building starts from low level and on a multi-layered structure, but progress must be achieved in developing convergent institution for East Asia. As an important step, it is necessary to consider moving from current  “ 10 plus 3” structure to a regional organization, i.e. Organization of East Asian Cooperation (OEAC) within about 5 years. OEAC should have its secretariat and functional committees. It will not only continue the current activities, but also develop new functions. OEAC will not replace or unify other multi-layered arrangements in the region in near future. However, efforts should be made in developing framework and institutions on the regional level, such as EAFTA, financial arrangements and sub-regional development projects. Political and security cooperation should be also finally integrated into OEAC. Unlike EU, OEAC’s major role is organizing and coordinating, rather than mandating the regional affairs. OEAC should extend its membership to all East Asian countries finally.

There is a long way to go before developing East Asia into a really integrating region. But the efforts must be made from now on in developing an integrated framework.

 

IV. China’s Role

 

Following the economic success and WTO accession, China has become very active in participating and promoting RTA, especially in East Asia. In 2002, China and ASEAN signed the framework agreement for comprehensive economic cooperation, including a FTA within 10 years.

 However, China will not just stop at this arrangement. Its larger interest lies in EAFTA. China proposed a Northeast Asian FTA (NEAFTA) in 2002 based on the joint studies of three official research institutions. China also support Thailand’s proposal for an early study and preparation of EAFTA.

Furthermore, China insists that East Asian cooperation should not be limited to economic areas. East Asia needs a strong political built up. An East Asian community building covers comprehensive areas of cooperation.

China understands that as a developing country, it needs strong capacity building to accommodate the quick process of globalization on the one hand, and regionalization on the other hand. China does not intend to be a leader of East Asian cooperation, but it surely prepares to play an active role.